It’s been a difficult past 7 days for executive pay across Europe.
First, it was the turn of the EU where parliamentarians voted last week to cap the pay of bank executives. Bankers in Europe must not receive annual bonuses higher than their individual base pay, the deal, agreed by negotiators from the European Parliament and the EU member states on Thursday, also said that shareholders in a bank may vote to raise the cap to double base pay, but not higher.
One quarter of a bonus could be paid in the form of longer-term financial products, for example bonds and share options, which were less likely to prompt excessive risk-taking and which could be claimed back by management if a banker performed poorly.
Banks will be allowed to discount the future values of such non-cash payments.
The new rules will apply to all bankers based in the European Union, as well as to the staff of European banks working outside the 27-nation bloc.
Separately, in Switzerland 68% of voters backed the so-called “rip-off initiative” in a referendum, giving shareholders a veto over salaries of managers and board members. New provisions, to be anchored in the Swiss constitution, will outlaw golden handshakes for arriving and departing managers, plus bonus payments for executives involved in mergers and acquisitions.
At general meetings, pension funds and other institutional investors will be obliged to act in the interests of their investors and publish their votes.
Managers and board members will, in future, be re-elected at company AGMs to obviate the need for payouts for prematurely ending multiannual contracts.
Breaches of the new law will result in fines of up to six years’ pay or a prison term of up to three years.
Whether or not new rules will have any real impact will take time to evaluate. However, money like water can take many journeys to its final destination. It’s unlikely that legislation will have any real impact on how industry leaders will be compensated for success.