Following recent discussions on this topic, lawmakers in the European Parliament have now adopted legislation intended to cap the value of bonuses paid to certain bank staff.

Background

The measure forms part of the Capital Requirements Directive IV package of reforms implementing the Basel III regulatory framework, which aims to improve stability in the financial sector.  The proposed reforms will apply to a range of credit institutions and investment firms. 

The final text will be subject to a detailed review of the legal drafting and translation into the official EU languages, before being presented to the Council of Ministers for formal adoption later this year.

What Does This Mean for Employers?

If formally adopted, the new rules will limit the potential bonus entitlement of certain staff at credit institutions and investment firms, whether they work within the European Union (regardless of their employer’s country of origin), or abroad (if working for a European bank covered by the rules).   

The rules will apply to employees whose professional activities have a material impact on their risk profile — such as senior managers, risk takers and staff performing control functions — and to other employees who receive equivalent remuneration.  The European Banking Authority will develop criteria to help employers identify staff covered by the rules. 

The proposals envisage that the default position for all staff covered by the rules will be a cap on annual bonus payments of 1 x salary.  An institution could increase the cap to 2 x salary with shareholder approval.  This would require the votes of at least 66 per cent of shareholders owning half the shares represented, or 75 per cent of votes if there is no quorum.  An element of long-term deferral will also be necessary for any bonus payment exceeding 1 x salary.  The European Banking Authority will, again, prepare guidelines in this regard.

It is envisaged that, once adopted, the new measures will affect bonuses paid in 2015 in relation to performance in 2014.  This will clearly have a considerable impact on remuneration practice in the financial services sector, particularly given the potential effect on any bonus years that fall wholly or partly after the rules come into effect. 

Employers in the United Kingdom will also eagerly await details of how, if adopted, the legislation will be implemented domestically, given the shift in emphasis from deferral to fixed remuneration that the new rules will have in practice.

What Happens Next?

The final text of the legislation will be prepared and presented to the Council of Ministers for formal adoption later this year.  If approved and published before 1 July 2013, which appears likely, the rules should then be implemented into the laws of each Member State by 1 January 2014.

We will keep the situation under review and will issue a further update as it develops.