How Goldman Sachs, Morgan Stanley and others will keep paying-up in Europe

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If you work for a U.S, investment bank in Europe, it's becoming clear that the European Union's bonus cap is not going to make much difference to your overall pay.

To recap, the CRD IV bonus cap works as follows:

  • Banks can only pay bonuses equivalent to 100% of salaries to 'code staff' (defined here) unless...
  • i) Banks can get permission from shareholders to increase bonuses to 200% of salaries.
  • ii) Banks can pay some of the bonus in long term instruments - in which case (with shareholders' permission) they can increase bonuses to 250% of salaries.

Last week, the Wall Street Journal reported that Goldman Sachs had received sign-off for its CRD IV arrangements from the U.K. regulator, without stating exactly what those arrangements are.

Lawyers say most banks are ditching complex schemes for simple 'role-based allowances'. These have already been heavily flagged in the press, but for U.S.-banks in particular senior insiders say the reality of the new arrangements has been lost in the outrage over banks' unwillingness to take the new rules at face value.

"At banks like Goldman Sachs and Morgan Stanley people are now being told what their total fixed compensation will be 2014," says a senior insider at one US bank. "They are being told that they will receive their salary on a monthly basis and that they will then be paid an additional lump-sum top-up payment at the end of the year."

These annual top-up payments will not be considered bonuses, but will be added salaries to increase fixed pay. Banks are working back from the amounts paid to senior staff last year, said the insider: "If someone was paid $1.5m last year and was on a $300k salary, the bank will need to give them a $200k lump sum in order to make it possible for them to pay a $1m bonus under the new rules."

For the sake of simplicity, lawyers say most banks are ignoring the option to increase the bonus cap to 250% if long term instruments are used. "At this stage, no one's breaking their back to get to 250%," said one lawyer, speaking on condition of anonymity as she's working with the banks involved.

It had been reported that banks would pay the top-ups on a monthly or bi-annual basis, but insiders say US banks are erring in favour of one-off payments at the end of the year. Both Goldman Sachs and Morgan Stanley declined to comment.

British banks like Barclays and Royal Bank of Scotland look more likely to go for frequent additional payments. As we reported in December, it's difficult for British banks to get shareholder sign-off to increase bonuses to 200% of salaries as UK-domiciled banks will need put the vote to shareholders in a public meeting. By comparison, U.S. investment banks with subsidiaries in the U.K. can simply get sign-off from the internal group holding shares in the subsidiary - a process that can take place behind closed doors. With U.K. banks struggling to pay bonuses equivalent to even 200% of salaries, monthly or quarterly fixed pay top-ups become more important.

Sam Whitaker, a counsel in the executive compensation practice at law firm Shearman & Sterling, said "virtually all banks" are adopting the fixed allowances system. "They've looked at a number of different ways of paying people and come back to this as the simplest method with the least risk." At one point, banks were looking at paying people in special shares that would appreciate rapidly in value, says Whitaker. "That proved just too difficult in terms of the corporate structure and it was unclear whether it would be accepted by the regulator," he says.

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