As has been widely reported, the European Banking Authority has stated that many role-based allowances should now be treated as variable remuneration, which will result in many banks being in breach of the "bankers' bonus cap".  

In this briefing we look behind the headlines, at the opinion published by the EBA.

In the past year a number of financial institutions have awarded "role-based allowances" to certain key staff members. The allowances are intended to qualify as fixed remuneration for the purposes of applying the cap on variable remuneration imposed by CRD IV (the so-called "bankers' bonus cap"). The allowances therefore allow a higher level of variable remuneration to be paid within the cap, but also give institutions more flexibility as to how to structure fixed pay, with the allowances being designed to mitigate the risks posed by high fixed costs.

The European Banking Authority has now announced a clamp-down on the use of role-based allowances, in an EBA Report and an accompanying EBA Opinion published on 15 October 2014. In this briefing we look at:

  • What has the EBA done?
  • What does the EBA believe constitutes a role-based allowance?
  • When can a role-based allowance be fixed remuneration?
  • How does the EBA's view align with the CRD IV text?
  • Can allowances still be paid in shares?
  • What does this mean for role-based allowances?
  • Does the EBA appreciate the impact on fixed costs?
  • Do investors have a view? 
  • Next steps

The EBA Report and the EBA Opinion are available here.

What has the EBA done?

The EBA has undertaken a review of role-based allowances, which it reports have been implemented in 6 EEA member states, including the UK. The EBA reviewed bank remuneration policies, as well as seeking input from local regulators, to assess the use of allowances by 39 financial institutions across the EEA, representing a material part of the European banking sector.

In the Report, the EBA reviews the characteristics of role-based allowances, and highlights those which, in its view, cause role-based allowances to constitute variable, rather than fixed, remuneration.

The EBA has explained that it is not seeking to prohibit the use of allowances, but is looking to ensure that where they are used they are correctly categorised.

The EBA Opinion states that local regulators should now use all necessary supervisory measures to ensure that, by 31 December 2014, relevant institution's remuneration policies are updated to classify role-based allowances as variable remuneration in line with the Opinion. Regulators will then be expected to ensure that any reclassification of allowances does not cause institutions to breach the cap on variable remuneration.

It is not yet clear how the EBA's Opinion will affect bonuses due to be paid in early 2015 in respect of the 2014 performance year. If existing allowances have to be reclassified as variable remuneration, the level of bonuses able to be paid in 2015 could be limited by the cap on variable remuneration to significantly less than staff may expect. Alternatively, if bonuses are paid in line with the firm's current expectations, those bonuses might prove to be in breach of the Remuneration Code.

The PRA has, however, been supportive of role-based allowances to date. In a speech on 16 October 2014 (available here), Andrew Bailey, the CEO of the PRA, said that allowances are "not a good solution", but that "the bonus cap is the wrong policy, the debate around it is misguided, and the best thing I can say about allowances is that they are a response to a bad policy". It might well be, therefore, that the PRA will seek to give firms time to implement any changes in approach that prove necessary as a result of the EBA's Report.

What constitutes a role-based allowance?

The EBA has identified 12 characteristics common to role-based allowances. These include:

  • they are treated as fixed remuneration, but without being included in basic salary or pensionable remuneration
  • they are initially granted for a limited period of time
  • they are based on "role and responsibility, seniority of staff or the level of influence of the staff in the institution"
  • they are reviewed by institutions periodically (in most cases either annually or quarterly)
  • payments are subject to the institution's discretion, and can be adjusted up or down
  • they are often forfeited on giving notice

The EBA distinguished a role-based allowance from other, more customary, allowances which "are part of routine employment packages". These include childcare allowances, additional pension contributions, travel allowances and health insurance, and these are not included in the EBA's review.

The EBA then also distinguished "market-value" allowances, where staff on assignment abroad receive an allowance to reflect remuneration levels in the local labour market. The EBA found that market-value allowances are available to all staff, pursuant to a transparent policy, and are paid for a duration and at a level set by predetermined criteria. The EBA therefore found that market-value allowances do "not seem to be problematic".

When can a role-based allowance be fixed remuneration?

In order for a role-based allowance to constitute fixed remuneration, the EBA states that both (1) the criteria for awarding allowances, and (2) the amount of the allowances, must:

  • be predetermined
  • be "permanent" (i.e. maintained over time for a specific role and organisational responsibilities)
  • be non-revocable
  • be transparent to staff
  • not provide incentives to take risks

How the EBA's view aligns with the CRD IV text

As became clear when institutions began considering the introduction of role-based allowances, the text of CRD IV does not give much detail as to what constitutes fixed or variable remuneration.

The text of CRD IV indicates that:

  • fixed remuneration includes remuneration that is not performance-related and which reflects professional experience and organisational responsibility, and
  • variable remuneration includes remuneration that reflects performance in excess of that required by the staff member to fulfil their job description.

However, the recitals to CRD IV (see box) state that, in addition to remuneration that is performance-related, in "exceptional circumstances" variable remuneration can include "other contractual elements but not those which form part of routine employment packages". The EBA places emphasis on this additional wording in its Report, and seems to see this wording as permitting it to view role-based allowances as being variable remuneration even when there is no (or only a very indirect link) to performance.

We look below at each of the criteria set by the EBA in light of the CRD IV text.

How does CRD IV define fixed and variable remuneration?

CRD IV, Recital 64

"… fixed remuneration … includes payments, proportionate regular pension contributions, or benefits (where such benefits are without consideration of any performance criteria), and variable remuneration … includes additional payments, or benefits depending on performance or, in exceptional circumstances, other contractual elements but not those which form part of routine employment packages (such as healthcare, child care facilities or proportionate regular pension contributions). Both monetary and non-monetary benefits should be included."

CRD IV, Article 92(2)(g)

"…the remuneration policy, taking into account national criteria on wage setting, [must make] a clear distinction between criteria for setting:

(i)      basic fixed remuneration, which should primarily reflect relevant professional experience and organisational responsibility as set out in an employee's job description as part of the terms of employment; and

(ii)     variable remuneration which should reflect a sustainable and risk adjusted performance as well as performance in excess of that required to fulfil the employee's job description as part of the terms of employment."


The requirement for the amount of fixed remuneration to be "predetermined" seems to be another way of stating that fixed remuneration cannot be dependent on performance, and this does not seem controversial. However, it is less clear from the text of CRD IV that the criteria for awarding allowances must also be predetermined: the fact that an institution might consider the level of allowance to be awarded to each staff member on a case-by-case basis does not seem to convert the allowances, once awarded, into variable remuneration. Indeed, CRD IV recognises that fixed remuneration should reflect (in part) a staff member's "professional experience", so tailoring the level of an allowance to reflect the skills and experience of each staff member should be as justifiable as tailoring the level of base salary.

Permanent and non-revocable

The EBA states that the requirement for allowances to be "permanent" is justified by the label of "fixed remuneration". However, as noted above, CRD IV seems to use the term "fixed" in the sense of not being performance-related, rather than being permanent.

The EBA does indicate that this requirement should be satisfied provided the allowance would be payable for the entire period during which an individual performs the role which entitles the individual to that allowance. Although not mentioned by the EBA, this requirement does seem to be supported by the indication in the CRD IV that fixed remuneration should "reflect … organisational responsibility". If an allowance can be adjusted or suspended without a change in role, it is less clear that the allowance fulfils this criteria.

The EBA also states that allowances which can be forfeited, in particular on the staff member giving notice, cause the allowance to become variable remuneration as the allowance is not permanent.

The EBA does not separately explain the basis for allowances to have to be "non-revocable" in order to constitute fixed remuneration, but presumably this is seen as another formulation of the requirement for allowances to be "permanent".

We recommend that, irrespective of payment dates, allowances should accrue on a daily basis in the same way as salary, and be paid to the date of ceasing employment. There is, however, uncertainty as to other terms that would be acceptable. The EBA does not discuss whether longer term allowances (fixed for a period of a number of years) could also be treated as sufficiently permanent, or whether it will be permissible to provide that allowances are reviewable in the event of material changes in regulation (a key point given the UK government's legal challenge to the CRD IV cap on variable remuneration).

Must not provide incentives to take risks and must be transparent to staff

The requirement for allowances "not to provide incentives to take risks" also seems, on its face, a reformulation of the requirement for allowances not to be performance-related. However, the EBA expands on this requirement in a number of ways.

The EBA notes that some allowances are reviewable based on the economic environment. This type of provision would be intended, by the institution, as a further protection to its prudential stability, so as to limit remuneration payments in periods of extreme economic stress. However, the EBA finds that "there is a link between the economic environment and the performance of the institution, as shown during the financial crisis", and this type of provision therefore causes the allowance to be performance-related. The reasoning that such an indirect link to the bank's performance is sufficient to cause remuneration to be performance-related may be a point on which local regulators will seek to disagree with the EBA (see also "Does the EBA appreciate the impact on fixed costs?" below).

A compromise position could be to restrict the grounds for non-payment or review to circumstances where the prudential sustainability of the institution is under threat: there would appear to be good policy reasons in support of such an approach, which local regulators may be able to persuade the EBA should override any indirect link to performance.

The EBA also takes issue with the fact that the role-based allowances are awarded without any transparent policy or criteria, either as to eligibility, quantum or the terms on which the allowances will be reviewed. The EBA notes that, without this transparent (and predetermined) policy, allowances do not guide staff behaviour, and could incentivise staff to take additional or excessive risks to seek to ensure that their allowances are not revoked or reduced.

Can allowances still be paid in shares (or other instruments)?

The EBA Report recognises that many role-based allowances are paid in shares (or other instruments), but the EBA does not highlight this as being a feature of an allowance that would cause the allowance to be treated as variable remuneration. If allowances can be designed to comply with the other tests laid down by the EBA, it therefore seems that it will still be possible for allowances paid in shares to be capable of constituting fixed remuneration.

What does this mean for role-based allowances?

It is likely that it will be possible to continue using role-based allowances which will be classified as fixed remuneration, but the flexibility with which such allowances are currently being used will be significantly reduced.

Allowances are likely to have to relate strictly to the role performed by the individual concerned, so as to be payable for the entire duration during which the individual performs that role, including during any notice period.

The circumstances in which the allowances can be suspended or reduced will have to be curtailed, although it might be hoped that local regulators will push back against the EBA's suggestion that any possibility of suspending payment on grounds of prudential stability would cause the allowance to become performance-related.

Institutions will also have to draft and publish a policy, in order to make the approach to role-based allowances explicit to staff.

As discussed in this briefing, the EBA seems to be on weaker ground with its suggestion that the means of determining the quantum of allowances must be predetermined. It might be that a middle ground may appear, so that institutions will be able to retain more discretion as to eligibility and the level of allowances that are awarded, provided that once awarded the allowances are more clearly permanent and non-revocable.

As also discussed above, it seems that allowances that comply with the tests laid down by the EBA should still be able to be paid in shares without being classified as variable remuneration, so that institutions can continue to rely on the share price to provide, indirectly, both an (acceptable) link to the bank's performance and a measure to limit the levels of remuneration where the prudential stability of the bank is at risk.

Does the EBA appreciate the impact on fixed costs?

In short, yes. The EBA Report explicitly addresses the fact that a commercial driver for introducing role-based allowances is the desire to retain cost flexibility, and the EBA notes that "cost flexibility is of importance where the performance of the institution or a business unit is no longer considered adequate". However, rather than seeing this as a reason why allowances should be accommodated, the EBA sees the fact that allowances create cost flexibility as another indicator that the allowances are indirectly performance-related.

This paragraph, and the EBA's separate discussion of the link between a bank's performance and the wider economic environment (discussed above), both seem to explicitly demonstrate that the EBA sees controlling how remuneration is awarded as being more important than allowing banks to have flexibility to ensure that remuneration levels are reduced in times of economic stress.

Do investors have a view? 

UK listed banks are required to present their Directors' Remuneration Policy to shareholders for approval (subject to a binding shareholder vote), and shareholders have approved bank Remuneration Policies that include role-based allowances. 

On 20 October 2014, however, the Investment Management Association issued an updated version of the IMA (previously the ABI) Principles of Remuneration, which state that; "Members consider that, in general, the use of allowances as part of fixed pay goes against the spirit of simplicity, clarity and pay for performance". 

This addition to these voting guidelines may add a further complication for UK listed banks if they need to update their Directors' Remuneration Policy to reflect any amendments to the terms or use of allowances. 

Next steps

The Prudential Regulation Authority's formal response to the Opinion will be keenly awaited, given the UK's hostility to the CRD IV cap on variable remuneration and the PRA's acceptance of role-based allowances to date.

Subject to the PRA's response, UK banks using role-based allowances will have to review the terms on which they offer allowances, and the terms of those allowances, if the allowances are to avoid being reclassified as variable remuneration. Given the possibility of having to amend remuneration policies backdated to 1 January 2014, institutions using role-based allowances should start to consider what action they may need to take. As some allowances will already have been paid, there are potential issues on how this will impact the level of bonus for 2014 and, further, the possibility of some allowances (if re-categorised as variable remuneration) themselves breaching the CRD IV cap on variable remuneration. Guidance will be needed from the PRA as to how to deal with these situations and, in particular, whether it will be sufficient for firms to change the terms that apply to allowances or whether firms may be required to consider claw-back or other ways of correcting the position.