The European Banking Authority (EBA) yesterday published its views on certain allowances paid to senior staff at banks caught by the new “bonus cap”.  These had been designed to be fixed pay to allow higher variable pay to be awarded without the normal costs and other disadvantages of salary.  

In general, the EBA thinks they have not achieved the banks' objectives.

Background – what are the relevant allowances?

By way of background, senior staff in large banks now have their maximum variable pay capped by reference to their fixed pay. Variable pay (bonuses, share scheme awards etc.) can only be 1 x fixed pay or, if shareholder approval is received, 2 x fixed pay. Click here to see our earlier Law-Now for details on this.

On the basis that banks still feel considerable pressure from their shareholders and employees to award high variable pay, most impacted banks have increased fixed pay.  That way acceptable (albeit often still reduced) multiples can still be awarded as variable pay in compliance with the new rules.

The simplest way to increase fixed pay is just to increase salary. However, that can have some knock-on implications in terms of increasing pension contributions or entitlements and affecting employee severance costs, both of which are usually expressed in terms of multiples of salary – and salary once increased can normally not be reduced later without employee consent.

An alternative way has been to introduce the concept of an allowance which is paid to reflect being a senior staff member. The allowance can be paid in cash or shares. While it would have no performance conditions itself, it is linked to the role and so falls away when the role ends. There have also been a number of other aspects to these allowances. For example, some can be withdrawn or reduced at will by the bank, or are of a fixed term (unless renewed by the bank), and most do not feed into pension contribution or severance cost calculations.

The bonus cap is an EU-wide measure.  Across Europe many felt that the terms of these allowances came closer to being variable pay rather than fixed pay, although the Prudential Regulation Authority (PRA) was satisfied that they could in the UK fall to be treated as fixed pay and so enable higher variable pay to be awarded. This issue was referred to the EBA for its views. With the policy intention behind the bonus cap to limit variable pay as much as possible, the European Commission added its own views that these were not fixed pay and so did not count towards variable pay multiples.   

EBA ruling

The EBA has delivered a formal opinion saying that in most cases the allowances it has seen fall the wrong side of the line and are variable pay and so do not increase the cap but rather eat into it.
While what is fixed pay and variable pay is not defined in the clearest of ways, as part of its opinion the EBA analyses the legislation, what was intended to be caught and how the allowances it has reviewed interact with the legislation. While its own analysis is not entirely clear either, the fact that the allowances can be easily withdrawn and do not feature in notice pay are two aspects that the EBA thinks put the allowances into the variable pay rather than the fixed pay category.  To be fixed pay, a degree of performance is required - the ability of a bank to withdraw or reduce them, or not renew them, is not helpful.

The future

Any allowances will now need to be analysed on their own particular facts in the light of the EBA’s opinion. The PRA has not yet expressed any public reaction.  However, anything which has even borderline elements will need to be carefully justified and cleared with the PRA.  The PRA though sympathetic to many banks and together with the UK Government is separately opposing the cap itself (click here to see our earlier Law-Now), nonetheless must now take the EBA’s formal views into account. 

It may now be that salary increases simply need to be accepted in order to reach a level of fixed pay which allows the desired level of variable pay to be awarded.  It is also not entirely clear what happens when allowance arrangements have been in place for the past year and whether anything needs to change retrospectively or whether it is just forward arrangements that need to be changed.

Further EBA guidelines on sector pay are also expected this year to affect 2015 and future remuneration and so there may be even more EBA views to take into account when setting pay for relevant employees next year