Circumventing European Bonus Cap

As you'll all probably know by now the EU is capping bonuses at a 1:1 ratio with salaries. Naturally the market will not tolerate this and will find a work around; here's my idea, help me iron out the creases...

Asymmetric Redux Salaries

You're hired by a firm and the bank/you negotiate a salary, say £100K/year. The firm then sets your contractual salary at an arbitrary amount, say £10m/year, which vests asymmetrically over the year. For 11 months of the year your monthly pay would be a pro rata amount of £100K/12, so for those 11 months you'll receive £8.3K each month. Then in the final month of the year you'll be paid the balance of £10m, which would be £10m minus 11x£8.3k - HOWEVER this figure (approx £9.9m) is reduced by a percentage amount in order to calculate a "bonus". So if they want your bonus to be £100K, they'll reduce the £9.9m by £9.8m. This way you're not actually paying someone a bonus, you're reducing their salary.

 
Best Response
shorttheworld:
didnt they learn to not fuck with financial engineers

Clearly not!

EDIT:

And this is why I got hired... From the FT -

But this Lex column strikes me as the only worthwhile thing to say about it:

Dear Star Banker, …

Your fixed, cash salary has been increased from €500,000 to €10m per year, roughly in line with your average total compensation for the past five years, to be paid monthly into an escrow account we will open on your behalf. By signing this contract you agree that from this escrow account a monthly net payment equivalent of €500k per year will be paid into your personal current account. At year-end, you are entitled to the full balance of your cash salary remaining in the escrow account subject to strict clawback provisions detailed in this contract. In summary, if 100 per cent of your various targets are achieved you receive €9.5m, on a sliding scale to zero … In addition, and based on the same formula and criteria as above, you will be entitled to a bonus worth at least 50 per cent of your post-clawback salary.

"#1: I want a Times New Roman in the streets but a Wingdings in the sheets."
 

If this goes through, this will really hurt their recruiting efforts in the US since it will apply to US offices as well. It will be hard to compete with the other BB across the street now paying significantly more.

On the other hand, if they raise base salary as mentioned several times on these boards, maybe that will be a seller point for recruiting.

"They are all former investment bankers that were laid off in the economic collapse that Nancy Pelosi caused. They have no marketable skills, but by God they work hard."
 

Also, one needs to wonder what the European regulators will do if the European places bypass the law, that is to say whether the financial punishment is sustainable for the firm or not.

For instance, if the fine amounts to £1,000 per employee who were granted too big a bonus, then the firm will most likely keep delivering the bonuses they want to give.

 
Unforseen:
Does this rule also apply for stock based bonus? Cause if so, then in your solution you are ignoring the significant tax component.

Whether that salary is paid in dollars, shares/dollar mix, or some other esoteric instrument (a la CS's PAF2), I think the principle of huge salary with assumed variable clawback is valid as per the FT.com article.

"#1: I want a Times New Roman in the streets but a Wingdings in the sheets."
 

This "solution" would make for a very interesting Q4 P&L.

"The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts." - Bertrand Russell
 

Not to repeat myself, but as someone with significant experience of European negotiations this is knowhere near a done deal yet. It still has to go to finance ministers for approval, and while the voting is QMV, the uk is incredibly good at buying off other member states for their votes...

I'm sure there will be a "cap" of some form, but I'd bet good money that it won't be 1:1 and they will make sure there are plenty of work arounds.....

 

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