Banks need to increase their fixed compensation. The European Union's bonus cap comes into effect in January 2014 and banks are running out of time to adapt to its stipulation that bonuses must not exceed 250% of fixed pay.
Salary benchmarking firm Emolument has conducted some research suggesting banks need to make some fairly serious adjustments to pay for a few of their top-level staff if they're to adhere to the EU's requirements.
Emolument looked a sample of 1,163 'validated' pay points for directors and managing directors in investment banking and markets jobs (ie. front-office jobs) at banks in Europe. Interestingly, the vast majority of senior banking pay packages already conformed to the EU's bonus cap. However, 9.8% (114 people's) didn't. Of those, the average bonus over-payment was a huge £253k ($407k).
If banks want to adhere to the cap, some of this money urgently needs to be reallocated in favour of fixed compensation. Jon Terry, a compensation consultant for PwC, points out that banks won't need to hike fixed pay by the full amount of the bonus over-payment. To adhere to the 1:2.5 ratio, fixed pay must rise by 28% of the bonus-excess ($114k).
The Wall Street Journal reports today that banks will be paying monthly 'allowances' to senior bankers affected by the bonus cap.
Terry says banks are finalizing these arrangements and that the cap will affect fewer bankers than most people expect. However, Terry points out that 'code staff' at European banks on Wall Street will be affected by the cap along with code staff in the City of London, Frankfurt and Paris.
If you're a senior banker at Barclays or BNP in New York, an average 'annual allowance' of $114k could therefore be coming your way soon. 10% of senior bankers in the European Union can expect a similar amount. Most people, however, will get nothing at all.