Europe Could Allow Banker Bonus Cap to Reach 250% of Salary

Bankers in the European Union could be permitted a bonus cap of 250% of their salaries, according to a consultation paper released by the European Banking Authority.

Under draft guidelines produced by the EBA, it appears that bankers' pay rules could be relaxed to allow deferred payments over five years.

The paper spells out how financial institutions in an EU member state could apply for a "discount rate" that would permit their workers to be paid more money over a longer period of time.

According to the EBA's guidelines, this is to ensure that any awarding of bonuses be aligned with sensible behaviour and incentives.

A major problem that emerged from the financial crisis was that bonuses encouraged risk taking which ultimately harmed banks and wider economies.

To get around this, the EBA has tried to calculate how bonuses or variable pay can be added onto a fixed salary over five years.

"The discount rate can only be applied to variable remuneration paid in instruments that are deferred for five years or more," the paper said.

Under current European rules, bonuses or variable pay are not allowed to exceed 100% of fixed pay at banks where staff engage in activities that have an impact on the risk profile of the institution.

Methodology

To work out the "discount rate" of a bonus on top of a fixed salary, the EBA factors in the inflation rate of a member state, interest rate for EU government bonds and two incentive categories to encourage prudent banking.

For a banker's payout to approach the maximum bonus cap of 250% of their salary, it must be approved by shareholders.

"A higher ratio of 200% may be allowed, subject to shareholder approval," said the EBA.

The consulting period for the responses to the paper close the 18 January 2014.

Rules will be finalised at the end of March 2014, said the EBA.

The EBA has been at the frontline of reforming Europe's banking system and spotting risks in the financial sector.

On 21 October the EBA published its recommendations to provide common definitions for European Union institutions to conduct asset quality reviews of banks' portfolios across the continent.