Banks Race to Increase Salaries to Beat EU Bonus Caps

Banks are racing to overhaul their remuneration structures by bumping up fixed salaries ahead of European Union-imposed bonus caps in 2015.

According to a prominent employment partner at law firm Pinsent Masons, banks are stuck between having to overhaul remuneration procedures by a certain deadline but without concrete rules, which is likely to result in across-the-board increases in salary.

"This European Union Council vote in favour of the bonus cap is no surprise and at least the banks have a clear timetable for reforming their bonus structures," said Christopher Mordue.

"The problem is that there are still some significant uncertainties about how the cap will work and who will be caught by it. Firms now face the difficult task of overhauling their remuneration practices in a short timescale without a clear picture of the final shape of the new rules.

"This is likely to result in broad brush compliance approaches, including increasing salary to mitigate the impact of the cap."

The EU Council pushed through the plan to cap bankers' bonuses at a maximum of double their salary from 2015.

The measure will come in on 2014's bonuses that will be paid out at the start of 2015.

However, the Parliamentary Commission on Banking Standard's final report, also proposed a number of significant changes in this area, which could lead to even more confusion over what bankers' bonus rules actually are.

"Another issue is that this proposal is only one strand in an emerging web of regulation around pay in the banking sector. The UK PCBS report just a couple of days ago also recommended significant changes in this area, including a new remuneration code, longer deferral periods for variable pay and greater use of claw back provisions," said Mordue.

"While these are broadly consistent with the thrust of the EU measures under Capital Requirements Directive IV, the question is whether the UK measures will impose structures and requirements beyond those under EU law, requiring yet further changes to remuneration packages.

"Firms will need to ensure that they maintain sufficient flexibility to alter pay structures to meet further regulation down the line."

Mordue added that since all these measures focus on variable pay, they inevitably build incentives to increase salaries.

"This is an approach which runs contrary to the aim of aligning pay with long-term performance and while also trying to disincentivise short-term and high-risk practices," he said.