Counterparties: European bonus season just got a lot more boring
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For the financial sector, London, and the rest of Europe, just got a little less swinging. As a part of Basel III, the European Union is moving ahead with new rules that will limit bonuses to one year‚Äôs salary, or two years‚Äô salary with shareholder approval. The rule will apply to employees at EU-based banks, regardless of where they‚Äôre located. It‚Äôll apply to employees of foreign banks working in the EU, too.
London Mayor Boris Johnson isn‚Äôt happy: ‚ÄúBrussels cannot control the global market for banking talent‚ÄĚ. He thinks the move is ‚Äúpossibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman empire‚ÄĚ. Europe‚Äôs bankers are also predictably unhappy. The WSJ quotes a bank executive who thinks the rules are ‚Äúcrazy‚ÄĚ and a ‚Äúdisaster‚ÄĚ.
The hyperventilators should probably take a deep breath. Base salaries will likely rise in response to the rules. Or, why not just do what John Carney and Lex suggest, and ‚Äúincrease the salary to the anticipated bonus, hold it in escrow until year’s end, and then subject it to a clawback for underperformance‚ÄĚ.
Masa Serdarevic thinks the rule will affect star traders of the world, and particularly, where they‚Äôll want to live. ‚ÄúWorking in Zurich for UBS, say, suddenly becomes a whole lot more attractive than any bank in London.‚ÄĚ She also says that big bonuses can serve a useful purpose:
It‚Äôs also worth thinking about why banks pay bonuses in the first place. It‚Äôs mainly because they want their staff costs to have a relatively small fixed component (base salaries) and a larger variable component (bonuses), meaning they can reward and retain individuals at their discretion. It‚Äôs sensible budgeting, not something they do because they like to throw money at their employees.
For now, there‚Äôs little for bankers to fret about: the regulations face numerous layers of scrutiny and likely revision before they take effect in January 2014. As the Epicurean Dealmaker tweeted, the sure-fire winners in this situation are compensation consultants, who have at least a year to figure the best way around the new rules. In fact, the FT reports that they‚Äôre already working on it. — Ben Walsh
On to today‚Äôs links:
The Supreme Court wants the SEC to work a little faster – Dealbook
For approximately the 87th time, the Volcker Rule is being delayed -¬†WSJ
Occupy the SEC is suing the Fed, SEC, CFTC, OCC, FDIC and Treasury over Volcker delays -¬†Occupy the SEC