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Banks race to overhaul remuneration as EU sets bonus cap

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The EU Council pushed through the plan to cap bankers’ bonuses at a maximum of double their salary from 2015.

The measure will come in on 2014’s bonuses, paid out at the start of 2015. Christopher Mordue, an employment partner at Pinsent Masons commented: “This vote in favour of the bonus cap is no surprise and at least the banks have a clear timetable for reforming their bonus structures. The problem is that there are still some significant uncertainties about how the cap will work and who will be caught by it. Firms now face the difficult task of overhauling their remuneration practices in a short timescale without a clear picture of the final shape of the new rules. This is likely to result in broad brush compliance approaches, including increasing salary to mitigate the impact of the cap.

Another issue is that this proposal is only one strand in an emerging web of regulation around pay in the banking sector. The UK Parliamentary Banking Commission's report just a couple of days ago also recommended significant changes in this area, including a new remuneration code, longer deferral periods for variable pay and greater use of clawback provisions. While these are broadly consistent with the thrust of the EU measures under CRD IV, the question is whether the UK measures will impose structures and requirements beyond those under EU law, requiring yet further changes to remuneration packages. Firms will need to ensure that they maintain sufficient flexibilty to alter pay structures to meet further regulation down the line. Since all these measures focus on variable pay, they inevitably build incentives to increase salaries, an approach which runs contrary to the aim of aligning pay with long term performance and disincentivising short term and high risk practices.”

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