EU policymakers strike banking bonus cap deal

28 February 2013

Policymakers in the European Union (EU) have reached a deal that will see bonuses in the region's banking industry capped. Negotiations between officials had been ongoing for several weeks, but it emerged last night (27 February) that a consensus has finally been reached.

As part of the incoming Basel III regulations, the maximum bonus bankers can receive will be set at the equivalent of one year's basic salary, with exceptions only being made on a case-by case basis if a large majority of a financier's shareholders agree, and even then an equivalent of two year's salary will only be allowed.

The UK opposed this plan from the start on the grounds that it could have an adverse impact on the City of London's standing at the EU's primary financial hub.

However, Michael Noonan - the Irish finance minister who led the talks in his role as President of the Council of the European Union - has welcomed the agreement and the wider implementation of Basel III.

"This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks," he added.

The proposed new legislation would require banks to disclose profits made, taxes paid and subsidies received country by country, as well as turnover and number of employees. From 2014 these would be required to be reported to the European Commission (EC) and from 2015 made fully public.

London's mayor, Boris Johnson, reacted furiously to the news, commenting that: "People will wonder why we stay in the EU if it persists in such transparently self-defeating policies. Brussels cannot control the global market for banking talent. Brussels cannot set pay for bankers around the world. The most this measure can hope to achieve is a boost for Zurich and Singapore and New York at the expense of a struggling EU."

However, the agreement received a friendlier reception from Cass Business School, where Andre Spicer, professor of organisational behaviour at the London-based institution, said curbs on bonuses would force banks to rethink how they motivate their star performers. “This could be good news for banks as most of the research suggests large cash bonuses are a very poor way to reward complex tasks," he said. "In fact, large immediate cash rewards can actually mean people perform worse. Cutting back on large bonuses could see better decisions being made.”
By Neil Ainger and Claire Archer

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