Banks should be allowed to claw back staff bonuses when performance claims prove to be bogus, the European Commission said this afternoon, pledging legislation on pay oversight.
Bankers' bonuses should not encourage risky behaviour and severance packages must not reward failure, the executive Commission said in non-binding guidelines for European Union states.
Bank executives have drawn public anger for winning big bonuses or huge payoffs despite their institution needing government money to stay afloat.
There was anger in Britain over news that Royal Bank of Scotland, which needed a government rescue, is paying an annual pension of £703,000 to its former chief executive Fred Goodwin.
“Up to now, there have been far too many perverse incentives in place in the financial services industry. It is neither sensible nor sane that pay incentives encourage excessive risk taking for short-term gain,” EU Internal Market Commissioner Charlie McCreevy said in a statement.
Leaders of the G20 group of industrial and emerging economies agreed this month to rein in overly generous pay at financial institutions that may have contributed to excessive risk taking.
Similar initiatives in the past have largely been ignored.
The first set of guidelines on bankers' pay is new. The second set updates guidelines on directors' remuneration that were issued in 2004 and ignored by nearly all EU states.
To give the guidelines teeth, Mr McCreevy said he would propose a draft law giving supervisors powers to intervene in bank remuneration policies deemed to pose risks to the market.
The proposal, to be made in June, will need the backing of EU states and the European Parliament to take effect.
If adopted, it would give supervisors powers to insist a bank set aside more capital if it is believed that remuneration policies encourage very risky behaviour.
The guidelines apply to all financial undertakings having their registered office or head office in an EU state.
Reuters