No one can say they didn't see it coming. After weeks and months of mumbled displeasure about banks' use of role-based allowances to sidestep the EU bonus cap, the European banking authority has finally put its foot down.
In a document issued today, the EBA says 39 banks are guilty of gaming its bonus cap with 'role-based allowances' and explains precisely why these allowances aren't permissable and must be either adapted or dropped.
In the world of the EBA, there are only two types of pay: fixed and variable. "There is no third category of remuneration it declares" definitively. Allowances cannot exist in a hinterland between the two. If banks want allowances to be classified as fixed pay, the EBA says they need to satisfy the following criteria:
1. Allowances can only be changed with the consent of the employee. They cannot be adjusted according to the performance of the company, the economy or any other 'proxy' which effectively renders them performance -related.
2. Allowances must be permanent. They need to be associated with a role and to be paid over "the full length of a contract." They cannot be granted for a limited period of time irrespective of whether the recipient continues in a role or not.
3. Allowances cannot be forfeited if an individual gives or receives notice.
4. Allowances can be paid if they're a 'market value allowance' paid to staff who work abroad and are receiving less remuneration than they would get in their home market.
Where does this leave banks? Rushing to amend contracts seems to be the answer. Contrary to some reports, this is not the death of allowances (some of which are huge), but it is the death of allowances which are awarded annually and renegotiated on the basis of performance or other factors every January. It doesn't mean allowances will have to be scrapped. Nor does it mean that they can never be renegotiated. It does mean, however, that if banks want to renegotiate allowances they will also need to renegotiate roles. If banks want to reduce allowances in future, bankers will also need to be demoted or moved into new jobs. Expect this to happen, often. The big beneficiaries will be banks' HR staff who are suddenly going to be in even greater demand than before.