European (And US?) Banker Bonuses Capped At Twice Base Salary

Tyler Durden's picture

Just days before the UK's Barclays bank is set to unveil the number of staff who earned more than GBP1 million last year in its annual report, as part of a push for more transparency, the FT reports that a provisional EU deal - set to go into place in January 2014, will bring the most severe pay crackdown since the 2008 crisis began. European Bankers' bonuses (and their US subsidiaries) are to be capped at two times bankers' salaries and banks will be subject to a strict transparency regime after a late Wednesday European parliament vote secured agreement on a mandatory 1:1 ratio on salary relative to variable pay, which can rise to 2:1 with explicit shareholder approval. With the UK 'threatening' referenda in the future, the deal, if confirmed, is a major victory for the EU parliament negotiators, who insisted on pay curbs as their price for passing Basel; and a sign of London’s relative isolation on some financial services issues. As far as a workaround, the EU commissioner responsible for the reforms, said it was "difficult to imagine now that we would scrap this compromise," though we are sure they will find a way, especially as MEPs want the tougher version eventually to apply to hedge funds and investment managers.

Via The FT,



The impact, however, will be partly softened for the City of London by giving more favourable treatment to long-term pay linked to the health of a bank, such as equity or bonds that are written down when an institution fails.




While the deal preserves the freedom for national authorities to require banks to hold more capital, the most important UK priority throughout the negotiation, the remuneration exemptions, fall well short of the London’s demands.


George Osborne, the UK chancellor who led frantic diplomatic efforts to blunt the curbs, must now decide whether to force a debate or a formal vote at a meeting of finance ministers next week.




Senior bankers warned that the pay curbs – which were not part of the Basel accord – will reset the balance of arguments for operating in Europe, with potentially far reaching implications. While average pay levels at banks fit within the ratio, star performers can receive multiples of salary of 10 times or more.


[The Workaround] - As part of the compromise, up to a quarter of variable pay can be issued in instruments deferred for more than five years.




The European Banking Authority will be given the task of determining the type of instruments that win favourable treatment and the discount rate that is used to calculate their value within the ratio.


Industry hopes of an exemption for international offshoots of EU based banks, as well as US or Asian banks operating within the EU, were dashed.




While the threat of a bonus clampdown has been hanging over the City for almost a year, the severity of the overall package will come as a big shock, especially given the lack of significant exemptions.




Banks pleaded with David Cameron, the UK prime minister, to fight the crackdown, warning that it would undermine the City and force banks to move top staff or lucrative operations to New York or Asia.




The reverberations of the cap will be felt beyond the banking sector. MEPs want the tougher version eventually to apply to hedge funds and investment managers, who are subject to existing bonus rules designed for banks.


Capital: There will be an effective minimum core tier one capital ratio of 7 per cent, rising to up to 9.5 per cent for globally systemic banks, by 2019. The definition of capital is also being tightened although not by as much as the global Basel III agreement required. Regulators may also impose countercyclical capital buffers if they believe an economy is overheating.


Liquidity: Banks will be required to keep on hand enough easy to sell assets to survive a 30-day market crisis. The requirement is phased in between 2015 and 2018, a year faster than Basel III requires. The definition of acceptable assets has not been finalised so it is unclear how closely the EU will follow the Basel III rules.


Bonus curbs: A tentative deal is taking shape where bankers’ bonuses exceeding salary will be banned in normal circumstances. Shareholders could raise the ratio to 2:1 or vote to exempt some long-term forms of pay. All banks must disclose the number of staff paid more than €1m.


Flexibility: Member states can ask individual banks to hold more capital. But they are more constrained about raising capital requirements to tackle systemic risks. The UK and Sweden are content with the complex approval procedure but the commission is pushing for a stronger means to intervene.

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prains's picture

It's all about fucking money and who owns it. Sure as hell not me.

But Jamie D sure likes to tell everyone how much he has and who is he???????


Buckaroo Banzai's picture

Am I being super cynical, or does this mean the collapse is now less than one annual bonus cycle away?

walküre's picture

let's pause here for a second.

banks agreeing to take pay cut or pay cap ... makes me go hmmmm

just how bad is the actual data for 2013 and forward? preeeeeeeetty bad is the god awful truth.

1) cap banker's ability to capitalize on the collapse

2) collapse

3) rebuild after the debt has been slashed, liabilities discounted

jeff montanye's picture

my favorite part was: The impact, however, will be partly softened for the City of London by giving more favourable treatment to long-term pay linked to the health of a bank, such as equity or bonds that are written down when an institution fails.

let's get to work on your bonuses boys and girls; get those equity and bondholders written down and those institutions failed.  if you're going to modify the moral hazard of too big to fail, this is an interesting way to do it.  apparently bonuses not bondholders are the final line in the sand.

philipat's picture

So that means we can expect to see Basic Salaries going through the roof very shortly??

Dr. Engali's picture

Unfortunately the days of good music are behind us. Now it's all canned corporate garbage.

DJ Happy Ending's picture

So instead they'll jack up salaries to compensate, unless I'm missing something.

chump666's picture

Inflation eats profit margins too, banks will cut staff. So far 2013: RBS India, Citigroup. Deutshe Bank, Morgan Stanley, JPM, BofA is still cutting, etc etc etc

Top will get salary increases, rest get boned. 

Keep printing Bernanke...


Carl Spackler's picture

I sense you are missing something.

The real profit centers, the trading desks, will not jack up the salaries...unlimited incentive is always needed to keep the army's skills honed and to maintain the will to take the risk needed to earn ever more.  Without appropriate spoils to gain, nobody exposes themselves to the line of fire that is a trading market.

The C-Suite will want its salaries jacked up, clearly, but future performance will disappoint, so their stars will be on a tarnishing trajectory.

The poster here who said this policy will bring bring us closer to the end point is...prescient !


YC2's picture

Right, the incentives have to be right to justify IB hours and eat-what-you-kill performance metrics.

I wonder if maybe your salary could be renegotiated annually to compensate.  You get half your bonus at bonus time and the rest over the next 12 months in extra base pay.  The tax treatment would be better and you'd have better retention.

I dunno, just spitballin here.

Carl Spackler's picture

Fascinating idea, creates a house of cards, as well...the one year the trader misses on his book's profitability, after a string of success, he prices himself out of a job.

So he always is incented to go all in by ramping up risk to try to get lucky and dig out of any performance hole. No skin off the trader's back, because if he loses the big risk bet to save his job, then he is out of a job, anyway. 

He wins it, he keeps his job. In other words, he is incented to always go out in a blaze of glory.


stacking12321's picture

while i'm no fan of bankers, it's possible govenment interference in markets is worse.

and the market, like the internet, always routes around damage, like gov't regulation.

there will be a work-around, one way or another.



Ghordius's picture

note that markets and banks are not exactly the same

are you advocating deregulation of banks? that's what the US did in 1999 and created the megabank phenomenon, aka TBTF

stacking12321's picture

i'm not quite sure where you are heading with the statement that markets  and banks are not the same - in this case the market in  question is the labor market, specifically the banking labor market - are you advocating central planning price controls for this specific type of compensation?


are you advocating deregulation of banks?

absolutely! i am advocating deregulation of EVERYTHING! the government has no business regulating and interfering in the voluntary and free exchange of goods and services between individuals.

with regarding TBTF, this is a blatant hoax, and an excuse by the cronies of corporatists who work in the gov't to funnel monies stolen from taxpayers to their co-conspirators in the banks.

sure, a collapse of the financial system would be very painful, but it was necessary and it should have happened in all honesty.

sometimes painful lessons are needed to learn and grow.

Stock Tips Investment's picture

There is definitely a rejection against the bankers. Probably the opinion pubic has a very negative view of them. However, I think we should be careful about the measures that are to be taken. Controlling wages has never been the solution to anything. If bankers do not do a good job, then you would have to fire them and hire better ones. Only in banana republics solves these problems by trying to control their salaries.

Dr. Engali's picture

I can guarrantee you that what they are missing in bonus they will make up in shorting the market at just the right time.

Anusocracy's picture


Salaries will go up 200% this year.

Problem solved.

Sandmann's picture

I do like increasing Fixed Costs - it will expose the uneconomic structure of Banking rapidly and lead to redundancies. Fixed Cost Control is the answer to Bankers' Salaries and it is time to levy a Tobin Tax to help constrain their largesse

orangedrinkandchips's picture

yes.....youre right. One way or another, that darkness has got to give... Water will find its way around anything you put in it's way! foundation, doors, drains....houses....water will find a way....


Just like these dirt-bags.....

notbot's picture

Eventually Ray Dalio is going to do this too, just not call it a bank. He's richer than Jamie anyway.

Banks will be relagated to effective utilities.  Really really big utilities with enought M.A.D. derivatives to sink us all, of course.

MoneyThangs's picture

As I understand it, the Blankfein is a type of weasel faced rat that spends most of the day scavenging in a cesspool of rotten turd corpses

Schmuck Raker's picture

I'm sorry, can someone please help me find the word "hangin' " in this article?

suteibu's picture

They'll have to run that by Jamie Dimon before it can happen in the US.

Laser Shark's picture

Why not just threaten to dump EU debt if the pay caps are not lifted?

Acet's picture

Because the banks are far more dependent on EU Government handouts and the ECB's ultra-low buddy-buddy loans to banks than the EU is dependent on banks. Not only that, the biggest game in town is actually to get cheap money from the ECB and then turn around and buy "high-yield" Tresuries from EU countries.

Also the City of London does most of their business within the EU market and don't want to risk that. This is why the British Chancellor fought so hard against these rules:the City banks will have no other option than to obbey them if they want to keep trading in the EU. Remember: the reason the UK joined the EU in the first place and hasn't left was exactly so that the country's companies would have free access to the single market.



Ghordius's picture

interestingly there were voices that pointed to the new trading balance between the UK and the rest of the EU (particularly the eurozone) where the UK is now a net importer and so would have a stronger position - I still doubt this

but yes, the stranglehold that megabanks have on the US and the UK is much, much weaker on continental europe - something I'm trying to point out since over a year here on ZH

and... ta dah! the currency grid that is this federation of national banks aka the eurozone is a further political shield against the inroads of the megabanks, Draghi-"Squid" notwithstanding

Acet, still more in the anti-EUR camp than in the pro-EUR one?

Sandmann's picture

It is a good move but not enough.  Banks should be Utilities

LetThemEatRand's picture

Lloyd Blankcheck will not be affected.   Nor will Jamie Diamondmine.  More for them.

Mark123's picture

Here's an idea you clueless idiots....let the f'ing banks fail!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!  Provide NO government support to lenders, depositers, businesses.....and reduce the size of government by say, 90%.  Oh about enforcing the existing laws and abolish private central banks?



zhandax's picture

giving more favourable treatment to long-term pay linked to the health of a bank, such as equity or bonds that are written down when an institution fails.

Yeah, it occurs to me that a bank would have to have a risk of failure for this to impair compensation.

sitenine's picture

OK, so let me get this straight.. Banks are TBTF, meaning that they are above the law, and at the same time we expect that new rules are going to somehow do WHAT exactly? Someone please help me understand this.

Ghordius's picture

to get you straight: this is an European Union law

Sandmann's picture

Yes and about time too....when will Ackermann be brought to account ?

Ghordius's picture

hope soon, very soon. I fervently hope that the monster known as Deutsche Bank will be dismantled, but I fear ze Germans feel the need to have a "financial dreadnought" (as Jesse of the Cafe Americain calls them) of their own

perhaps they should rename the beast in Bismarck or Tirpitz Bank

Lebensphilosoph's picture

It's A European Union law. Kindly refrain from decimating our language with your continental hyper-correctivity.

Ghordius's picture

+1, Lebensphilosoph, I stand corrected and thank you for it. Do you care for a comment on the matter of the article or any of my musings?

I really like that: continental hyper-correctivity

sitenine's picture

So you are implying that European banks are not TBTF and that they follow the law? Sorry, but that doesn't help.

Ghordius's picture

some european banks are indeed TBTF - see my comment on Deutsche Bank

follow the law? well, it depends - see the Monte dei Paschi di Siena scandal

but one thing I can tell you for sure: continental europeans see the banks as a facility

and have a tendency to nationalize instead of bailing out

resurger's picture

Does that go for the small average bank employee and the CEOz, CIOz, Managers as well ?

or some bankers are more equal than others. If others get a smaller cut of the cake, that means others get more.

GtownSLV's picture

The great battle of sucking; Socialists vs TBTF...

dunce's picture

Our banking problems were not and are not caused by bankers pay levels, they are the result of government meddling in the credit market and messing with pay packages will not fix that problem. It is more likely to aggravate the problem. The politicians act like they have never heard of opportunity cost or if they have then they do not understand the practical effects of such costs. They think any moron can manage money because they do.

q99x2's picture

That's still enough to buy one of my sculptures.

Ghordius's picture

LOL - "The impact, however, will be partly softened for the City of London..." Time for the City of London to leave the EU, eh? Too bad they have to drag England with them, eh?


"George Osborne, the UK chancellor who led frantic diplomatic efforts to blunt the curbs, must now decide whether to force a debate or a formal vote at a meeting of finance ministers next week."


Oh, poor, poor George, I wonder how many friends you still have in the FinMin group?


As I have written many times here in ZH, continental europeans see the banking systems as facilities, in the same way as the other systemic grids


Acet's picture

Well, the Tories received most of their campaign contribution money from Financial Institutions in the City of London, so Osborne is just fighting for his paymasters.

Also, the carrot of highly paid sinecures in Finance once they retire from politics is certainly still being dangled in front of the nose of those politicians. Wasn't Tony Blair (that pinacle of Financial and Economic expertise) that ended up in Goldman Sachs getting $4 milllion a year!?

By the way, RBS, the local bank that had to pretty much be nationalised (but is "kept at arms length from the state", which means that they effectivelly manage themselves and have thus carried on with the same old shit, only worse so, thus remaining socially useless) has just posted a loss of £5 billion for 2012, their 5th consecutive year of losses (interestingly, their investment banking arm kept getting billions in bonuses all throughout these 5 years).