Last October, the EBA signalled its support for the bonus cap introduced as a result of the EU’s Capital Requirements Directive (CRD IV), which said banks should limit bonuses to no more than twice fixed salary, and is likely to require many to redraw executive pay packages.

Now the watchdog says it is reviewing its guidelines on sound remuneration policies with a view to legislating for the new approach by the end of 2015, with all institutions apply the new rules for the performance year 2016 and onwards.

The draft guidelines set out the governance process for implementing banking remuneration policies across the EU, as well as the specific criteria for mapping all remuneration components into either fixed or variable pay.

Specific guidance is provided on how the ratio between the variable and the fixed components of remuneration should be calculated, taking into account specific remuneration elements, such as allowances, sign-on bonus, retention bonus and severance pay. The document also covers pay-out processes and types of instruments used to pay variable remuneration,

The watchdog has said that the use of allowances to boost fixed pay and thus evade the bonus cap is not allowed under EU rules. It has identified 39 institutions across the EU using fixed allowances.

 In the consultation document, the EBA says: ‘The correct mapping into these two categories is crucial for the calculation of the ratio between the variable and the fixed component and to safeguard that the limitation of this ratio is complied with.’

The EBA says that the requirements on deferral and payment in instruments have to be applied to all institutions, although it says specific exemptions could be introduced for certain institutions that do not rely extensively on variable remuneration and, if confirmed by further analysis, also for identified staff that receive only a low amount of variable remuneration.

The remuneration guidelines are based on the ‘comply or explain’ principle, which means that competent authorities will have two months to express their intention to comply with them and in case of non-compliance, they will need to explain their intention not to comply.

Tom Gosling, head of PwC’s reward practice, said: ‘The EBA has strengthened the expectation that firms will apply longer deferral and holding periods to bonuses, and that clawback will apply for a period after they've been paid. This moves the rest of the EU closer to the UK's position on these issues, and will lessen the competitive disadvantage UK firms will face. But the UK rules are still likely to be more prescriptive and more rigorously applied.’

Gosling said that there was likely to be ‘major concern’ in the City over the EBA guidance on proportionality, which could draw in a large number of institutions to the new regulations.

‘On the face of it the EBA seems to be saying that all firms covered by the directive will be subject to bonus cap and deferral rules, drawing in a huge number of firms such as small banks and asset managers which previously had exemptions,’ Gosling said.

Gosling also highlighted a technical change which he said would have ‘significant ramifications’ for UK banks.

‘The EBA is saying that long-term incentive plans should be counted towards the bonus cap in the year performance conditions are met rather than the year of award. It means that UK firms will need to strike a new pay deal for executives with their shareholders, as in most cases the existing model won't work any more,’ Gosling said.

The EBA consultation is open until 4 June and details are here: http://www.eba.europa.eu/documents/10180/1002374/EBA-CP-2015-03+%28CP+on+GLs+on+Sound+Remuneration+Policies%29.pdf