The European Banking Authority (“EBA”) has published a follow up report relating to the use of Role Based Allowances (“RBAs”) at European financial institutions, which reinforces the aim of preventing banks from continuing to classify such allowances as fixed pay.
Since January 2014, EU banks have been required — under the Capital Rights Directive IV (“CRD”) — to limit variable pay to a maximum of one times fixed pay, or two times fixed pay with shareholder approval. In response to these prescribed limits, UK banks introduced fixed share allowances to a number of executives, with HSBC the first to do so in February 2014; Stuart Gulliver, CEO of HSBC, receives an allowance of £1.7 million annually, on top of his regular fixed pay arrangements.
While the Directive applies to banks in each EU member state, it appears to have caused the most controversy in the UK, home to some of the world’s largest lenders, and a market where performance-based pay has historically been more prominent. The Bank of England has repeatedly expressed concerns over the cap on variable pay, stating that it will result in the ratcheting up of fixed pay at the expense of performance; indeed, the introduction of RBAs at UK institutions was designed to circumvent the cap, effectively doubling fixed pay at all the UK’s major listed banks, thus allowing bonuses and long-term incentives to remain relatively high in absolute terms.
The EBA’s original opinion, provided in October 2014, concluded that most allowances shouldn’t qualify as fixed pay, for reasons including their discretionary nature and the fact that they could generally be adjusted at any stage. In issuing its latest report, the EBA has stated that the competent authorities in the relevant member states had taken measures necessary to ensure that banks’ remuneration policies remain in line with European legislation, with such measures only becoming effective for 2016, given the time required to implement them appropriately.
It should be noted that the EBA has not shut the door completely on the use of RBAs, so long as they are within the banking watchdog’s definition of fixed pay, namely that the compensation is “predetermined, transparent to staff and permanent,” ensuring that companies comply with the spirit of the directive, being a reduced emphasis on variable or ‘at risk’ pay. As such, it appears creative compensation committees and consultants may well be able to devise a structure that allows pay to remain at its current level, while not transgressing the CRD and EBA’s requirements.
While this development may appear to have settled the dust somewhat on the ongoing dispute between the UK regulator and its EU counterpart, there are undoubtedly practical difficulties coming into 2016, not least of which the possibility that employees are contractually entitled to previously agreed upon RBAs, or that portions of such allowances have been paid in contravention of the EBA’s guidance. Either way, while closer to a conclusion on the definitive outcomes of the effects of the CRD IV on UK banks, and the resulting spat between the UK and the EU, it appears the push and shove between EU and member state has not fully concluded. In this regard, we will be watching closely to see if any changes are required and implemented at the UK’s listed lenders during the 2016 proxy season.