When the European Union conceived its bonus cap, the intention was undoubtedly that pay for 'bankers' would fall. The City of London was undoubtedly supposed to be at the vanguard of this reduction. After all, it's in the City of London that almost all the high earning bankers in the EU are located.
However, it's becoming apparent that the European Union's pay plan has seriously backfired. It's already known that banks are topping up newly-constrained bonuses with 'fixed allowances.' What's less known is that banks are deliberately cutting bonuses and reallocating pay to monthly allowances so that bonuses fall below deferral thresholds and they pay as much as possible in cash.
"U.S. banks are paying huge allowances to their managing directors," says one leading headhunter in London, speaking on condition of anonymity. "Some are getting seven figures. Bonuses are becoming unimportant and banks are structuring packages so that bonuses always fall below the deferral threshold. For example, if a bank starts deferring bonuses above $500k, someone on a million pound bonus will now get an allowance of $501k and a bonus of $499k.
"It's completely changed the pay dynamic," he adds. "If you're a banker, London is now one of the best places for getting paid in cash."
Peter Hahn, a former Citigroup banker and senior lecturer at Cass Business School who has worked with the UK Financial Conduct Authority on pay rules, says the allowances system means bankers in the City of London are now getting their pay upfront, based on previous performance. "The allowances are all about how well you performed last year," he says. "The original argument against bonuses were that they were handed out regardless of current performance. The allowances system has simply formalized that."
In theory, European pay regulations require that 40-60% of a bonus should be deferred over a minimum three to five year period. However, headhunters say most U.S. banks defer far less than this for staff earning under $1m. It helps that the EU rules apply only to so-called 'code staff' who work in regulated roles. "Banks try to keep their numbers of code staff down," says Sam Whitaker, a counsel at law firm Shearman & Sterling. In 2012 (the last year for which figures are available), most US banks in the City had little more than 100 code staff each.
The big question over the new allowances is whether they can be clawed back in the event of wrongdoing or if the bank makes a loss for the year in which they were paid out. Banks like HSBC, Standard Chartered and Barclays are paying some or all of their allowances in the form of shares for this reason. However, headhunters say U.S. banks are paying the allowances entirely in cash. And how do you clawback something that's already been paid out (and possibly spent?).
"This is what people are wrestling with now," says Hahn. "Some banks want clawbacks six years after the event - but how can you clawback money that you paid six years earlier?"
Whitaker said he hasn't come across any banks that are imposing clawback conditions on their cash allowances. "I know that some banks have toyed with the idea though," he tells us.