At Goldman in Europe, There’s Salary, Bonus and a New Option

LONDON â€" To navigate pesky bonus caps in Europe, Goldman Sachs will offer a new kind of pay class for bankers in Britain and on the Continent, a person briefed on the firm’s plans said.

Call it the third way of pay.

Starting this year, certain Goldman employees will earn a salary, a bonus and some “role-based pay.” This pay will be paid monthly and will not be used when tallying pension contributions. The bank may be able to claw some of it back, and it can change from year to year. But it will have the effect of driving up base salaries.

Role-based pay, which Barclays also plans to use, is a response to bonus caps passed by European Commission for employees unceremoniously labeled “code staff.” Code staff includes those engaged in risk-taking and in control functions, senior managers and employees who make over a certain threshold of income. Starting in 2014, bonuses for code staff will be limited to 100 percent of an employee’s fixed salary, or two times salary, if shareholders approve it.

Typically bankers earn a fraction of their pay in salary and are rewarded with large bonuses.In 2012, for example, Goldman Sachs paid its 115 code staff $86.1 million in salaries and $450.7 million in cash and stock bonuses. That averages out to about $4.7 million per each individual, or a bonus equal to 5.2 times salary.

In September, the British Treasury filed a lawsuit in the European Court of Justice challenging the bonus caps, arguing that they would shift compensation from bonuses to fixed salaries. It said the caps were an overextension of what was permitted in the European Union Treaty.

Not surprisingly, limiting compensation has not gone over well in the City of London. Right before the government filed the suit, the British Bankers’ Association said about 35,000 employees at banks around the world could be affected. When asked on Wednesday whether he thought the European Union’s decision to push through “crude” bonus caps of 200 percent was the wrong approach, Mark Carney, governor of the Bank of England, said, “Absolutely.”

Goldman said Thursday that profits for the fourth quarter fell 19 percent to $2.3 billion, with weak fixed income results. But full year net income rose 8 percent to $8.04 billion. Compensation, which at one point rose as high as nearly 50 percent of net revenues, is down to 36.9 percent.

Goldman’s annual earnings announcement typically coincides with “compensation communication day,” also known as bonus day. But while bankers were told their bonuses for 2013, they were not told their 2014 salaries as the bank is still working to understand who will be affected by the role-based pay.

Stephen Brooks, a people and change management specialist at PA Consulting Group in London, said he opposed the bonus caps because they limited banks’ financial flexibility. He also said the caps would deprive the British government of a lot of money, since it gets 60 cents of every bonus dollar. But he was optimistic that the bankers would find ways to get paid.

“That it is their core skill â€" coming up creative financial ideas.”