New rules on pay for certain staff in the financial services sector limit the amount of variable pay affected staff may receive to 100 percent of fixed pay (or, if shareholder approval is obtained, up to 200 percent).
As part of a restricting of pay arrangements, certain financial institutions have been adopting so-called "role-based allowances" and treating these allowances as fixed remuneration. Typically, such allowances may be amended from time to time, or revoked by the employer.
In an opinion published on 15 October, the European Banking Authority ("EBA") has now made it clear that role-based allowances "which are not are not predetermined, are not transparent to staff, are not permanent, provide incentives to take risks or, without prejudice to national law, are revocable, should not be considered as fixed remuneration". The EBA's report considers common characteristics of role-based allowances. According to the EBA, many of those characteristics are typical conditions used for variable remuneration, so role-based allowances with those characteristics should be considered a form of variable remuneration.
Competent authorities will be expected to ensure that this opinion is followed and that the affected allowances are correctly treated as variable remuneration.
The deadline for implementing these new rules is fast approaching - 31 December 2014. The UK government has submitted a legal challenge to these new rules, which was heard on 8 September 2014, but the decision is not expected until after the deadline.
Those institutions affected will therefore need to reconsider their approach to this question and various alternative suggestions may need to be revisited. Baker & McKenzie's integrated incentives and employment practice is able to help institutions swiftly consider this new development and the various issues it raises.