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Industry lobbyists have strongly resisted bonus caps, arguing such limits would only force banks to hike base pay to keep staff, making wage bills less flexible. Britain in particular is wary of any measure that might hurt the City of London, the continent's financial capital, with 144,000 banking staff and many more in related jobs. Britain, anxious to protect a sector that accounts for one tenth of its economy, wants to dilute the impact of the cap by allowing higher bonuses if they were paid in share options. It accepts there should be a cap on cash bonuses.
However European lawmakers see a total cap - possibly limiting bonuses to no more than a banker's base pay or double that level if bank shareholders agree - as the only way to rein in pay, reduce incentives for risk and make banks safer.
Although tougher rules now seem certain, it is unclear whether a final deal can be struck at a meeting of EU country diplomats and the European Parliament to finalise the draft legislation. "This will only change the way that pay is structured", said Andrew Breach, a head-hunter at Michael Page, which recruits traders and other bankers. "This is not the civil service. This is a market-driven industry. If you want people to make profit, then you need to reward them."
An earlier attempt to limit bankers' pay with an EU law forcing financiers to defer bonus payments over up to five years merely prompted lenders to increase base salaries. However Arlene McCarthy, the European lawmaker, said it would be harder for banks to raise base pay this time around. The bonus rules will come as part of wider legislation setting higher capital standards for banks, increasing their costs and curbing freedom to hike salaries.
The restrictions planned by Brussels, which could come into force from the beginning of next year, may, however, be overtaken by events in an industry where slack activity has already driven down most bonuses to twice salary or lower. On Wall Street, by contrast, the securities industry's bonus pool was expected to total $20 billion last year with the average cash bonus rising an estimated 9 per cent to almost $121,900, New York state's comptroller said this week.