The EU's proposed new 1:1 bonus to salary ratio looks like exceptionally bad news for Deutsche Bank
Yesterday, the Financial Times divulged that the EU's proposed 1:1 bonus to salary ratio for investment banks will probably be going ahead. Today, the Financial Times has a little of bankers' reaction to it. "This is batty," says one. "This is mad," says another. "Oh Christ," says the last.
However, expletive-uttering bankers can take some solace from the fact that not everyone will have their bonuses restricted to the size of their salaries: the EU's proposed rule will apply only to material risk takers (MRTs), known as 'identified staff' in the EU and code staff in the UK.
And different banks, in different countries, define code staff and MRTs differently.
How material risk takers (who will have their bonuses constrained) are identified across the EU:
The Financial Stability Board noted this yesterday, in its paper on investment banks' compensation practices globally.
In France, the FRB said code staff/MRTs are typically: "...senior management, heads of units/desks, individuals with large delegation of power.
In Germany, the FRB said: "institutions generally adopt a function specific approach in which only management levels are identified."
And in the UK, the FRB said: "Practices for identification in firms vary", but that banks, "in general consider staff who hold "significant influence functions," other senior managers and heads of key business units or control functions" to be MRTs. In addition to this, it said firms will, "consider other staff they deem to be material risk takers (e.g. some firms use threshold metrics such as amounts of revenue or assets under management or value-at-risk); and individuals in the same remuneration bracket as senior management and risk takers, to assess whether their professional activities have a material impact on the firm’s risk profile."
The short answer therefore appears to be that in the UK there are going to be a lot more MRTs as a proportion of investment bankers than elsewhere. The City will therefore suffer disproportionately from the EU's new compensation ratio rule.
The UK's get-out clause already stipulates a ratio of 2:1 between salaries and bonuses
However, the UK has a get-out clause in its all-encompassing definition of code staff.
This is the well-known rule saying that even if you're a Material Risk Taker, or a designated member of a bank's code staff, the remuneration rules won't apply as long as you also earn less than £500k and that no more than 33% of this (£165k) is paid as a bonus.
From this point of view, the UK's rules are already fairly punitive: either code staff earning less than £500k accept a salary to bonus ratio of 2:1, or they accept the array of deferrals and other constraints imposed on compensation by the European Union.
The heart of the matter: avoiding getting yourself classified as code staff
Ultimately, if you want to avoid having your bonus restricted by the EU, you may need to avoid being classified as code staff. This looks hard: the EU has demanded that the definition of code staff be tightened.
For the moment, however, your chances of being designated a member of code staff look very dependent upon where you work.
As our graph below shows, some banks (Deutsche) have more than a thousand code staff ('regulated employees'). Others (Standard Chartered) have little more than 100.
Deutsche's large quantity of code staff follows its decision, announced in its 2011 compensation report, to classify all the MDs in is corporate and investment bank as regulated employees. Until this happened, it only had 168 of them.
All MDs at Deutsche are therefore facing the prospect of their bonuses being restricted to 100% of their salaries, while other banks will remain free to pay many of their MDs however they like.
In reality, this may prove a good thing for investment banking managing directors at Deutsche Bank: their salaries will be ramped up massively, with the result that their cash compensation (last year restricted to £167k for bonuses) will be a lot higher than before. It will all seem wonderful - until they get made redundant because it's the only way Deutsche can cut its employment costs.