Counterparties: European bonus season just got a lot more boring

By Ben Walsh
February 28, 2013

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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’s salary, or two years’ salary with shareholder approval. The rule will apply to employees at EU-based banks, regardless of where they’re located. It’ll apply to employees of foreign banks working in the EU, too.

London Mayor Boris Johnson isn’t happy: “Brussels cannot control the global market for banking talent”. He thinks the move is “possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman empire”. Europe’s bankers are also predictably unhappy. The WSJ quotes a bank executive who thinks the rules are “crazy” and a “disaster”.

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 “increase the salary to the anticipated bonus, hold it in escrow until year’s end, and then subject it to a clawback for underperformance”.

Masa Serdarevic thinks the rule will affect star traders of the world, and particularly, where they’ll want to live. “Working in Zurich for UBS, say, suddenly becomes a whole lot more attractive than any bank in London.” She also says that big bonuses can serve a useful purpose:

It’s also worth thinking about why banks pay bonuses in the first place. It’s 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’s sensible budgeting, not something they do because they like to throw money at their employees.

For now, there’s 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’re already working on it. — Ben Walsh

On to today’s links:

Businessweek’s latest cover presents “minorities as greedy grotesqueries” - Ryan Chittum

Why Argentina will default this year – Felix

Interesting Failures
The “ownership society” ideal is way past its sell-by date - Mike Konczal

New Normal
Student debt has almost tripled in the last 8 years, average balance up 70% – Liberty Street Economics
Private student loan ABS is so hot right now – WSJ

Popular Myths
Neither the public nor the pundits understand the basics about America’s debt – Dan Drezner
A Nobel-winner on some of the more persistent debt myths – Robert Solow

Nice Try
Lehman is trying to blame its bankruptcy on JPMorgan’s London Whale trader – Reuters

Good Reads
“Brooklyn is a large place, larger than ‘Brooklyn’”: A great essay on 27 years in Brooklyn - David Wondrich

Ang Lee, uncertainty and endurance as the key to success – Jeff Lin

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

Life Is Not Fair
Blogger disappointed to discover that blogging has failed to influence Congress – Matt Yglesias

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Of course, one could just recast bonuses as ‘profit sharing’. I’m quite sure it would be very difficult for EU mandarins to create law that would exclude equity/RSU holders from getting dividends only if they are ‘bankers’…

Posted by ckm5 | Report as abusive

ckm5: that would be a great result. Pay bankers large compensation only to the extent profits also get distributed to shareholders. That seems to solve several incentive misalignment problems with one change.

Posted by SteveHamlin | Report as abusive


It would not do what you think. A new class of equity would be created with different dividend structures or some other allocation mechanism like capital accounts. Basically, it’s far too easy to find a different way of achieving the same goal, just don’t call it a bonus….

Posted by ckm5 | Report as abusive

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