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EU bonus cap arbitrary and easy to circumvent

10 January 2014

The EU bonus cap, which came in to effect 1 January 2014, is ‘arbitrary and easy to circumvent’, as banks look at other ways of staying competitive.

A comment made by Stephen Brooks, a people management expert at PA Consulting Group while speaking to Governance & Compliance, he also said, ‘we have already seen banks raising base salaries to maintain competitive total compensation levels; banks are also structuring pay so that it appears to be base pay but is in fact not guaranteed’.

Jon Terry, partner in PwC’s reward team, agreeing that banks will find other ways, indicates the use of an allowance system; ‘many large banks in the EU are looking to introduce allowances rather than simply increasing salaries ... [as this] will offer banks more flexibility and payment in shares will help reassure shareholders that employees' interests are strongly aligned with theirs’.

Weakened financial system

This initiative has forced a shift from variable to fixed labour costs, which will weaken the financial stability of banks, according to Brooks. He believes that the action UK regulators had taken to curb excessive banker’s bonuses in the aftermath of 2008 was more than enough and that further legislation from Europe is unnecessary.

Looking further ahead at the situation, Brooks sees that flexibility of labour costs allows institutions to take a longer term view and ‘reducing that flexibility will mean that employment will become more volatile, with banks firing people quickly when things look bad and then scrambling to hire rapidly when the situation picks up. This volatility will encourage greater risk taking as people fight to retain their jobs’.

Global competitiveness

A weakened financial system will, in turn, hurt EU’s competitiveness and set it at a disadvantage in the global markets; Terry says that it creates an unequal playing field for EU firms operating in Asia, North America and elsewhere outside the EU – ‘how this plays out over the longer term and whether it will lead to firms exiting those markets remains to be seen. Europe now has the toughest pay practices for financial institutions in the world.’

He also adds that, with over ‘three quarters of bank staff earning over €1m residing in the UK, it is the UK that will feel the fullest force of the bonus cap’.

To this, Brooks says that hitting the competitiveness of London and other EU financial centres, it will be far more attractive to ‘locate the most profitable businesses and most highly paid people in the US or Far East’.

Bonuses not the problem

Defending the bonus system in the banking industry, John Bloor, Director of Finance Practice at Alium Partners, believes there is nothing wrong with paying bonuses and nothing really wrong with having them uncapped. ‘What the banks got wrong was not having a bonus structure that was transparent or demanding of its recipients the behaviours and performance that create long term sustainable value for all stakeholders, including customers, employees and shareholders.’ 

He adds that ‘this is a criticism to be levelled at the financial services industry as a whole; witness the proliferation of mis-selling, which ironically has created quite an industry for interim managers. However, rather than relying on government intervention to correct the problems in the banking industry, resolution should be sought by strong leadership within the industry, which unfortunately of the right quality has been in rather short supply’. 

Going off banking

The result of the numerous scandals that have plagued the financial and in particular, banking industry, has, in addition to a barrage of regulations, also resulted in a loss of trust and attractiveness as a career option. 

Speaking to Governance & Compliance, David Press, Director of DMJ, a company secretarial recruiter, commented, ‘ [a] trend we’re seeing at DMJ is that graduates looking to enter the banking profession are now considering trading as too risky as far as long-term job prospects are concerned.  Instead they’re increasingly attracted to high demand roles in company secretarial, compliance, governance and risk which, while not offering the same financial rewards, are much less risky as a career option’.

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