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Business Comment

Banks could be wiped out by the 'role-based allowances'


Outlook London's banks, with no small encouragement from City watchdogs, have been canny in coming up with ways around the hated European bonus cap. They have alighted upon the idea of "role-based allowances" – payments that are supposedly not based on the individual bankers' performance, but on a wider measure, such as the state of the general economy.

They're a way of continuing to pay monster packages to bankers in the good times, while allowing the banks flexibility to reduce them in the downturns. As far as the company's cash flow goes, in other words, they effectively work like bonuses.

That doesn't wash with the spirit of EU's stipulations. The EU clearly wanted to see bankers' pay move into line with the rest of the world – that is to say, overwhelmingly dominated by a fixed salary. Given that some European jurisdictions are going out of their way to fill in such loopholes with reinforced regulatory concrete, expect some loud carping in Brussels at London's role-based wheezes. Despite those harrumphs, however, Britain's banks will probably get away with it. The EU has plenty of bigger disagreements with Westminster to get knicker-twisted about.

But employment lawyers see further potential problems (or, for them, opportunities) arising in a few years' time; specifically, when it comes to sacking bank staff in the next recession. You see, redundancy pay-offs are generally calculated on a ratio of salary multiplied by number of years worked. Given that salaries have historically been a relatively small proportion of overall pay, that has allowed the banks to keep the golden goodbyes under control.

But what about role-based allowances? Employers hope they will not count as salary when the redundancy rounds come up, but specialist lawyers are less convinced. They reckon, with a prevailing wind and a friendly judge, a decent QC could succeed in arguing that pay not based on personal performance is salary, whatever it says on the label.

Barclays yesterday said it had to pay big to prevent it being plunged into a "death spiral" triggered by staff being poached. But if banks don't write their new contracts carefully enough, they could face themselves being wiped out by paying people to leave.