Amid the continuing economic weakness across much of Europe, executive pay remains a lightning rod for criticism. The past week brought several developments with potential implications for the structure of compensation in European countries, including:

  • A provisional agreement between European Union (EU) institutions over the introduction of a cap on variable pay in the financial services industry
  • A referendum in Switzerland in which citizens voted to give shareholders a binding say-on-pay vote on the compensation paid to executives and directors of Swiss companies.

Here’s a closer look:

The EU Provisional Agreement

As part of the process for implementing Capital Requirements Directive IV (CRD IV) — the latest in a series of measures designed to stabilize the European banking system — the EU Commission, Parliament and Council provisionally agreed last week to adopt a cap on the amount of variable pay leading banks can provide to certain employees. The compulsory cap on variable to fixed pay would be 1:1, which can be increased to 2:1 with shareholder approval.

In other words, absent shareholder approval, affected banks would not be allowed to pay bonuses to certain employees that exceed the amount of their fixed pay. In certain areas of the banking industry, it is common today to pay bonuses exceeding two times.

Similar to CRD III, CRD IV will potentially apply to the regulated employees of European subsidiaries of non-EU banking institutions, as well as to regulated employees of EU-headquartered institutions working around the world. Regulated staff tends to include senior executives, material risk-takers and other highly paid staff.

In practical terms, for North America-headquartered banks, the new regime will affect regulated employees located in the U.K., Germany, France, Spain and other EU countries. An analysis of our Global Financial Services database suggests that the cap will have the greatest impact on banking staff in the U.K. working in companies that focus on sectors such as investment banking and capital markets or wealth management, with far less impact on retail or consumer banking.

For affected individuals, maintaining current total pay levels could require changing the definition of fixed pay to include other pay components (e.g., pension contributions) or increasing salary rates. Further analysis of our Global Financial Services database suggests organizations may have to increase salaries in the range of 50% if this was the route taken.  

The new restrictions are currently planned to take effect in January 2014 (i.e., likely affecting bonuses to be paid for 2013 results), and detailed guidance is expected to be issued later this year by the European Banking Authority (EBA). As the CRD IV language regarding the cap is high level and the detailed guidance will not be issued for some time, organizations will need to make provisional recommendations pending final guidance from the EBA.  (For more details, click here.)

The Swiss Referendum

While part of Europe, Switzerland is not part of the EU and isn’t subject to the CRD IV proposals previously outlined. Nevertheless, there has been pressure on executive pay in Switzerland as well.

On March 3, over two-thirds of Swiss citizens who went to the polls voted for a proposal offered by Thomas Minder, a member of the Swiss Parliament, to require companies listed in Switzerland to conduct binding shareholder votes on the aggregate compensation for the executive board and outside directors. Minder’s proposal also would bar companies from paying bonuses to executives joining or leaving a company and in change-of-control situations. Pay packages that violate the rules could lead to large fines (up to six times annual salary) and even prison terms in some cases.

Minder’s proposal still must be enacted into law by the Swiss Parliament.  

Mark Shelton is a managing director in London who leads Towers Watson’s global financial services consulting team for talent and rewards, and Tamsin Sridhara is an executive compensation consultant in London who leads the firm’s governance advisory services practice in Europe. Email, or

About the Authors

Mark Shelton

Mark Shelton
Towers Watson London

Tamsin Sridhara

Tamsin Sridhara
Towers Watson London