Higher bank salaries poised to offset Brussels bonus cap
Four out of five European banks plan to raise executive base salaries to counter regulation-driven bonus cuts next year, potentially undermining the effectiveness of the planned variable pay cap in bringing down pay.
An EU-wide bonus cap will from 2014 limit variable pay to up to twice the level of salary.
However, 79 per cent of European banks surveyed by Mercer, the consultancy, said they were planning to raise base pay for the employees affected.
(Read More: EU Bank Bonus Cap to Put Pressure on US: Schulz)
Based on such efforts to increase fixed pay, more than half the banks said they would keep overall pay levels mostly unchanged next year, according to Mercer's global financial services pay report to be published on Thursday.
The report highlights how European bank boards are considering ways to alter pay structures in advance of the new rules amid worries they could prompt an exodus of senior talent to overseas rivals.
Vicki Elliott, senior partner at Mercer, warned that reducing the amount of bonuses would weaken the link between performance and pay.
"With less variable pay that can be linked to performance, there will also be less pay that can be deferred and aligned with the risk time horizon of the business."
"It really works counter to the principles they [the regulators] were trying to enforce," she added.
Barclays, for example, would have to double to slightly more than £2m the salary and pension allowance for incoming finance director Tushar Morzaria next year to comply with the cap while keeping his total £6.2m pay package unchanged.
(Read More: Isolated Britain Fails to Avert EU Bank Bonus Cap)
A majority of 57 per cent of respondents at European banks said they would try partly to circumvent the rules by raising allowances and ramping up benefits such as pensions and company cars.
Another 43 per cent said they planned to increase the deferral period for bonuses to five years from the standard of three years, a decision that would allow them to increase the bonus cap to up to 2.5 times base salary by the new rules.
The EU regulation is set to hit tens of thousands of bankers, mostly in London, after Europe's banking regulator in May proposed substantially to widen the definition of staff to be affected by the incoming bonus cap to include anyone earning more than €500,000.
Read more from the Financial Times
Even by the former, less broad, definition of affected staff, 20 European banks polled by Mercer alone had 6,255 so-called material risk takers that would be affected by the cap.
Lawmakers are targeting bankers' bonuses because they view them as one of the causes of the financial crisis and of trading scandals at some banks, as traders were seen to be encouraged to take excessive risks.
To comply with the bonus cap rule while handing out the same pay, banks in the UK would have had to increase overall base salaries in 2011 by slightly less than €400m for those earning more than €1m, a report by a European regulator this week showed.
(Read More: Five Essential Questions on the Bonus Cap)
Two-thirds of banks worldwide were not planning to introduce their own, individual caps for variable pay, and only 15 per cent had such a ratio in place throughout the whole organisation, Mercer's research said.