The EU introduced new rules, CRD IV, governing bankers’ pay in April 2013. So why is this topic a matter for newspaper headlines now?
The rules include a cap on the value of variable pay of many employees of banks and credit institutions (although generally FCA prudentially regulated investment firms are excluded). The cap limits variable pay to an amount equal to 100% of base salary, or 200% if approved by shareholders.
The new rules were met with much opposition from the financial sector while other groups felt the provisions did not go far enough.
What is happening in the market now?
The UK published its challenge to the EU ruling in February 2013 – however, the cap will be implemented in the UK pending the outcome.
In the meantime, many financial institutions are outlining their plans for dealing with the cap.
Virgin Money is to use the shareholder approval route to award bonuses of up to 200% of base salary. Meanwhile, Barclays and HSBC are both planning to pay monthly allowances to affected staff. Such arrangements have drawn criticism where monthly allowances can be varied annually on the basis that it is a circumvention of the rules by including in fixed remuneration an amount which actually can vary in level.
Andrew Tyrie, Chairman of the Treasury Select Committee and the Parliamentary Commission on Banking Standards is highly critical of the distance between the approach of some banks and the Commission’s proposals, and over the coming months we can expect to see more calls to align bankers’ reward to the maturity of risk.
What should you be thinking about?
Many financial institutions have been reviewing remuneration policies in light of CRD IV. However, any employer considering amendments to bonus plans must take account of employment law issues which could restrict their ability to make changes.
- Generally employers can amend employment contracts and bonus schemes to ensure compliance with the law. However, that power remains subject to a general obligation on an employer not to breach the implied mutual duty of trust and confidence, and this must at least include giving employees adequate notice of any proposed change to remuneration policies.
- Firms who can disapply the full scope of CRD IV may not be able to rely on the need for legal compliance as a rationale for any proposed changes: technically they are not legally required to comply. However, it should be possible to make changes provided that employees’ contractual terms and/or the scheme rules reserve discretion to the employer and include a power to make variations.
- It is essential that any bonus plan reserves a power for the employer to make changes to take account of legal developments. If the UK’s challenge to the bonus cap is successful, employers may want to make further amendments to bonus plans in due course.