Commission moves to cap bankers' pay across EU

BANKERS’ BONUSES and golden parachutes would be capped in all European Union countries under a draft policy circulating in Brussels that amounts to one of the broadest responses yet to concerns about executive pay.

Under the European Commission recommendations, a copy of which was seen by the Financial Times, all 27 EU countries would be asked to bring in tougher remuneration rules for financial institutions with an office within their borders and covering all staff whose activities affect the firm’s risk profile.

The commission also proposes the rules be applied to subsidiaries of EU-based parents, including those in offshore centres.

Under the draft policy, directors’ termination payments would be limited to no more than two years of their fixed remuneration and they would also face a minimum three-year vesting period for share options.

Financial companies would be able to withhold bonuses entirely or partly when performance criteria were not met and a major part of bonuses should be deferred, the policy says.

Calls for a tougher approach to remuneration policies have been widespread in the wake of the financial crisis, most recently at the G20 summit of world leaders in London, as resentment over perceived “rewards for failure” has mounted.

The draft policy – a final form of which is due to be published next Wednesday – acknowledges there can be “an appropriate balance” between fixed remuneration and bonuses, but says member states should ensure that any financial group’s remuneration policy “sets a maximum limit on the variable component at a specified percentage of the total remuneration”.

A separate revised recommendation covering directors’ remuneration suggests termination payments should not “be a reward for failure” and this should be taken into account when designing contractual arrangements. The commission also proposes running an annual “scorecard” to show how member states are performing in terms of implementing guidelines.

Commission officials yesterday declined to comment on the leaked draft, which could be subject to revisions before it is published.

Recommendations – as opposed to EU directives – are not binding on member states, and the commission’s previous efforts to improve standards for setting directors’ remuneration had limited take-up at national level. But the political impetus for action on this policy may be much greater.

The EU yesterday approved its first direct regulation of Standard Poor’s, Moody’s Investors Service and other credit-rating companies blamed for ignoring risks that led to the financial crisis.

EU governments and the European Parliament adopted a law imposing oversight of rating companies and setting other requirements to contain conflicts of interest. – (Copyright The Financial Times Limited 2009 / Bloomberg)