The history of banking pay is like the history of homo sapiens. Having failed to evolve for a long, long time, there have been some recent dramatic changes. And there may be more changes to come. Here's what to expect in 2015.
For senior bankers in Europe, and at European banks in the US and Asia, 2014 has been the year of 'role-based allowances.' Known euphemistically as 'allowances,' these top-up payments were introduced in preparation for the EU bonus cap, which comes into effect in January 2015. Like salaries, they're paid monthly. Unlike salaries, they're non-pensionable and they don't count towards severance pay. In theory, they allow for more flexibility than salaries without actually being bonuses. In reality, they're a lot less flexible than they seem.
"Most of the allowances...did not fulfill the conditions for being classified as fixed remuneration," declared the European Banking Authority (EBA) in October 2014 following an investigation into the payments. The EBA deemed that if role-based allowances can be paid according to the whim of the bank, if they're flexible, or if they're impermanent or subject to removal at any time, they're not actually allowances but bonuses. As such, they'll fall under the bonus cap. - Banks that are paying huge fixed allowances to their top performers (eg. Barclays is paying Tom King £600k annually) in an attempt to avoid the cap may have to think again.
Tom Gosling, leader of PWC's Reward Practice, said banks will need to amend their role-based allowances to match the EBA's requirements in 2015. "The allowances simply have to be linked to the role rather than the individual," he told us."They can't be variable downwards and they have to be permanent. To all effects and purposes, they become like a salary."
In time, Gosling predicts that role-based allowances will become subsumed by salaries. But this won't happen right away. "For 2015, banks will stick to the basic allowance construct and tighten it up, but once the final EBA guidelines are published in autumn, they will review allowances and consolidate them into salaries," he said.
However, not everyone is so sure that allowances will disappear as quickly as they arrived. Sam Whitaker, a counsel at law firm Shearman & Sterling in London, thinks allowances offer too many advantages to be a fleeting phenomenon. "These are payments that don't count towards pensions, life assurance, or severance pay. They can fall away if the individual receiving them stops doing a code staff role [allowances only apply to 'code staff' in the UK] or if he/she works for a US bank and goes back to the states. They're very distinct from salaries."
While European regulators are doing their utmost to restrict cash bonuses, banks are moving in the opposite direction. They want to pay more cash, and are doing so wherever possible.
Morgan Stanley recently told its bankers that it will be paying a higher proportion of cash this year. Alan Johnson, chief executive of Wall Street compensation consultancy Johnson Associates, said this typifies the trend in the US and Asia, where compensation regulation is less stringent. "Bonus deferrals in banks have become abnormally and dysfunctionally high," he told us. "High deferrals hurt recruiting and make it difficult for banks to cut future compensation costs. They make no economic sense. Where they can, banks are simply trying to get back to a more normal state."
Even in Europe, the European Union's compensation edicts apply only to senior risk takers and managers. Junior bankers in London should therefore also benefit as banks increase cash payments to lure the younger generation. "It's no longer automatic that top people go into finance," said Johnson. "You can earn more in technology, hedge funds, or private equity."
Performance bonds are another concept waiting in the wings from 2014. First floated by Federal Reserve Chairman Bill Dudley in October, performance bonds were taken up by both Bank of England governor Mark Carney and UK Chancellor George Osborne in November. The idea is that money which would be paid as bonuses is set aside as a bond which pays coupons - unless the bank is hit by heavy regulatory fines, in which case the coupon payments won't happen.
Johnson thinks the bonds are a great idea that has little chance of being implemented. "They're easy and simple. But this is the kind of thing that's talked about but no one really runs with."
Gosling agrees: "Performance bonds are a long way off. Carney was talking about them as an area for global convergence, but that would require a fundamental change in regulation - which won't happen any time soon."