European Union lawmakers may introduce tougher curbs on banker pay, including a limit on the gap between lenders’ highest and lowest salaries, as part of an overhaul of financial regulation later this year.
Members of the European Parliament’s Socialist and Green parties have proposed that a draft EU law to bolster bank capital should include new pay rules, as well as stricter curbs on risk taking, according to two members of the institution’s financial affairs committee.
“Wrong incentives were part of the banking culture that caused the crisis,” said Udo Bullmann, a German lawmaker following the proposed law for the parliament’s Socialist group. “I expect there will be quite a lot of sympathy among different party groups” for further rules on pay.
Labor leaders and politicians have criticized bank-bonus awards as out of touch with economic reality. Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester this year waived his 963,000-pound ($1.5 million) bonus after the U.K.’s opposition Labour Party said it would ask the national Parliament to vote on the award at the bailed-out lender.
Michel Barnier, the region’s financial services chief, has said he is considering proposing extra rules on bonuses in response to payouts that go against “all reason, common sense and morality,” including restrictions on the difference between a lender’s maximum and minimum pay. Some lawmakers would like to move faster by including the measures in the draft bank-capital law, which is scheduled to come into effect on Jan. 1, 2013.
“It would be impossible to implement a regulation prescribing a maximum ratio of highest-paid to lowest-paid employee salaries within an organization,” Richard Portes, professor of economics at London Business School, said in an e-mailed statement. “Do you include cleaners? Part-time workers? How do you value bonuses paid in shares?”
It would be “much better to use competition policy and stricter capital ratios to drive down bank rates of return and force cuts in overall compensation ratios, which would bring down top salaries,” Portes said.
Barnier presented the draft law last year to implement an overhaul of bank rules agreed on by the Basel Committee on Banking Supervision. National governments and the EU Parliament lawmakers must agree on the final form of the measures before they can enter into force. The parliament’s financial affairs committee is scheduled to vote on the rules by May.
Bullmann and Philippe Lamberts, a Belgian lawmaker who is following the law for parliament’s Greens, will seek to limit the ratio between the lowest and highest paid personnel in a bank.
Lawmakers “have been adamant” that further curbs on remuneration are needed, Lamberts said in an interview.
“It is hard to see how imposing a maximum ratio would work in practice, particularly as so much of bank remuneration is performance linked,” Sylvie Watts, a lawyer at Allen & Overy LLP, said in an e-mail. The measure “could also have the effect of increasing the overall pay levels at the lower end of the pay scale,” she said.
The EU adopted pay rules for the financial industry in 2010 that included limiting immediate cash payouts as a proportion of total bonus awards.
“The U.K. government is considering imposing a requirement on U.K. companies to disclose the highest and lowest pay, but that goes to transparency rather than regulating what companies are allowed to pay their people,” Watts said.
Lawmakers are also seeking a range of other changes to the draft capital rules. Members of the Socialist, Green, and Conservative groups have called for changes to give national regulators greater freedom to impose stricter capital rules on their banks than required by EU law.
The EU’s “implementation of tighter global banking standards must not be pegged back to the pace of the slowest countries,” Vicky Ford, a U.K. lawmaker following the draft law for the parliament’s Conservative group, said in an e-mailed statement yesterday.
The law should also include a requirement for lenders to back long term loans with stable sources of funds, Bullmann said.