How new EU rules will restrict bonus payouts
BANKERS in Europe face a cap on bonuses as early as the start of next year, following agreement in Brussels on Thursday to introduce what would be the world's strictest pay curbs.
The change in the law is set to be introduced as part of a wider body of legislation, known as Basel III, which demands that banks set aside roughly three times more capital and build up cash buffers to cover the risk of unpaid loans.
Here is how the new pay regime is expected to work. With some technical points still open, there may yet be changes:
- The rules will apply to all bankers based in the European Union, and to staff of European banks located abroad. A Deutsche Bank employee working in New York or Tokyo would be subject to the limits, as would a Goldman Sachs banker in London. These provisions could later be revised.
- The cap on a banker's bonus is automatically set at the level of annual salary. That ceiling can be raised to twice base pay if a bank's shareholders vote in favour.
If at least half of shareholders turn out to vote, then 66 percent need to vote in favour for the cap to be raised. If fewer turn out, then 75 percent need to vote in favour of lifting the cap.
- The cap has been somewhat softened by provisions by allowing banks to discount the future value of shares, options or other non-cash payments that are paid out over a number of years.
One quarter of a bonus can be paid in the form of long-term instruments of more than five years, which are seen as less likely to prompt risk-taking. These could be bonds or share options that can be clawed back by the bank if necessary.
When calculating the size of a banker's bonus to determine whether it breaks the new ceiling, the value of such payments will be discounted. The European Banking Authority will set this level of discount.
- The law also introduces country-by-country reporting of performance for banks, a contested measure unpopular with some countries including France. Profits and tax will be reported back to the European Commission on a confidential basis from 2014 and a range of data will be published from 2015.