European lawmakers have stirred up the ire of the financial industry by proposing rules that would limit banker bonuses. But the regulations, assuming they are passed, may not prove the sweeping overhaul that bankers are lamenting.
For one, existing regulations have already forced financial firms in the United States and Europe to rethink their pay packages. And big banks, struggling to bolster profits and share prices, have been trying to keep a lid on compensations levels since the financial crisis.
On the surface, the proposed rules seem drastic.
Late Wednesday, the European Parliament and European Commission struck a provisional agreement to limit bonuses to 100 percent of bankers’ salaries. Financial firms would be able to hand out payments that amount to double the salaries, with the approval of a majority of shareholders. If bonuses exceed salaries, then a quarter of that additional payout must be deferred for at least five years.
By doing so, lawmakers are hoping to curtal the type of risky behavior that led to the financial crisis. And given the high level of government support that these institutions have received, the argument goes, these countries should have a bigger say in corporate governance that could help prevent another disaster from happening again.
It’s prompted an outcry in Europe, and particularly the London financial district, known as the City. European bankers decry that the onerous rules will prompt top talent to flee to less restrictive regions like Hong Kong and New York City.
Others indicate they will simply find some ways around the rules. Top banking executives are said to already be discussing sharp rises in base pay, which would go a long way toward circumventing the new rules.
“It will drive up fixed salaries to compensate,†one British financial services executive told the BBC. “Businesses that do not need to be inside the European Union will leave. And when banks invest in future divisions, it will be outside the! E.U.â€
It’s a tactic that institutions have used before when lawmakers have pushed for changes in the ways banks dole out compensation. In the aftermath of the crisis, several big banks tried to quell the political outrage by tempering their annual bonuses, quietly adding to base pay at the same time.
The recent move by European Union officials only further solidifies the changed world of banker pay, rather than shaking up compensation practices. And regulators, with increased powers to oversee bank compensation, may be anticipating modest efforts to skirt the new rules.
Big financial firms once had a lot of leeway over how much they compensated their employees, but â€" on paper, at least â€" that changed considerably after the financial crisis of 2008. With the industry reeling, the Group of 20, a collection of finance ministers and central bankers, set up a framework for regulating pay.
One of the key principles that the G20 agreed to is tying bankers’ pay to the amount of rik they take when doing trades. That can involve making sure that banks have employment agreements in place that allow banks to “claw back†pay if trades don’t work out.
Bankers are typically rewarded compensation for one year’s performance, but then they receive the cash or shares that make up that sum in a staggered fashion over several years. In theory, that gives banks the ability to cancel that pay if trades don’t meet pre-set targets. This approach doesn’t necessarily target the overall level of pay, however.
Raising base salaries could run straight into regulatory guidelines that demand pay be link to the financial performance of trades. By promising to pay an employee a large sum upfront, the bank would essentially loosen the link between compensation and risk. Connecting the two is the main principle at the heart of regulators’ new approach to pay. If traders makes a bad bet, it would be harder for bosses to punish them through their paycheck.
In addition, bank! s may the! mselves decide that it’s not in their interests to commit to giving employees large upfront salaries. The financial industry has traditionally used bonuses to incentivize hard work throughout the year. Simply increasing the base pay of a banker may lessen the power of that motivational tool.
At the same time, banks, especially in Europe, don’t exactly have deep pockets to dole out large salaries or bonuses. Many of the region’s banks have reported staggering losses in recent quarters. On Thursday, the Royal Bank of Scotland announced a $9 billion loss for the year.
In the current environment, European banks, especially in Britain, have been under pressure to rein in pay, especially in the face of their legal woes. R.B.S. and Barclays have both recouped past pay from executives to help cover fines related to rate-rigging cases.
Nationalist appeals to preserve countries’ financial services industries may not hold much sway, at least for the moment. Legislators are showing a willingnes to pursue moves that could prompt financial institutions to move more of their operations to jurisdictions outside of European Union control, like the United States and Asia. Britain, which has zealously protected its reputation as a global financial capital, has professed precisely this worry.
It’s also not clear that banks will lose their best employees to rival, as some executives have argued. Othmar Karas, an Austrian lawmaker who helped spearhead the new initiative, has described the current plan as encompassing any banking operations that reside within the European Union.
In the end, the rules may just help codify what’s already happening. Since the crisis, big banks â€" in the face of new regulation and waning profits â€" have retooled their compensation practices. The European Union’s latest bonus rules will make it hard for banks to go back to their old ways, if the boom times return.
