There is no mistaking the nature of the responses to the Banker’s Bonus Cuts proposed by the EU and the gathering speculation around the finer details yet to be published. Looking past this initial reaction there are some who are beginning to consider how to compensate for performance in a ‘post bonus cap’ culture.
Bending the Rules
At present the rules are understood to only address what the European Banking Authority term ‘key risk takers’ this means the likely number of people affected will be determined by local regulators who are responsible for the direct definition. Therefore if the changes do come in to affect the number of people impacted by a bonus cap is likely to be smaller in the UK; however it is worth noting these are often the key strategic employees who are highly valued.
Bump the Base
If history is anything to go by, in particular the response to the introduction of rules to defer bonuses and a one off bonus tax in 2009 & 2010, this is likely to be first port of call. Nonetheless this would present difficulties increasing the cost base and restricting the banks abilities to cut costs through reducing or clawing-back bonuses.
Banking on the future
Deutsche Bank’s initiative may indicate another route to retaining the elusive bonus. Last year the remuneration packages of the top 150 managers were altered so that the proportion of variable pay that vests after 5 years was increased. If this was to be adopted across the industry it would have a significant impact on the calculations of bonus caps by allowing a discount to be applied .
Blurring the Bonus Terms
Another line of thought regarding the end of year bonus is to vary salaries annually based on performance. This would essentially see the fixed salary accommodate the traditional bonus aspect of a package which would then be reassessed on annual performance.
Bye Bye Britain
One of the more extreme suggestions has been the possibility of relocating headquarters in order to avoid the bonus cap. Although this is not a new concept with the likes of HSBC and Barclays previously threatening it, the practicalities in terms of political and reputational damage would be severe, more so than damages caused through avoiding the bonus cap.
The more likely option would be the transfer of headcount away from Europe to other financial hubs such as New York or Hong Kong, which would see the development of new capabilities and the retention of bonus packages.