Financial sector bonuses to be capped

03 / 03 / 2013

Last week the Economic Affairs Committee of the European Parliament, the European Council and the European Commission reached an initial political agreement to place stricter rules on financial sector remuneration.

The agreement is in the context of the EU’s discussions to approve the new Capital Requirements Directive (CRD IV), which will force banks to strengthen their capital and liquidity levels and to limit the bonuses paid to their employees.

Caps on bonuses:

1:1 ratio: if the text (still pending publication) is approved without changes, a mandatory 1:1 bonus-to-salary ratio would be set, implying that bonuses could not exceed fixed salary.
2:1 ratio: this ratio could only be raised to 2:1 (that is, up to double annual salary) by means of a resolution of the shareholders’ meeting, with the agreement of a qualified majority of the shareholders.
Long-term incentives: the future value of the long-term component of variable payments will be taken into consideration to calculate the bonus ceiling; bonuses may be increased by 25% provided that instruments are used that vest over five years or more and that they can be restructured and/or clawed back in the case of poor performance.
Other measures: the agreement notes the intention to extend the clawback clauses that allow banks to require that bonuses be returned, and to extend to golden handshake bonuses the conditions relating to greater alignment to risk and to banks’ long-term interests.
Geographical reach: the new limits would apply to EU banks located within and beyond the European Union, and to subsidiaries or branches of non-EU banks established in the EU.

Next steps:

The document containing the terms agreed was presented last Thursday 28 at the meeting of the Committee of Permanent Representatives in the EU (COREPER). It seems the Irish presidency decided not to put the matter to a vote, after the United Kingdom asked for more time to analyze the situation. This lack of consensus implies that the text should be ratified by absolute majority at the ECOFIN meeting to be held on Tuesday, March 5.

If the political agreement is approved, the Plenary Session of the European Parliament should give its approval, possibly at the vote planned for the April 15-18 session.

In any event, according to the press release of the Irish presidency, significant further technical work will be needed to complete the details of the legislation before the agreement to be approved by the EU Parliament is final.

Once the agreement is approved, the Member States will have until January 1, 2014 to incorporate it into their domestic legislation.