Some bankers may escape EU cash bonus limit

Most of Europe's best-paid bankers will get only 20% of their next annual bonus upfront in cash under guidelines finalised on Friday, but some may escape the net thanks to a last-minute concession.

The stamp of approval from European Union regulators comes as banks prepare to make their annual bonus awards within days.

The Committee of European Banking Supervisors (CEBS) alarmed banks in October when it published the guidelines in draft form because they were tougher than what world leaders at the Group of 20 countries had agreed.

Bankers and lawyers said the more flexible, revised guidelines agreed by CEBS on Friday to take effect next month remain the toughest pay curbs in the world.

The guidelines, which came in an 86-page document, will cover the 2010 bonus round and onwards.

The revised guidelines surprised bankers and lawyers by including the ability for firms or staff who take on little risk to "neutralise" some requirements.

Lawyers welcomed the less rigid criteria for deciding which types of staff should fall into the net, focusing less on income and more on risk taking and responsibilities.

Bankers said compliance would put Europe's banks at a disadvantage.

"These requirements will mean that banks operating in Europe, and European banks operating elsewhere in the world, will be at a competitive disadvantage unless there is recognition of the need for a global agreement on compensation practices," said Simon Lewis, chief executive of the Association for Financial Markets in Europe, a banking lobby.

At least 40% to 60% of bonuses must be deferred over three to five years, while at least 50% must be in the form of equity-linked instruments. All of these rules remain unchanged from the October draft.

Those top-flight bankers earning bonuses of à1-million or so will be limited to 20% of that upfront in cash - and as little as half of that once tax is paid.

But in order to meet a proportionality principle in the EU framework law, firms can "neutralise" some elements of the rules - allowing some firms, either for all or some of their staff, to put aside the requirements on variable pay in equity-linked instruments, retention or deferral.

But supervisors must make sure that in applying this principle the objectives of the guidelines to cut excessive risk taking or a level playing field among different firms and jurisdictions are not affected.

Stefan Martin, a partner at law firm Allen & Overy, said the "neutralisation" provision was a significant change and could offer an escape route for brokers and market makers who act as intermediaries and not committing the firm to major risks.

"That will be seized on not just by smaller firms but across the board to try and justify why for particular employees a particular provision is not proportionate," Martin said.

The CEBS guidelines still stop short of a pan-EU maximum ratio between fixed and variable pay, leaving it up to banks to decide on an "appropriate balance", in line with earlier drafts.

CEBS will study the implementation of the guidelines in the fourth quarter of 2011. Banks such as HSBC and Barclays have already begun bumping up base salaries in view of the bonus curbs.