A new cap on bankers' bonuses agreed in Brussels was hailed by its supporters as a breakthrough to rein in the financial sector, but dismissed by critics as a reckless move that would drive bankers abroad or force up their base pay.
Bankers in Europe could be barred from receiving bonuses equal to more than their base salaries as soon as next year, following agreement in Brussels yesterday. Shareholders would be allowed to vote to raise the cap to double base pay, but no higher.
The cap has been somewhat softened by allowing banks to discount future values of shares, options, bonds or other non-cash payments paid out over a number of years, but nevertheless it amounts to the toughest limit of its kind in the world.
The rules would apply to Europe-based employees of any bank, as well as to staff of European banks wherever they are based.
That means a Deutsche Bank employee working in New York or Tokyo would be subject to the limits, as would a Goldman Sachs banker posted to London, although that provision may later be reviewed.
"There will be no exceptions," said Othmar Karas, the Austrian lawmaker who helped negotiate the deal.
"It goes for all banks inside and outside the European Union and for all foreign banks inside the European Union."
The cap addresses public anger at what many European politicians describe as rampant greed in the financial sector.
Many people on the continent blame huge bonuses for encouraging bankers to take outsized risks that caused the 2008 financial crisis, when banks had to be bailed out with public funds.
Banks argue that without big bonuses they will be forced to increase base pay to keep staff, raising their fixed costs and making it more difficult to manage their businesses.
"If the cap is implemented, it could result in significantly more complex pay structures within banks as they try to fall outside the restrictions to remain competitive globally," said Alex Beidas, a pay specialist with the law firm Linklaters.
The backing of a majority of EU states is needed for the deal to be finalised, so no country would not be able to block it alone.
Still, one member of the European Parliament privately signalled that the deal could yet change, pointing to the "reservations" of some EU countries.
The limit on bankers' pay, set to enter EU law as part of a wider overhaul of capital rules aimed at making banks more stable, will be popular on a continent struggling to emerge from the ruins of the financial crisis.