Yesterday, the European Banking Authority ("EBA") proposed Guidelines widening the application of the EU bonus cap. Most significantly for banks, the Guidelines stamp out the use of certain “allowances” that regulators thought were being used to circumvent the bonus cap. The Guidelines take effect on January 1, 2016, so we expect national supervisors to apply them to compensation for the 2016 performance year.
The EU bonus cap is part of the Capital Requirements Directive IV that became effective across the EU on January 1, 2014. It limits bonuses paid to senior managers and other "material risk takers" to no more than 100% of their fixed pay generally, or 200% of their fixed pay with shareholders' approval. Concerned about talent retention, EU-based banks since last year have engaged in a variety of practices to lessen the impact of the provision, often by using allowances in lieu of bonuses.
The EBA issued a non-binding opinion in October 2014 which clarified the criteria for categorizing compensation as either fixed or variable. Consistent with that opinion, the Guidelines mandate that compensation (including allowances) be classified as fixed only if it is predetermined, transparent to the employee, not dependent on performance, and maintained over a period tied to specific roles or responsibilities, among other criteria.
This Regulatory brief additionally offers our views on (a) the expanded scope of the bonus cap (to now clearly include certain asset managers), (b) the US impact, and (c) what will happen next.