Banker Bonuses Would Be Curbed by Shareholders Under EU Plan

Bankers Would Face Shareholder-Fixed Bonus Caps in Draft EU Plan
The proposed compromise by Michel Barnier, the European Union’s financial services chief, also includes curbs on when lenders can offer guaranteed bonuses to their employees. Photographer: Georges Gobet/AFP via Getty Images

Banker bonuses would be limited by shareholders under compromise plans criticized by European Union lawmakers who are calling for stricter limits on financial-industry pay.

Michel Barnier, the EU’s financial services chief, has proposed that bank investors should set maximum ratios on the size of bonuses compared with fixed pay, according to a document obtained by Bloomberg News. The European Banking Authority would publish aggregate data on the limits.

Bonuses that are a “large” multiple of fixed pay “are likely to encourage excessive risk taking and undermine confidence in the financial sector generally,” according to the plans.

Bankers are facing a backlash from European Parliament lawmakers determined to cut variable pay as part of a quest to reshape lenders as utilities rather than money-making machines. The regulatory push comes as public outrage and shareholder rebellions this year forced some banks, including Citigroup Inc. and Barclays Plc, to retreat from their initial pay plans.

Barnier’s move is an attempt to broker a compromise between parliament members, who are calling for a ban on bonuses that exceed fixed pay, and national governments that are concerned about the impact the measure may have on competitiveness.

The ban has become a sticking point in negotiations on a draft law to overhaul bank rules that the EU is seeking to settle by Jan. 1, 2013.

Bank Legislation

Lawmakers including Sharon Bowles, chairwoman of the parliament’s economic and monetary affairs committee, and Philippe Lamberts, who is leading work on the bank legislation for the assembly’s Green group, have said that the Barnier plan isn’t tough enough.

The proposals will be discussed by officials from Cyprus, which holds the rotating presidency of the EU, and lawmakers at a meeting on Sept. 5.

German Finance Minister Wolfgang Schaeuble has called for a narrower ban that would outlaw immediate cash bonuses that are greater than bankers’ fixed pay. Such a cap would exclude deferred parts of a bonus award.

Writing in today’s Financial Times, Schaeuble also suggested that shareholders vote on overall bonus awards that exceed pre-set financial thresholds.

Barnier’s proposed compromise also includes curbs on when lenders can offer guaranteed bonuses to their employees.

Such a step should only be taken “when hiring new staff and where the institution has a sound and strong capital base,” according to the four-page document. Guaranteed bonuses must be “limited to the first year of employment.”

The commission also calls on banks not to offer “disproportionate” compensation in an attempt to poach executives from other firms.

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