Most EU banks seek 200% bonus cap

Most EU banks seek 200% bonus cap

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The EU Capital Requirements Directive IV (CRD), which has placed a cap on variable, performance-linked pay in the EU’s banking sector, is weakening efforts by EU-based banks to manage performance and risk through pay, according a new survey by Mercer.

In order to remain competitive in attracting and retaining talented staff, 70% of EU-based banks are seeking approval for increasing their bonus cap to 200%. Additionally 63% of EU-based banks are implementing base salary increases, compared to only 13% of non-EU banks that plan to do so.

The majority of EU-based banks (55%) are also planning to increase cash allowances to compensate for the bonus cap for impacted risk-taking staff. These allowances cannot be performance linked under the European Banking Authority’s definition of fixed compensation.

“High-performing employees expect remuneration comparable to their peers,” said Mark Quinn, head of talent at Mercer UK. “ are looking at other methods of making up the shortfall to prevent staff walking into the arms of other less-regulated competitors, such as hedge funds.”

“Cash allowances are a form of fixed compensation that do not generally require a corresponding increase in benefits costs as base salary increases do. However, both are forms of guaranteed cash with no variable link to performance which is far from satisfactory.”

Other ways that EU banks said they planned to adjust pay were: enhancing broader employee value propositions beyond pay elements (20%), increasing the use of long-term deferred compensation (11%), lengthening vesting periods (11%) and paying bonuses in bail-in convertible bonds (5%).

The report, which analysed pay information among 78 financial services organisations including 44 banks in 18 countries, also found that in some cases banks are opting not to pay any upfront annual cash bonus at all in light of the increases in fixed pay. They are instead shifting all variable compensation into multi-year deferral or long-term incentive arrangements.

“The progress the banks have made in improving their pay practices over the last several years since the crisis is now being reversed to some extent with the impact of the CRD IV rules”, says Vicki Elliott, Mercer’s global financial services talent leader.

“To remain competitive, banks are shifting a significant portion of compensation into fixed, guaranteed pay which reduces their ability to pay for performance and also to defer as much compensation subject to malus over a multi-year performance period.“
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