At last. The new EU bonus rules are out. Now it only remains for staff at the FSA to work all weekend formulating them into something UK specific.
Much remains the same: the complicated deferral requirements are still in place (40%-60% deferred for at least 3 years, only half the 'non-deferred' element to be paid in cash).
Mostly, however, the finalised rules are better than the draft rules. Here are the major things of note.
· Buybacks WILL be banned
As of January, it will be possible to hire a new member of staff on a guaranteed bonus of less than 1 year in exceptional circumstances. In no circumstances will it be possible to issue a guaranteed bonus to an existing member of staff to prevent them leaving.
This will prevent buybacks. The British Bankers Association fought hard against this on the grounds that it would create a 'poachers charter.'
· Banks will have to disclose how much they're paying by business area
The new rules include disclosure requirements far more comprehensive than anything seen previously.
These include requirements that they disclose:
Aggregate quantitative information on remuneration, broken down by business
area; aggregate quantitative information on remuneration, broken down by senior
management and members of staff whose actions have a material impact on the risk.
- new sign-on and severance payments made during the financial year, and
the number of beneficiaries of such payments; and
- the amounts of severance payments awarded during the financial year,
number of beneficiaries and highest such award to a single person.
Business by business disclosure is probably good news for employees as they'll be able to see how much of the compensation pool colleagues in rival business areas are getting. However, it could be a nightmare for banks, who will have to manage intra-business disgruntlement when the cross-subsidisation of compensation becomes starkly apparent.
· M&A bankers may not have to adhere to the deferral guidelines
Previously, the FSA rules introduced a concept of 'proportionality' under which different organisations were obliged to apply remuneration requirements to a different extent depending upon things like their size, complexity and systemic impact.
Under the finalised CEBS rules, individual banks will be able to apply the pay requirements to a different degree across different business areas depending upon their risk profile, seniority, and the size of their bonuses relative to their salaries - as long as they justify every single diversion from the rules.
In particular, the new guidelines state that organisations only have to observe the 40-60% deferral threshold on an 'average weighted basis' across the institution as a whole.
The implication is, therefore, that some employees could have substantially less of their bonuses deferred, if others have substantially more.
"If you have got a group of M&A guys who aren't putting capital at risk, you might decide to pay them more quickly," says Nick Dent, an employment lawyer at Barlow Lyde and Gilbert. "On the other hand, you may then decide to defer 75% of pay for traders."
· EU banks will still be expected to apply the rules outside the EU (eg. in Hong Kong and Wall Street), but there are get-out clauses
Bank and banking bodies have also been lobbying to get the global reach of the new compensation rules diluted.
They have not been entirely successful. The finalised version of the rules states that: 'The remuneration policies and practices should apply to any subsidiary of an EEA parent institution that is located offshore, including in a non-EEA jurisdiction.'
However, it also states that the remuneration rules can be 'neutralised' outside the EU if the subsidiary is operating a different business model - as long as this isn't used as a way of evading the rules by making people employees of the offshore subsidiary, and as long as the subsidiary doesn't have a 'material impact' on the risk of the whole firm.
· Partners in hedge funds will be able to avoid the new rules
Suddenly everyone will want to be a hedge fund partner. The rules state that dividend payments to partners, "are not covered by these guidelines."
· The rules DON'T specify that a strict proportion of total remuneration must be paid as a base salary.
Paranoid types feared this might happen. Instead, the rules state that:
An institution should set in its remuneration policy explicit maximum ratio(s) on the variable component in relation to the fixed component of remuneration. This maximum ratio must be set for the different relevant categories of staff whose professional activities have a material impact on the risk profile of the institution. The maximum balance between fixed and variable remuneration should be set in a sufficiently granular way, so that exceptions are
avoided or are kept at a minimum..
This seems largely meaningless - incredibly granular ratios could be set allowing a particular group of rates traders to receive bonuses equivalent to 30X salary and it wouldn't (apparently) be an issue.
And also of note...
· The EU wants bonuses to be paid in Cocos
BarCap's already said to be toying with CoCo bonuses. Other banks may follow suite.
The guidelines state:
"It should be possible for such instruments to include a capital instrument which, where the institution is subject to severe financial problems, is converted into equity or otherwise written down."