EU Bank Bonus Proposal Has Few Teeth

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A compromise proposal to limit bank bonuses in the European Union would have little or no practical impact as most bank bonuses are already below the proposed cap.

Under a proposal by Cyprus, which holds the rotating EU presidency, bonuses for bankers would be limited to five times fixed pay as long as shareholders approved. Without shareholder approval, bonuses could be up to three times fixed pay. The move is aimed at reaching agreement with the European Parliament, which wants to ban bonuses that exceed a banker's fixed salary.

The Cypriot proposal would have little affect on current bonus policies at most banks. Take Deutsche Bank, for instance. The bank has 1,363 "regulated employees," defined as those who have a special responsibility for risk in the bank's business and who are the company's top earners. In 2011, according to company reports, these employees earned an average of 1.424 million euros, with total payments of  1.941 billion euros. Of this, 437.4 million euros was in fixed salaries and 1.503 billion in variable compensation, representing a factor of 3.44. Thus, the German bank easily meets the Cypriot compromise proposal.

The same logic applies to proposals to cap the cash portion of the bonuses at 100 percent of the fixed salary. The German bank paid cash bonuses of just over 50 percent of salaries last year.

Other banks have paid bonuses in similar proportions, according to our research. Royal Bank of Scotland paid out mean variable compensation of $794,000 against a fixed average salary of $510,000 while UBS variable comp was, on average, 2.4 times that of average fixed salaries. Barclays had the biggest proportion of variable to fixed compensation with average fixed comp at $400,000 and average variable compensation at $1.66 million, or just over four times fixed pay. That's still well below the 500 percent proposed by Cyprus.

The draft Cypriot plans also clarifies existing EU bonus rules that require payment of at least 40 percent of an award to be deferred over at least a three years. This deferral rate should rise to 60 percent for bonuses of more than 500,000 euros, according to the document.

A meeting is scheduled for next week between officials and lawmakers on the draft bank capital law where the bonus proposal is expected to be discussed. The EU is facing an international deadline of January 1, 2013 to approve and publish the legislation.

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