Bank bonus limit agreed by European Parliament
- 7 July 2010
- From the section Business
The European Parliament has approved a deal placing new limits on bankers' bonuses from next year.
Under the deal agreed by the EU members in June, bankers will receive no more than 30% of their bonus immediately and in cash, a limit that falls to 20% for larger bonuses.
Remaining payments will be deferred and linked to long-term performance.
Hedge funds will also be covered by the new rules. But there will be no cap on what bankers can be paid.
In the wake of the bailout of banks across Europe, MEPs have taken aim at the huge bonuses paid to top performers, the BBC's Dominic Hughes in Strasbourg reports.
Some blamed the bonus culture for encouraging risky behaviour which in turn led to the financial crisis, our correspondent adds.
Under the new scheme, 40% of a bonus must be deferred for between three and five years.
Half of the total bonus will be paid in the form of what is called "contingent capital". This is a kind of IOU from the bank that can then be turned into shares if it runs into trouble, our correspondent says.
As a result, bankers' bonuses become much more closely tied to the health and actual performance of banks, he adds.
'End to risk-taking'
The new rules have been agreed by EU member states and the European Parliament, though MEPs now need to hold a formal vote.
The agreement includes proposals to link bonuses more closely to salaries and the long-term performance of the bank.
Large severance packages for departing executives will also be limited.
"These tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk-taking," says Arlene McCarthy, one MEP involved in negotiating the deal.
The limits will apply to all 27 EU members, although similar rules are already in place in countries including the UK.
However, the rules do not limit the size of bonuses that can be paid to bankers, only the proportions that must be paid in cash and shares, and the timing of those payments.
That reflects the agreement reached by the G20 countries last year, which fell short of imposing caps on the amounts bankers could be paid in bonuses.
The inclusion of hedge funds in the new European rules is likely to alarm many in the City of London, where 80% of European funds are based.
Last month EU finance ministers agreed tougher regulation for the industry, despite objections from the UK government.
The EU's plans are the latest sign of a tightening of global regulation of the financial industry since the catastrophic financial crisis in the autumn of 2008.