Go to the Globe and Mail homepage

Jump to main navigationJump to main content


Europe to overhaul bankers' pay Add to ...

If you're an investment banker seeking employment in Europe, your accountant might advise you to nail down a job in Switzerland or another country outside of the European Union.

That's because new regulations laid out by the Committee of European Banking Supervisors, the EU's bank supervision adviser, are going after bankers' pay. The committee aims to curb bonuses, and defer payments for years. The goal is to take some of the risk out of risk-taking, so that bankers have an incentive to work for the long-term interests of the company instead of rolling the dice every year in the hopes of bagging lavish bonuses.

Of course, EU politicians hope the new pay rules will be applied globally. But that is unlikely to happen. Some global banks, such as Goldman Sachs , UBS and JPMorgan, plan to structure pay packages differently - hiking salaries to reflect lower bonuses - for their employees in EU countries, notably Britain, and non-EU countries, such as Switzerland, where the rules would not apply, according to reports.

Tighter banking regulation and attempts to cap bankers' pay could lead to an exodus of bankers from London, Europe's financial centre. HSBC Holdings , Britain's biggest bank, has threatened to move its headquarters outside the country because of stricter regulations, including limits and high taxes on compensation.

Last year, Guy Hands, the founder of Terra Firma Capital Partners , one of Europe's largest private equity funds, moved to Guernsey, in the Channel Islands, to escape Britain's 50 per cent tax rate on higher earners. In October the Financial Times reported that one in four hedge fund managers has moved from London to Switzerland.

The United Kingdom Financial Services Authority has approved the new EU rules that restrict bonuses and cash payments for banks' broker-dealers and proprietary traders.

Vince Cable, Britain's business secretary, has said the government won't be "bullied" by banks that threaten to leave for countries with light-touch regulations. On Monday, deputy prime minister Nick Clegg, in a joint press conference with Prime Minister David Cameron, said the banks "can't behave as if they exist in a social vacuum.

"They operate in a society that feels they've come to the aid of the banks and banks need to play their role too."

The CEBS rules would cap cash bonuses at as low as 20 per cent of total pay. Large banks must defer as much as 60 per cent of bankers' bonuses over three to five years, while a separate "retention period" would be imposed on stock-based incentives.

In the United States, regulators are going through a similar exercise. The Federal Reserve, the Securities and Exchange Commission and other banking agencies could force the big investment banking groups to boost the deferred payment component and reduce the cash bonus component of bankers' pay.

The Dodd-Frank Consumer Reform and Consumer Protection Act, signed into law last summer, requires the SEC and other federal regulators to prescribe rules "that prohibit any types of incentive-based payment arrangement, or any feature of any such arrangement, that regulators determine encourages inappropriate risks."

The new payment rules must be in place by April. Until recently, American regulators were more concerned about the health of the banking system than overhauling bankers' pay to reduce risk. In Europe, where highly paid bankers are often blamed for wrecking the Irish economy and causing deep pain elsewhere, bankers' compensation has been at the forefront since the 2008 financial crisis year.

Even in Australia, which survived the crisis and recession with minimal damage, executive pay is coming under scrutiny. Draft legislation on pay would give shareholders the power to oust a board of directors at a special meeting if a company's remuneration report has been voted down by 25 per cent of the votes for two consecutive years. The "two-strikes" rule, as it's known, is undergoing public consultation.

Report Typo/Error

Follow us on Twitter: @GlobeBusiness


Next story




Most popular videos »

More from The Globe and Mail

Most popular