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Banks rush to redraft pay deals

Banks across the European Union are racing to adhere to new executive bonus rules.

Story highlights

  • Banks across Europe race to amend executive pay deals by month end
  • New EU bonus rules cap senior bankers' bonuses at the level of their salaries
  • Experts predict significant salary inflation to offset the caps

Banks across Europe are racing to amend executive pay deals by the end of the month in an attempt to adhere to new EU bonus rules and secure shareholder approval at upcoming annual meetings.

"It couldn't be a more difficult time," said one remuneration committee member whose bank's annual meeting is looming in May. "Our lawyers thought they had all the paperwork done and signed off. Now they're looking at whether they can redraft everything in time."

Banks and their shareholders were thrown last week when the EU pushed through a long-debated plan to cap senior bankers' bonuses at the level of their salaries -- or twice that tally with the express approval of investors. The rules are set to come into force in January 2014.

"We've spent months structuring sophisticated schemes with our shareholders," one bank boss said. "Now we're going . . . back to the drawing board."

The most pressing problem relates to chief executives and other board-level executives, whose pay deals must be put to shareholder votes.

While banks and their investors say it is too early to predict how pay deals will be restructured, most remuneration experts believe there will be significant salary inflation to offset the caps. Annual bonuses and long-term incentive plans are also likely to be amalgamated.

Pay experts said that would mean chief executives, at present paid salaries of up to £1.5m, could expect basic pay to rise to between £2m and £3.5m. "Banks are going to have to roll up their sleeves to get these schemes restructured fast," said one senior fund manager.

Directors warn that missing the deadline would mean either flouting the rules next year -- or being forced to call an extraordinary general meeting later this year exclusively to vote on pay. "That would really put people on the spot. It would be incredibly dangerous reputationally," one bank chairman said.

Many investors and regulators dislike the idea of moving away from performance-based pay because it reduces flexibility, but there is a spreading sense of resignation among bank shareholders. "I can't really see any other option," one said. "If the banks do start to perform well . . . chief executives will deservedly want good pay and that will have to be in fixed pay rather than bonuses."

One governance expert at a UK investor expressed concern that there would be pressure for payouts closer to the maximum possible numbers: "There could be an incentive to have less robust performance criteria."

HSBC, which has prided itself on its sophisticated bonus metrics for chief executive Stuart Gulliver, announced last week that it paid him only 52 per cent of the maximum annual bonus.

"Metrics like those are likely to be tweaked so that you can more easily get a 90 per cent payout," said one pay expert.