(Bloomberg) The European Union’s largest securities firms may have to raise fixed pay for bankers or risk losing their highest-paid staff to U.S. competitors after the region’s banking regulator blocked efforts to sidestep limits on bonuses, according to analysts and recruiters.
The European Banking Authority yesterday gave firms until the end of the year to bring their practices into compliance with EU rules that ban bonuses of more than twice fixed pay after finding 39 banks got around the cap.
Barclays Plc (BARC) and HSBC Holdings Plc (HSBA) are among the biggest European lenders with global investment banking operations that have sought to offer employees discretionary payments tied to the role the employee holds. At stake is the firms’ ability to retain staff in some of their most profitable businesses and compete with U.S. firms without boosting fixed costs. Unlike U.S. and Swiss firms that are only subject to the restrictions in the EU, European firms must implement the rules worldwide.
“This is the first time banks haven’t been able to circumvent the continuous pressure from Brussels to stop additional pay to bankers,” said Jason Kennedy, chief executive officer of London-based recruitment firm Kennedy Group. “This can be a total disaster for them. This is the final nail in the coffin for European banks vis-a-vis the battle to remain ahead of U.S. banks.”
European regulators have moved to tighten compensation regulations to prevent a repeat of the risk-taking that contributed to the 2008 global financial crisis.
Britain has challenged the rules at the bloc’s highest court in Luxembourg, arguing that they overstep the powers laid out in the bloc’s treaties. The British Bankers’ Association estimates the rules apply to about 35,000 employees globally.
“The EU bonus cap is a fundamentally flawed approach,” Andrew Tyrie, a British lawmaker and chairman of Parliament’s Treasury Committee, said in an e-mail. “It will encourage banks to increase fixed pay rather than embed incentive structures that improve standards.”
Salaries for senior bankers rose an average of 26 percent in 2012 as banks prepared for bonus caps, the EBA said in a June report, which surveyed 137 banks across the EU.
Officials at HSBC and Barclays in London, Paris-based BNP Paribas (BNP) and Deutsche Bank (DBK) AG declined to comment today. Stefan Krause, the Frankfurt-based company’s chief financial officer, estimated in April the bonus cap would cost the bank 300 million euros ($383 million) in 2014.
U.S. investment banks with businesses in Europe have already moved to increase pay for some bankers in light of the bonus caps. Goldman Sachs Group Inc. (GS) is planning to raise fixed pay for some senior employees and traders in Europe, a person with knowledge of the plan said in January. Representatives of the firm in London declined to comment as didCitigroup Inc. (C)
Banks affected by the limits are likely to try and find a way around the restrictions by increasing benefits-in-kind, according to Simon Maughan, head of research at financial-analysis firm OTAS Technologies.
Firms may also scale their activities and seek to reduce costs through greater use of technology, according to Neil Smith, a banking analyst at Bankhaus Lampe in Dusseldorf,Germany.
“It reduces the flexibility and it creates weakness for European investment banks,” Maughan said. “They will find a way around.”