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Here’s what happens to your bonus if Britain leaves the EU

Brexit bonuses

Reasons to vote leave?

Will Britain vote to leave the European Union? Bloomberg’s Brexit tracker says no, as do UK bookmakers. That’s good: an exit is widely expected to be disastrous for UK investment banks and for the UK financial services industry as a whole. However, there could be one big beneficiary – bonuses. If Britain ‘Brexits,’ banking bonuses could rise.

Specifically, London bonuses could rise if elements of CRD IV, the European Union’s banking remuneration regulations introduced on 1 January 2015, are repealed. For anyone who’s spent the past 18 months living under a stone, these regulations cap bonuses for regulated staff at 200% of salary with the agreement of two thirds of shareholders. Without the agreement of two thirds of shareholders, bonuses are capped at 100% of salary – as is the case at RBS.

If the UK leaves the European Union, the bonus cap could go.

“UK regulators, including Mark Carney, have long been against the bonus cap,” points out Jon Terry, market leader of PwC’s global Financial Services HR Consulting practice. “Given the current UK government’s view on the cap, they would almost certainly be reluctant to continue with it if the UK leaves the European Union.”

Without the bonus cap, banks based in London would once again be free to pay key staff bonuses that are many multiples of salary. London banking salaries could then fall back to previous levels and London bonuses could rise. London banks would subsequently be less lumbered with punitive fixed costs, and free to vary pay in accordance with revenues. This in itself could make London an appealing place to base staff compared to continental Europe.

That’s the theory. The reality is that Britain may need to maintain the bonus cap in order to claim “equivalence” with EU regulations and to maintain access to EU markets. “If the UK leaves and wants to access EU markets, the EU will be in a pretty powerful position to demand that the bonus cap persists in London,” says Terry. “However much political will there is to get rid of it in the UK, EU negotiators are going to have the upper hand as the British government will want to stop London finance jobs moving to Frankfurt or Paris.”

Even if the much-disliked bonus cap isn’t cast-aside, there may be some flexibility in a City that’s outside the EU. Sam Whitaker, a counsel in law firm Shearman & Sterling’s executive compensation and employee benefits practice, points out that UK regulators have already applied the bonus cap selectively: employees working for so-called ‘tier three’ firms aren’t currently covered by the cap. Outside the EU, the UK could possibly choose to exempt employees at tier two firms too.

The bonus-cap aside, pay experts point out that much of the UK’s bonus legislation is more punitive than the EU’s. UK regulators demand that bonuses are deferred for seven years with three years’ additional clawback, for example. “In the EU, it’s three years now moving to five years in 2017, and clawback rules don’t exist,” says Terry.

Photo credit: Polling station – EU by Descrier is licensed under CC BY 2.0.b

Comments (1)

Comments
  1. To my mind the issue is one of nationalism in a global world. We hear issue such as the failure of Credit Derivatives becoming a party political issue, the conservatives blame Labour and the FSA for being ‘asleep at the wheel’ . The reality is that we re in a global world, technology has enabled that. When we look at Capital Markets they operate in our time zone but can equally sit in Frankfurt as well as London. Governments can provide incentives of course but the bottom line is they do not make the decision any more. So narrow nationalism has no place. Much discussion of tariffs relating to Car exports, the issue is where is my market, if we leave that market is 75% EU with a growing population Turkey et al. Nissan, Toyota, Tata will upsticks offered incentives and if you want to sell here produce here, we do not want our balance of payments adversely impacted importing UK cars… 700K jobs are at risk, not a scare story., just he reality of global business.

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