European lawmakers voted on Tuesday to cap banker bonuses at the region’s largest institutions, as part of a major set of reforms designed to curb the financial industry’s risky behavior.
As part of the hard-fought deal, compensation limits will restrict bonus payments to one year’s base salary, though that figure can be doubled if a majority of shareholders approve. The legislation will apply to all banks active in Europe, as well as the international divisions of European firms like Barclays and UBS.
“The rules will put an end to the culture of excessive bonuses, which encouraged risk-taking for short-term gains,” said José Manuel Barroso, president of the European Commission. “This is a question of fairness. If taxpayers are being asked to pick up the bill after the financial crisis, banks must also make a contribution.”
While lawmakers hailed the vote as a major victory, many in Europe’s finance sector questioned whether the new laws would lead to overall reductions in bankers’ pay. Analysts warned that many firms would look to skirt the new restrictions by offering higher base salaries for their top earners, which would allow them to continue to receive multi-million dollar salaries despite the cap on bonuses.
“Inevitably there will be an increase in fixed pay,” said Nicholas Squire, an employment partner at the law firm Freshfields Bruckhaus Deringer in London. “Banks will see their costs rise because they will have to pay higher base salaries.”