EU to propose caps on executives', bankers' bonuses

April 25, 2009 10:50:06 AM

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The European Commission will propose next week to set caps on bankers' and corporate executives' bonuses after the financial crisis exposed excesses, according to draft documents obtained by AFP.

In proposals due to be released on Wednesday, the European Union's executive arm lamented that corporate remuneration has become too complex, focused on rewarding achievements in the short term, and in some cases simply too rich.

To rectify the problem, the commission said in a first proposal that "companies should set limits" on corporate fat cats' bonuses, which should be tied to long-term performance criteria.

It also recommended capping golden parachutes, urging such one-off parting pay-offs to be limited in general to no more than two years of wages and said they should be conditional on performance targets.

Executives would also not be able to receive such pay-offs when they resign on their own account.

After the recent public outrage over bankers' huge bonuses before the crisis, the commission's second proposal aims to clamp down on the risk-taking bonus culture of the financial sector.

It too recommends that bonuses should be "based on longer term performance," suggesting that "the actual payment of bonuses is spread over the business cycle of the company."

It said that such performance pay-offs and bonus pools should also be adjusted to reflect the risks that a company is exposed to.

The commission said that financial companies should not be contractually obliged to pay employees bonuses and should have the right to suspend them if the group gets into trouble.

The commission wants the caps on both executives' and bankers' pay by the end of the year.

In 2004, the European Commission issued recommendations for tougher salary controls but found little support from member states, apart from the Netherlands.

However, since the current crisis broke out, support for action to rein in executive bonuses has been building up both within Europe and elsewhere.

In October 2008, EU finance ministers reserved the right to dismiss executives of failing banks that get state bailouts, without their golden parachutes.

More generally, the ministers adopted recommendations that would allow governments to limit golden parachutes even at companies that do not get state bailouts, particularly in the financial sector.