Updated, 8:44 p.m. | To navigate bonus caps in Europe, Goldman Sachs will offer a new kind of pay class for bankers in Britain and on the Continent, a person briefed on the company’s plans said.
Call it the third way of pay.
Starting this year, certain Goldman employees will earn a salary, a bonus and some “role-based pay.” It may be paid monthly or divided, with some paid monthly and some accruing to be handed out at the end of the year. The new type of pay will not be used when tallying pension contributions. The bank may be able to claw some of it back, and it can change from year to year. But it will have the effect of driving up base salaries.
Role-based pay, which Barclays also plans to use, is a response to bonus caps passed by the European Commission for employees unceremoniously labeled “code staff.” Code staff includes those engaged in risk-taking and in control functions, senior managers and employees who make over 500,000 pounds ($820,000). Starting in 2014, bonuses for code staff are limited to 100 percent of an employee’s fixed salary, or two times salary if shareholders approve it.
Typically, bankers earn a fraction of their pay in salary and are rewarded with large bonuses. In 2012, for example, Goldman Sachs paid its 115 code staff employees $86.1 million in salary and $450.7 million in cash and stock bonuses. That averages to about $4.7 million in total compensation for each person, with the bonus equal to 5.2 times salary.
In September, the British Treasury filed a lawsuit in the European Court of Justice challenging the bonus caps, arguing that they would shift compensation to fixed salaries from bonuses. It said the caps were an overextension of what was permitted in the European Union treaties.
Not surprisingly, limiting compensation has not gone over well in the City of London. Right before the government filed the lawsuit, the British Bankers’ Association said that about 35,000 employees at banks around the world could be affected. When asked on Wednesday whether he thought the European Union’s decision to push through “crude” bonus caps of 200 percent was the wrong approach, Mark Carney, governor of the Bank of England, said, “Absolutely.”
Goldman said on Thursday that profit for the fourth quarter fell 19 percent to $2.3 billion, with weak fixed-income results. But full-year net income rose 8 percent to $8.04 billion. Compensation, which at one point rose to nearly 50 percent of net revenue, is down to 36.9 percent.
Goldman’s annual earnings announcement typically coincides with “compensation communication day,” also known as bonus day. Bankers were told their bonuses for 2013, but they were not told their 2014 salaries because the bank is still working to understand who will be affected by the role-based pay.
Stephen Brooks, a people and change management specialist at the PA Consulting Group in London, said he opposed the bonus caps because they limited banks’ financial flexibility. He also said the caps would deprive the British government of a lot of money, because it gets 60 cents of every bonus dollar. But he was optimistic that the bankers would find ways to get paid.
“That it is their core skill — coming up with creative financial ideas,” he said.