European Union banking supervisors agreed on finalized mandatory guidelines for awarding bank bonuses on Friday, saying key requirements can be neutralized for less risky firms and staff.
The Committee of European Banking Supervisors (CEBS) alarmed banks in October when it published the guidelines in draft form, as they went beyond what world leaders at the Group of 20 countries agreed.
CEBS has considered the feedback received and has revised its initial proposal in order to address the main issues and concerns raised, namely those related to proportionality, equity-linked and other instruments as part of variable remuneration, distribution of such instruments and retention periods, the committee said in a statement.
The guidelines, which apply from January 2011 and will cover the 2010 bonus round, are still seen as being more stringent than the set of principles world leaders at the Group of 20 countries agreed to introduce.
The revised guidelines include further neutralization of some requirements for investment firms if they have a lower risk profile, CEBS said.
Finally, in response to the concerns about retention periods, CEBS's guidelines have further emphasized the difference between deferral and retention periods and have added some further proportionality for retention periods of deferred instruments, the committee said.
The guidelines flesh out a reform of the EU's bank capital requirements directive which included tough remuneration curbs inserted by the European Parliament, leaving CEBS with little wriggle room.
This means the minimum portion of 40 to 60 percent of variable pay must be deferred over three to five years with at least 50 percent of variable pay in the form of equity-linked instruments, all remain unchanged from the October draft.
But in order meet a proportionality principle also included in the EU framework law, firms can neutralize some elements if this is reconcilable with the risk profile, risk appetite and the strategy of the institution.
This means that some firms, either for all or some of their staff can put aside the requirements on variable pay in equity linked instruments, retention or deferral.
But supervisors must make sure that in applying this principle the objectives of the guidelines to cut excessive risk taking or a level playing field among different firms and jurisdictions are not affected.
The guidelines still stop short of a pan-EU maximum ratio between fixed and variable pay, leaving it up to banks to decide on an appropriate balance, in line with earlier drafts.
In all cases, the separation between the fixed and variable components must be absolute. There must be no leakage between these two components, the guidelines say.
The EU's executive European Commission, which drafted the EU framework law, welcomed the finalized guidelines.
We are confident that CEBS guidelines are consistent with European Parliament requirements and are very happy with that, a spokeswoman for EU financial services chief Michel Barnier said.
CEBS, due to become a more powerful European Banking Authority from January, will study implementation of the guidelines in the fourth quarter of 2011.
(Reporting by Huw Jones; Editing by Mike Peacock)