Under the legislation, which will be introduced in 2011, the majority of cash bonuses will be capped at 30 per cent while âparticularly largeâ pay outs will be limited to 20 per cent.
Firms will be able to defer large amounts of bonuses while they will could also be reclaimed if performance is not as good as expected.
Pension payments will also be covered by the new rules while bonus pay-outs will be capped to salary.
Arlene McCarthy, the rapporteur in charge of negotiations surrounding the initiative, said: âTwo years on from the global financial crisis, these tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk taking. A high-risk and short-term bonus culture wrought havoc with the global economy and taxpayers paid the price.
âThe public want banks to prioritise stability and lending over their own pay and perks. In the last two years the banks have failed to reform, and we are now doing the job for them.â
Further rules agreed upon will see special restraining measures on bonuses put in place for bailed out banks.
Banks will also be required to have stricter control of their capital requirements to ensure they are covering their risks.
By Jim Ottewill