On 21 December 2015, the European Banking Authority (EBA) confirmed the rules to apply capping banker incentives. As expected, the EBA rules are highly prescriptive, and will limit the flexibility of regulated entities to respond to future financial crises by varying payroll. Nevertheless, it is worthwhile understanding these rules, given the temptation by all governments to prescribe pay limitations, and the prospect that similar perspectives may creep in, over time, to various Australian investor guidelines, if not the laws and regulations.

The rules also apply to EBA regulated subsidiaries of Australian and other international companies.

As prior articles indicated (for example, see HERE), a significant proportion of incentives are to be deferred. In Europe the deferral amounts to either 40% or 60% of the incentive. In addition, incentives are limited to 100% of fixed pay, unless there is specific shareholder approval for more, up to a cap of 200%. Half of the deferred amount is to be in equity.

The deferral period can be 3 or 5 years, although the UK has already made provision for a deferral period of up to 7 years.

The cap encompasses sign-on amounts for forgone benefits.

The incentives included are long-term incentives as well as short-term incentives.

After some kerfuffle late last year, the EBA has relented to permit the valuation of LTIs for cap purposes to be at grant date fair value, rather than value at vesting. The latter would have made company compliance with the rules impossible, because if they could predict equity value at the end of the vesting period they would be deserving of the “Masters of the Universe” moniker. Despite how obvious this was it took some time for Eurocrats to come around. However, they have not yet defined “fair value”, which can be fraught with issues.

The EU will legislate to ensure member states, including the UK, interpret the rules consistently. It has until 1 January 2017, when the new rules will apply. However, member states will retain some flexibility in interpretation when applying the rules to smaller and non-complex organisations.

The new EBA rules can be seen HERE.

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