26 September 2014

Financial Times: EU in danger of lifting bankers’ salaries by blocking variable pay

The EU’s bonus cap, considered the world’s toughest, already restricts performance-based variable pay to no more than twice salary. But the UK is challenging the rule in court and, in the meantime, regulators in London have taken a fairly lenient stand on enforcing it.

Regulators have allowed banks to supplement salaries and bonuses with “allowances” that do not count toward pensions and can be adjusted upward and downward. These allowances are supposed to be role-based, rather than performance-based. UK banks say they need this flexibility to compete for staff with Wall Street and Asia, and overseas banks with London offices say they use allowances to pay their London-based staff a total package commensurate with peers elsewhere.

Now, leaked documents from the European Banking Authority show that the watchdog is planning to clamp down on allowances, saying that they must be awarded for set periods and cannot be withdrawn when certain individuals vacate their roles. This narrower interpretation will not be a problem in most cases, but could hit those banks that have used allowances particularly aggressively.

London bankers will be further unsettled by the revelation that the incoming European Commission president Jean-Claude Juncker has removed pay from the remit of Britain’s Lord Hill, who has been appointed to oversee Europe’s financial sector. The move is designed to head off critics who say a UK commissioner will be too lenient on the industry. But it will stoke fears of a further crackdown.

Were that to happen, London would be doubly vulnerable, because rising real estate prices and a strong pound have driven up living costs there by 40 per cent since 2008 in dollar terms. It is now the most expensive city in the world in which to work and live, displacing Hong Kong, according to a new report from Savills.

Politicians may believe they have good reasons to try to curb banker pay, including concerns over rising inequality and the payment of outsized rewards for activities that do little to help the broader economy. However, if that is the objective, they are choosing an ineffective and potential dangerous way of going about it.

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