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Is your bonus about to be capped?

By Principal Lawyer, Employment & Partnership

The much talked about ‘cap’ on bankers’ bonuses comes ever closer, as the UK’s financial regulator seeks to implement through amended Remuneration Codes a European Directive that with effect from 1 January 2014 imposes a cap on the maximum ratio between fixed and variable (bonus) remuneration for certain staff. Employment Solicitor John Marshall answers some useful questions surrounding the issue below.

Will it apply to you?

If you work for a bank (or a large financial institution), then the answer is probably yes. But if you work for an asset manager, hedge fund or private equity firm, no.

If at the bank you are a senior manager or a material risk taker and have been identified already as ‘Code Staff’ chances are you will remain so and subject to the amended regime. However, it is likely, as with prior Remuneration Codes, banks will with encouragement from the regulator, adopt a ‘firm wide’ approach, so that all staff who are in receipt of a compensation package which has a significant bonus element will be treated in the same way as Code Staff and therefore subject to the new capping regime.

By the same token, if you are not currently caught by the existing Code or treated in line with it, it is unlikely this will change, unless your status at work changes.

Those firms not currently subject to the same remuneration codes as banks, such as asset managers, hedge funds and private equity firms, will nevertheless be caught by the Alternative Investment Fund Managers Directive which requires implementation of similar provisions to the existing bankers remuneration code by 21 July 2014. However, there is nothing in this directive that currently imposes a cap on the salary:bonus ratio and no indication this will change.

What is the new bonus cap?

It is said by Government, they are not seeking to regulate ‘what’ you are paid, just ‘how’ you are paid. So the new regime has 3 main points:

First, your bonus (cash and non-cash) should not exceed 100% of your basic pay.
Second, the Shareholders of your employer can approve a higher maximum ratio up to 200%.
Third, If part of the bonus is awarded in long-term instruments, up to 25% of those instruments can be discounted if they are paid over 5 years.

Which bonus and bonus year will be affected?

The bonus cap will not apply retrospectively, as it will only apply to bonus awards for services you provide from the year 2014 onwards. Likewise, in the short-term it should not affect pre-existing contractual arrangements that stretch beyond 2014, although it is anticipated that firms are going to be required to take reasonable steps to amend or terminate non-Code compliant arrangements.

What is going to be the effect of the new capping arrangements?

Banking staff caught by the new capping regime, may see substantial increases in their base salary, to give employers the ‘head room’ to pay those staff sums in line with previous/promised compensation levels. It seems that this approach will not offend against the Code, as long as the salary:bonus ratio remains balanced.

So, these are important changes and likely to be imposed on those affected with little or no consultation. As they are to be in place by 1 January 2014 you may want to think about how they will affect you and discuss matters with your employer sooner rather than later and take appropriate legal advice from a specialist employment lawyer on your position and negotiation strategy.

By Employment Solicitor John Marshall.