Commenting on the provisional European Union deal that bankers’ bonuses are to be capped at two times salary, Jon Terry, remuneration partner at PwC, said:
“Capping bonuses to the extent proposed is a major problem for European banks and will create a huge wave of unintended consequences. Salaries are almost certain to rise substantially, leaving banks with less flexibility to reduce or claw-back bonuses when needed.
"The proposal to allow some forms of deferred pay to count at discounted value provides some relief, although in practice it is unlikely to increase the effective ratio much above 2.5 for 1.
“Bonus caps will reduce both Boards' flexibility in managing one of the most important elements of the cost base and shareholders’ ability to influence pay outcomes. What we really need is greater alignment between performance and pay. Capping bonuses will weaken the link between performance and pay.
"Shareholders won't welcome being put in the invidious position of having to vote to increase bank bonuses.
“The cap will further widen the gap between pay practice in the US and Europe. European financial institutions could find it very hard to attract talent from outside of Europe due to the stringent pay constraints.
"The failure to grant an exclusion for employees outside the EU is a blow for the large EU banks who will now need to compete with one arm tied behind their backs against non-EU banks in New York or Hong Kong. Coupled with a likely expansion of the definition of "risk-takers" later in the year, these proposals could seriously undermine the competitiveness of EU banks outside the EU.
"The proposals mean banks are more likely to build new capabilities in New York, Hong Kong, or Singapore instead of Europe. This will harm employment, not just of bankers but in the wider economy.
"The consequences will be extensive, and most of them unintended. Introducing bonus caps runs the material risk of increasing risk, rather than reducing it.”
