The worst has happened. As feared, the European Banking Authority (EBA) has passed judgement on banks' use of 'fixed allowances' to dodge the European bonus cap, and its judgement is not good.
You can read the full EBA document for yourself here. It says that banks have done their best to use allowances as a replacement for bonuses and that this must stop.
The dodges discovered and detailed by the EBA include:
- A bank that was awarding members of its management body share appreciation rights (SARs) as part of their fixed allowances. The vesting conditions for these SARs included a performance condition.
- A bank that was only awarding allowances for three years and reserved the right to revoke them after that.
- A bank that was reviewing the size of its allowances every year.
- A bank that had a share matching programme in which it decided whether or not to match the amount of deferred shares already awarded to a member of staff that year, on a discretionary basis.
All of this is now banned. More to the point it is banned as of 2016: these dubious forms of fixed allowance will be counted as bonuses in the coming bonus round.
This threatens to become a problem. Fixed allowances can be pretty huge. For example, Tom King, CEO of Barclays' investment bank received a fixed allowance of £642k this year.
Headhunters say most banks think in terms of total compensation and have structured pay so that bonuses are twice as large as salaries (as per the EU rules) and that fixed allowances provide an additional non-pensionable sum on top of this.
One M&A headhunter said high performing managing directors in London are typically receiving packages comprising £350k in base salary, up to £700k in bonus, and £200k in fixed allowance. If the £200k allowance is considered a bonus and the bank still pays a £700k bonus, the mandatory 1:2 ratio between salary and bonus will have been breached.
What can be done? It's worth noting that the EBA isn't banning fixed allowances altogether - it's simply saying that in order to be considered as part of fixed pay instead of bonuses, allowances need to be 'predetermined, transparent to staff, permanent..and tied to the specific role and organisational responsibilities.' In other words, they need to be like salaries. Yes, banks could always vary allowances by changing organisational responsibilities each year, but Sam Whittaker, a counsel in the compensation practice at law firm Shearman & Sterling warns that the EBA will be onto this: "If you constantly change someone's role just to vary their allowance, the EBA would say it's an anti-avoidance mechanism and the EBA is very alive to anti-avoidance mechanisms, so I'd sound a loud note of caution."
The other option is clearly a simple salary hike. Last month, headhunters said senior bankers were pressing for salary rises in anticipation of the EBA's judgement. As of today, they seemingly have a case for a £200k increase, soon.