In 2014, the European Commission made strides to cap bonuses for financial firms, thus affecting world markets. How? Here are some fast facts and provisions of those decisions made two years ago:
- Bonuses must be a proportion of fixed pay – 100% of salary or 200% with special shareholder approval.
- A large part of the bonus must be deferred.
- European Banking Authority (EBA) has determined that the bonus cap applies to all institutions – affecting thousands of European firms (including small banks).
- The purpose of this regulation is to sway bankers from taking excessive risks that could damage their institutions in hopes of receiving a performance bonus.
- Hedge funds remain outside the scope of the rules.
- There is also a ban on “special payments” that have been used as a loophole to navigate around bonus caps.
- The rules have been strongly opposed by the UK government and the Bank of England (prior to Brexit).
- The U.K. is Europe’s largest financial center – it has also been the main offender in bonus cap violations and treatment of lofty allowances.
- The Bank of England argues restricting bonus payments will only result in higher salaries.
- The U.K. refuses to enforce the legislation onto smaller banks.
- Barclays (London based Investment Bank) argues that firms need to be able to pay competitively to retain top talent.
Although the media’s focus has been centralized on social policy issues, this legislation undoubtedly played a major role in Brexit –enabling the U.K.’s financial freedom.