Asset managers are considering how they can continue to give generous rewards to their staff after the European Parliament voted to cap bonuses at financial firms.

The law, one of a series of financial reforms designed to kerb irresponsible behaviour, will limit bonus payments to one year’s salary or double that if a majority of a firm’s shareholders agree. It will come into force next year.

Efforts to manoeuvre around the legislation will likely focus on increasing base salaries, making salaries variable, or relocating staff to jurisdictions not subject to the bonus cap rule, such as Asia.

“Query, for example, whether employers may seek to set ranges of base salary for individual employees and obtain specific authorisation to flex base salaries upwards and downwards,” says Robert Davies, partner in the employment team at law firm Dundas & Wilson.

Awarding variable salaries would increase operational complexity for asset managers, though, and may raise concerns about equal pay and discrimination. Regulators may view this strategy as simply “bonuses in disguise” and legislate to make it illegal.

Some firms may prefer the option to move staff outside the reach of the legislation and continue with current bonus practices. Financial centres in Asia such as Singapore could benefit from an influx in asset management staff, as might cities such as Dubai in the Gulf.

Both this and the variable pay strategy may be preferable to increasing base salaries, which would raise asset managers’ fixed costs, leaving them vulnerable should their businesses have a period of poor performance.

However, some managers may consider rethinking their policy on bonuses, as regulators wish. Researchers and academics remain unconvinced that large bonuses encourage, rather than simply reward, good performance; many hold that current practices lead to excessive risk-taking and “short-termism”.

Source : Funds Europe 18/04/2013