Bloomberg News

Bank Bonuses May Face Weaker Limits in Watered-Down EU Plan

November 09, 2012

Barclays Plc Former Chief Executive Officer Robert Diamond

Barclays Plc former Chief Executive Officer Robert Diamond, prior to his resignation over the Libor scandal, was pressured by investors into foregoing part of his total compensation. Photographer: Simon Dawson/Bloomberg

Banker bonuses as much as five-times fixed pay would be allowed under compromise European Union proposals on compensation that clash with tougher demands from EU lawmakers.

Such awards would be tolerated if a majority of shareholders approve, according to draft EU plans obtained by Bloomberg News. Without that approval, the maximum would be 300 percent of fixed pay.

The document drawn up by Cyprus, which holds the EU’s rotating presidency, is an attempt to broker a compromise with the European Parliament, which has called for an absolute ban on bonuses that exceed fixed pay. Governments argue that the measure may hamper the EU’s competitiveness as it struggles to emerge from the biggest economic slump since the Great Depression.

The Cypriot proposal is “totally unacceptable,” Philippe Lamberts, the lawmaker leading the work on the bank capital law for the parliament’s Green group, said in a telephone interview. “I expect negotiations on that.”

The split over pay rules has threatened to slow down the bloc’s implementation of international accords to boost banks’ capital requirements, with the EU assembly insisting that the bonus curbs be included in the same draft law.

Bankers are facing a backlash from EU lawmakers determined to cut variable pay as part of a quest to reshape lenders as utilities rather than money-making machines. Public outrage and shareholder rebellions have already led some banks to limit payouts.

Banker ‘Superstars’

Citigroup Inc. (C:US) shareholders rejected that bank’s executive pay plan earlier this year. Barclays Plc (BARC) former Chief Executive Officer Robert Diamond, prior to his resignation over the Libor scandal, also was pressured by investors into forgoing part of his total compensation.

Having a bonus cap “doesn’t change the going rate for the superstars,” Alistair Woodland, an employment lawyer at Clifford Chance LLP in London, said in a telephone interview. “The obvious way of paying them would be to hike salaries and that’s not really the intended consequence that the EU is going for.”

The legislation, proposed last year by Michel Barnier, the EU’s financial services chief, must be agreed on by the assembly and by governments before it can take effect.

Maximum Cap

Barnier supports a maximum cap on bonuses, Stefaan De Rynck, his spokesman, said in an e-mail.

“We very much support the presidency compromise,” Simon Hills, executive director of the British Bankers’ Association, said by e-mail. Banker pay is already “comprehensively regulated” by EU laws that strengthen “the linkage between performance and pay,” he said.

Lenders have reacted to the EU parliament’s plans by boosting salaries, with the side effect of restraining banks’ ability to cut pay in response to lower revenues, Hills said.

Under the Cypriot proposals, bankers would be banned from receiving immediate cash bonuses that are larger than their fixed pay.

The plan “offers the flexibility needed, especially for globally active institutions,” according to the Cypriot document. It “also ensures a maximum ratio that cannot be exceeded even by a shareholders’ vote.”

Deferred Bonuses

The draft Cypriot plans also clarify existing EU bonus rules that require payment of at least 40 percent of an award to be deferred over at least three years. This deferral rate should rise to 60 percent for bonuses of more than 500,000 euros ($636,000), according to the document.

The parliament has called for the 60 percent rule to kick-in for bonuses above 100,000 euros.

The Cypriot compromise bid comes ahead of a Nov. 12 negotiation meeting between officials and lawmakers on the draft bank capital law.

The EU is facing an international deadline of Jan. 1 to approve and publish the legislation. The meeting may stretch into the night in an attempt to resolve outstanding issues, Lamberts said.

The bonuses proposal may be discussed at the Nov. 12 meeting, Lamberts said.

The Cypriot presidency is seeking views from national governments on the plans, ahead of the next round of talks with the parliament, Nikos Christodoulides, a spokesman for the presidency, said in an e-mail. “We feel it is a good compromise.”

Golden Hello

The Cypriot proposals also seek to curb so-called golden hello pay awards when a bank recruits new staff. Separately, they call on the European Commission to carry out a study by the end of 2014 on whether banks are making profits from longer-term refinancing operations carried out by the European Central Bank.

The report might be accompanied by a draft law on how banks can use LTRO money, according to the document.

James White, a spokesman for the Association for Financial Markets in Europe, a group representing international lenders including Deutsche Bank AG (DBK), BNP Paribas SA (BNP) and Barclays, declined to comment.

Othmar Karas, the lawmaker leading the parliament’s work on the draft bank capital law, also declined to comment.

Lawmakers and governments are split on other parts of the draft capital rules.

These include how to implement liquidity rules for lenders, and how much scope national regulators should have to impose tougher capital requirements on their banks.

Separately, diplomats from EU states will meet on Nov. 15, seeking to make headway on a draft law to overhaul the bloc’s financial market rulebook, known as Mifid.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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