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Global restrictions on bonuses: where’s it’s punitive, where it isn’t

In advance of next weekend’s G20 meeting, and the likelihood of further measures to curb banking pay and profitability, here’s a roundup of bonus restrictions in several countries and territories, starting in Asia.


The Monetary Authority of Singapore (MAS) issued its Corporate Governance Regulations and Guidelines consultation paper in March. The guidelines aim to boost the existing governance regime in the wake of the financial crisis, but they do not set out any eye-catching, Singaporean-specific restrictions on bonuses.

The MAS instead proposes to incorporate a global framework – the Financial Stability Forum’s April 2009 “Principles for Sound Compensation Practices” – in order to reduce excessive risk-taking from the structure of compensation schemes.

Singapore’s regulator expects most of its proposals to take effect from the first Annual General Meeting of each locally-incorporated financial institution held on or after 1 January 2011.

Hong Kong

In March, The Hong Kong Monetary Authority (HKMA) issued its Guideline on a Sound Remuneration System, which it expects to be fully implemented by the end of the year.

The guideline, which applies to both local and foreign authorised financial institutions, states that a “substantial proportion” of executive bonuses should be awarded in the form of shares or share-linked instruments.

In order to better manage compensation standards, banks should establish remuneration committees for board-level oversight, and have a written salary policy for all staff. Wages need to be in proportion to employees’ seniority and responsibility, and guaranteed minimum bonuses to senior bankers should be granted only under exceptional circumstances, with approval from remuneration committees.


Under rules issued by the China Banking Regulatory Commission in March, Chinese banks, trust companies and financial units of other government-owned enterprises must withhold at least 40 per cent of bonuses for top executives for a minimum of three years. They can recover payments if poor performance causes losses.

Bonuses will be capped at three times an executive’s salary, and the criteria for assessing them will be based on a range of factors, such as a bank’s business performance, social responsibility, and risk management, which includes bad loans. The regulations are part of a wider Chinese Government crackdown on rash lending by banks.


After last September’s G20 meeting, the US declined to impose prescriptive requirements regarding deferrals. Instead, the Federal Reserve unveiled a set of
compensation rules in October, including fairly self-evident requirements that banks establish and maintain, “incentive compensation arrangements that do not encourage excessive risk-taking.”

US banks which have yet to repay TARP funds are constrained by the dictates of the, ‘pay tsar’, who is able to veto bonuses. However, most investment banks, Citigroup included, have now repaid in full.

More worrying currently for banks in the US is the Financial Reform Bill, and in particular the dreaded Section 716, which originally proposed that banks wanting FDIC insurance or using the Fed’s discount window should spin off their derivatives units into affiliates separate from the bank holding company.

However, as Economics of Contempt points out, Lincoln’s proposal has been substantially watered down. And Baseline Scenario argues that the financial reform bill is dead on arrival.


The UK adopted the G20’s September bonus proposals enthusiastically, prompting then City minister Lord Myners to claim in November that the UK was at the cutting edge of the G20 and the EU in terms of bonus reform.

Specifically, the UK Financial Services Authority requires that 40-60 per cent of bonuses for people earning more than 1m or in ‘significant influence functions’ are deferred over three years, and that 50 per cent is paid in shares or share-based instruments.

Multi-year guarantees are also outlawed, except in contracts negotiated before March 2009.

The UK’s 50 per cent bonus tax elapsed in April 2010, having raised 2.5bn. It is being replaced by a levy on banks’ balance sheets, which is expected to hit larger firms like HSBC and Barclays hardest, and to raise 2bn. The levy is considered relatively lenient given early expectations that it would be designed to raise up to 5bn.

The European Union

At present, there are no EU restrictions on bonuses, but this could change. Earlier this month, the European Union’s Economic and Monetary Affairs Committee voted in favour of new rules, including capping directors’ salaries at €500k, preventing directors from receiving bonuses until taxpayer funds have been repaid, limiting cash bonuses to 6 per cent of the total bonus, deferring at least 40 per cent of any bonus for five years, and capping bonuses at 50 per cent of pay.

The measures are expected to be watered down by the European Commission, but there is plenty of support for them in the European Parliament, so the issue may resurface.

The European Union is also expected to propose a transaction, or ‘Tobin’ tax at this week’s G20 meeting. French President Nicolas Sarkozy has indicated that he and German Chancellor Angela Merkel are prepared to implement it unilaterally.


Last week, the German Bundestag approved a law allowing the German banking regulator, BaFin, to reduce or deny bonuses at banks or insurance companies in financial difficulties. Angela Merkel backs a transaction tax with Sarkozy.


Following last September’s G20 meeting, the Federation Bancaire Francaise agreed to: ban guaranteed bonuses lasting more than one year; defer at least 50 per cent of bonuses (and 60 per cent for the highest bonuses) for at least two years on average; and introduce clawbacks.

The French government also introduced a one off tax of 50 per cent on 2009 bonuses above €27.5k. However, this was a one-off and there has been no talk of repeating it.

President Sarkozy has been one of the main exponents of a transaction tax.


Italy has introduced an additional 10 per cent on personal income tax levied on all bonuses exceeding three times basic salary. This is immediately effective for compensation paid from 31 May 2010.


Not long ago, Swiss banks were faced with the scary-ish prospect of all bonuses above $1.9m being non-tax deductible. However, this now appears to have been quietly shelved.

In the meantime, Swiss bankers have more pressing issues to worry about. Reforms currently being negotiated in the Swiss parliament will require banks to hold twice as much capital according to UBS, a measure that could clearly impact productivity.


Dutch banks adopted a new voluntary code of conduct in September last year, which included capping bonuses at 100 per cent of salary and limiting redundancy pay to one year’s salary. The Dutch finance ministry has held up the code as an example to the rest of the world.


In April last year, the Dubai Financial Services Authority said it had no plans to regulate salaries or bonus payments for the “foreseeable future.”

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