European banks work around compensation constraints*

Posted by Marc Hodak on January 26, 2014 under Executive compensation | Read the First Comment

About a year ago, I wrote about the new restrictions the EU imposed on banker bonuses, i.e., limited to two times their salaries.  I predicted that bankers, being better versed than legislators on how money works, would likely nominally raise salaries, then claw back a portion of that nominal salary based on performance.  One year later, it appears that is pretty much what Goldman Sachs and Barclays (at least) are doing:

Starting this year, certain Goldman employees will earn a salary, a bonus and some “role-based pay.” It may be paid monthly or divided, with some paid monthly and some accruing to be handed out at the end of the year. The new type of pay will not be used when tallying pension contributions. The bank may be able to claw some of it back, and it can change from year to year. But it will have the effect of driving up base salaries.

Yes, to some extent base salaries are going up, but the deferred portion subject to claw-back serves exactly the same function as a target bonus that is realized (or not) based on performance.  And this bumped up “salary” provides enough headroom to provide double the amount again for bonuses.

For an example, here is how the numbers worked for Goldman.  Last year, average salary for Goldman employees covered by the new law was about $750,000, and their average total pay was about $4.5 million.  This year, Goldman bumped up these folks salaries by about $1.5 million, for a total “salary” of $2.25 million.  Half of that “salary” increase (hence the quotes), i.e., $750,000, is subject to a performance-based clawback.  If, instead, the employee performed well, they would get their total “salary” of $2.25 million.  If they performed very well, they could get another $2.25 million, for a total pay of about $4.5 million.  In other words, they could end up exactly where they were before, but via a more complicated path to be in compliance with the letter of the law.

If you can’t follow these numbers, that’s OK, you could still become a legislator.  If one were serious about containing bankers’ pay, they would be pursuing a very different, more finance-literate path of regulation.  I’m not holding my breath.

* That’s a longer headline than “Dog bites man,” but I must be cognizant of what search engines will pick up.

  • Oscar said,

    I knew someone would bring that up but I hntosely doubt it would be significantly different. What using cap hits does is take some of the year-to-year variations out of the mix (i.e. $10-million for Vanek in Year 1) that really skew things.Cap hit is the figure that applies against the salary cap, and it’s really what teams base their salary structures around. You’ll see what I mean with the next posts.

Add A Comment