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EU bonus cap doubted by industry experts

Miranda Alexander-Webber

Operational Risk & Regulation

28 February 2013


PA Consulting Group’s Stephen Brooks, people management and organisational change expert, is quoted in an article on bankers’ bonuses.

Stephen shares his view on the EU’s decision to cap bankers’ bonuses so that they are not larger than an individual’s basic salary: "It has been poorly thought through and is yet another example of politicians trying to win popularity by bashing bankers."

Stephen argues that the mandatory 1:1 ratio of base salary to variable pay will simply lead to increases in fixed salaries. He explains: "If you're on £200,000 and I want to give you a £1 million bonus, then I'll just make your salary £1.2 million for the next year. There are lots of ways you can get round it."

Financial regulators have encouraged long-dated payment schemes so that staff are held responsible for their long-term performance. However, Stephen warns that this should not be prioritised over risk management. He draws on his experience as head of Human Resources at Lehman Brothers: "A third of an employee's bonus [at Lehman Brothers] was paid in Lehman shares, which were deferred for three years, but that didn't stop Lehman from going bust. They didn't realise the risks that banks were running."

The legislation does mean, however, that international banks operating in the EU and European banks based abroad will not be exempt from the cap.

As a final thought, Stephen thinks that the legislation is “too late” and says that most regulators have already taken action in this area.

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