Views on improving the integrity of global capital markets
26 March 2013

Banker Pay Limits in Europe: Bad Idea or Horrible Idea? The Swiss Take It One Step Further

There is no corporate governance issue that enflames opinion more than executive pay — and, more specifically, banker pay. High banker pay is a visceral issue that is blamed for igniting the financial crisis as well as the scourge of short-termism in today’s markets. Increased investor anger and new tools like “say-on-pay” votes and majority voting for boards have increased investor influence on pay. In recent months EU regulators, large banks, and the Swiss electorate all have been active and vocal on the question of pay.

EU lawmakers recently agreed to a rule that would cap bankers’ bonuses. The lone dissent, unsurprisingly, came from the U.K., which feels that such rules would compromise its role as a leading financial center. The rule — set to take effect in 2014 — would limit bankers’ bonuses to one times salary, or two times their salary if shareholders agree to such an arrangement.

Bankers and other financial professionals are by nature a rather mobile lot, so don’t be surprised to see a mini-exodus of European financial minds in the following year if the draft law is approved by member states. The rule extends to all employees of EU banks (even those working in other countries), so the only way to escape it is to move out of the EU and to work for a non-EU bank. There is a finite number of banking jobs in the world, so not everyone who threatens to move to Dubai, New York, or Hong Kong for a banking, trading or analyst job can do so.

Naturally, we expect to see a legal challenge to the rule. But conventional wisdom out of the EU tells us that such threats carry little weight. Bear in mind that remuneration rules for the financial industry have been passed at the EU level, including rules to reduce risk incentives, and some see bonus caps as a simple extension of that authority.

Could an EU member state refuse to implement the rule? It is theoretically possible, but no country can reject implementing a binding directive or regulation — unless they leave the EU.

One possible silver lining for bankers: as much as a quarter of the bonus may be valued at a discount if payment is deferred for at least five years. This simply means that part of the bonus can be valued at a discount (using an appropriate discount rate) if payment is deferred for at least five years. Because the amount is deferred over a number of years, the discounted amount used to report the bonus would be less than the nominal value that will be paid in the future.

Opponents of the new rule argue that banks will adjust by simply increasing fixed pay, thereby decreasing their flexibility when the next crisis comes and perversely placing the taxpayer at greater risk — the very thing proponents say they are trying to avoid. The law of unintended consequences makes us believe that is the most likely outcome — the rule will likely end up making the risk of future taxpayer bailouts more likely, not less so. Some investors have stated concern that a smaller bonus pool could result in watered down incentive criteria at financial institutions.

Those who back the new rule state that variable pay inevitably leads to bankers taking on too much short-term risk, which leads to things like the financial crisis.

A recent article by The Economist postulates that this short-term risk assertion is often made, but never proven. The publication states that the biggest bank failures in Europe stemmed from lending against property in corporate and retail banks, not the investment banks with high bonus cultures.

The real answer may be not legislation — it rarely is — but to make variable pay more, well, variable. Bonus payouts have declined in recent years as banks have slowly, but surely, altered their bonus culture in response to investors demanding that boards more adequately address the issues of compensation and culture.

Innovations such as clawbacks on ill-gotten gains, variable pay that vests over multiple years, contingent convertible bonds (CoCos) that can lose their value if the bank breaches a capital level, and incentive pay linked to the banks’ own bonds are just a few of the strategies that big banks around the world have employed to “right-size” pay.

And then there is Switzerland.

When Swiss voters recently voted to limit executive pay, they did not limit their wrath to bankers. The Swiss referendum will introduce strict curbs on pay following a vote supported by 68% of Swiss citizens. The new rules include giving shareholders a binding say on executive pay, banning golden parachutes and signing bonuses, requiring annual re-elections for directors, and threatening criminal sanctions for non-compliance. The law will also increase voting transparency, making pension fund votes on executive pay routine and the results public. The referendum now goes to the government, which will create a proposed law to pass on to the Swiss Parliament.

Business group concerns that a “yes” vote would drive away companies likely fell on deaf ears in the wake of recent news that Swiss pharmaceutical company Novartis planned to give its departing chairman a US$78 million golden parachute. The plan was later scrapped, but the public relations damage was done.

Bye-Bye Bonuses as Big Banks Slash Pay

To head off regulatory solutions to what many consider outsized executive pay packages, several large investment banks have altered their compensation structures over the past year. Below is a summary of what we have seen thus far from some of your favorite mega-banks.


In April 2011, Barclays was one of the first banks to receive a wake-up call from investors on pay, with nearly 27% of shareowners voting “no” on the company’s advisory vote on executive pay.

Fast forward to 2013 and the company’s new CEO Antony Jenkins’ announced plans to revamp company culture to build a more ethical banking climate. For starters, Barclays announced in January that the bank would cut investment banker pay by up to 20%. Jenkins also stated plans to cut overall compensation levels in the investment bank by up to 39% of company income for 2012, down from 47% in 2011.

Expect a more detailed explanation of compensation matters in the company’s 20-F filing (as a foreign issuer, they file a 20-F with the SEC). Last year’s discussion about compensation starts on page 27.

Barclays’ 20-F is expected in late March, and its annual general meeting is usually held in late April.


Last proxy season, Citigroup was embarrassed when only 45% of shareowners approved its executive pay practices in the annual non-binding “say-on-pay” vote. The vote came amid a US$15 million pay package for former CEO Vikram S. Pandit, who shareowners believed had not earned such a high payday.

According to the Citigroup proxy statement released on 15 March, in the last year the board has embarked on a series of meetings with shareowners representing nearly one-third of the company’s shares. Investors found that the compensation program was too subjective, CEO compensation was not aligned to performance, metrics lacked rigor, and compensation decisions were not easy to understand.

In its 2013 Compensating Discussion and Analysis (CD&A), Citigroup’s compensation committee states that it set out to redesign the program with four main objectives:

1) Align compensation to shareholder interests

2) Manage risks to Citi by encouraging prudent decision-making

3) Implement evolving regulatory guidance

4) Attract and retain the best talent to lead the company to success

This year’s CD&A is 25 pages, which is a bit long, but considering where Citi is coming from on pay, it can be forgiven for the level of detail.

Over the last year, Citi made the following changes to its executive compensation program:

  • Performance share units tied to pre-determined financial metrics, replacing deferred cash
  • Formulaic process for determining incentive compensation, replacing discretionary approach
  • No new Key Employee Profit Sharing Plan awards in 2012 or future years
  • Executives required to hold 75% of the net shares acquired through Citi’s incentive compensation programs. Executive will be required to hold half of these accumulated shares for a full year after ceasing to be an executive officer, even if they are no longer employed by Citi.
  • Performance-based vesting allows for cancellation of incentive compensation if an executive is found to have significant responsibility for a material adverse outcome.
  • A blanket prohibition against hedging and pledging of Citi stock by executive officers

Citi also highlights other best practices of its executive compensation plan:

  • Clawbacks
  • Limits on perquisites and no special benefits or supplemental retirement plans
  • No change-in-control agreements or severance agreements
  • Limited employment agreements
  • Use of independent compensation consultants

A word on Citi’s new performance share unit awards. In February 2013, Citi introduced performance share units to its executive compensation framework. These awards represent 30% of the eligible executive officers’ annual incentive compensation. The performance share units are delivered at the end of a three-year performance period only to the extent that Citi achieves pre-determined objective goals. The goals selected: return on assets and relative total shareholder return.

If Citi’s average return on assets is less than 0.6%, or Citi’s total shareholder return is lower than the 25th percentile, no performance share units will be earned at the end of the three-year performance period.

So, basically, check back in three years to see how this has worked. Citi’s disclosure and transparency in 2013 is an improvement over years past, so I’ll give them the benefit of the doubt … for now.

Citigroup’s annual meeting is scheduled for 24 April.


JPMorgan Chase & Co. cut pay at the equities unit about 4% and pay in the broader investment bank by about 3% in 2012.

In the wake of the 2012 “London Whale” trading loss, the company cut back CEO Jamie Dimon’s 2012 pay by about 50% from the previous year. We will have to wait to see the CD&A portion of this year’s proxy statement to see whether there are any new wrinkles in the JPMorgan pay plan. However, we can look at last year’s proxy (CD&A starts on page 15) to see what we can expect.

In 2011, nearly 94% of Dimon’s pay was variable, as was about 75% of pay for the four other most highly compensated executives. A majority of this variable pay was made in the form of “restricted stock units” (RSUs) and “stock appreciation rights” (SARs), each of which vest over multiple years. According to the JPMorgan proxy statement:

The RSUs granted for 2011 vest in two equal installments on January 13, 2014 and 2015. Each RSU represents the right to receive one share of common stock on the vesting date and non-preferential dividend equivalents, payable in cash, equal to any dividends paid during the vesting period.

The Firm awarded SARs to the Named Executive Officers, effective January 18, 2012, with an exercise price of US$35.61. The SARs will become exercisable 20% per year over the five-year period from January 18, 2012. All shares obtained upon exercise must be held until the fifth year after grant and are subject to the Firm’s stock retention requirement.

JPMorgan does not allow its executives to hedge their investments in the company, does not have any golden parachute or special severance plans for executives, and has adopted clawback provisions that “permit recovery of incentive compensation awards in appropriate circumstances.”

Read the details of the JPMorgan CD&A plan for yourself, as it comes in at a manageable 10 pages.

JPMorgan’s proxy is expected in late March or early April, and its annual general meeting is usually held in mid-May.

Morgan Stanley

Morgan Stanley made news in January when it issued IOUs to top executives instead of bonuses. In order to ensure that employees are properly incentivized for the long term, the company will pay its bonuses in four equal installments, the first in May and the last in January 2016. Employees who leave before a payment may lose their deferred compensation unless they negotiate a separate deal with Morgan Stanley. All employees who have both total pay of more than US$350,000 and bonuses of at least US$50,000 are affected by the new pay plan. That said, about 80% of employees won’t be affected by the deferral plan.

The company set aside US$6.7 billion in 2012 to pay investment-bank employees, a 7.6% reduction from a year earlier. The ratio of compensation to revenue in the unit fell to 44% from 53% in 2011.

Last year’s Morgan Stanley CD&A (starts on page 26) came in at an eminently readable 12 pages. We expect many changes to this year’s executive compensation plan based on the changes mentioned above.

Morgan Stanley’s proxy is expected in early April and its annual general meeting is usually held in mid-May.


To help its bankers think more long term, UBS will award bonuses to 6,500 senior bankers in the form of bonds that can be wiped out if the company doesn’t meet capital standards. Paying bankers in this way was first recommended by European banking regulators. These “bail-in bonds” can be written down when capital dips below a safe level.

The debt bonuses awarded by UBS will be wiped out if the bank’s regulatory capital falls below 7%, or in the case of a “non-viability” loss. The 2012 bonus pool fell by at least 5% on top of the previous year’s 40% drop.

The company already said in October it will cut about 10,000 jobs as it downsizes its investment banking operation to focus on wealth management.

Expect a more detailed explanation of compensation matters in the company’s 20-F filing. Last year’s discussion about compensation starts on page 242.

UBS’s 20-F is expected in early April and its annual general meeting is usually held in mid-May.

Companies and regulators are trying to realign banker pay metrics (and in Switzerland, the pay of all public company executives) with longer-term bank stability. The proof as to whether these efforts succeed will not come for years, as we wait to see if incentives such as clawbacks, longer-term vesting periods, and more ”skin in the game” truly do align bankers’ incentives with the needs of society. Surely there will be unintended consequences to changes in banker and executive pay rules. Will a tidal wave of bankers flee Europe for domiciles with friendlier pay practices? Will some financial firms in the EU leave the continent? Will Swiss competitiveness be harmed by the new pay law?

Only time will tell.

What say you?

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About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

3 thoughts on “Banker Pay Limits in Europe: Bad Idea or Horrible Idea? The Swiss Take It One Step Further”

  1. tony says:

    Im concerned those move may draw away talent if not coordinated at the global level

  2. Matt Orsagh, CFA, CIPM says:

    Yes, that is a real concern. We will have to see how this plays out, but we would not be surprised to see a number of EU financial professionals seeking friendlier climates elsewhere. Thank you for your comment.

  3. brian john webster says:

    Millions pounds lost.millions worker job lost do think it that there fair. there should be big cut.yes by75%.also boss get 1,
    500pounds per bay&the worker1,500 per year.

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