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European Union: Draft Proposal Imposes Strict Control on Banker Bonuses

(July 9, 2010) The European Parliament and the Member States of the European Union reached a political agreement on June 30, 2010, on draft legislation that imposes limits on bankers' bonuses and links them to their banks' overall performance. The agreement, which was endorsed in plenary session by the European Parliament on July 7, 2010, provides that bankers will receive no more than 30% of the bonuses immediately. Half of each payment will be paid in shares or securities linked to the bank's long-term performance. Payment of the rest of the bonus will follow within the next three to five years. A significant aspect of the proposed legislation is that it places no upper limits on bonuses, thus allowing the banks' practice of awarding large or what have been deemed excessively large bonuses to continue.

In addition, the draft proposal restricts “golden parachutes,” that is, excessive severance payments for executives. It also includes controls on the bonuses of managers of hedge funds, who until now were not subject to any restrictions on bonuses. Finally, it provides for financial penalties to be imposed on those banks that violate the above rules. (Leigh Philipps, EU Ties Bonuses to Performance, EU OBSERVER (July 1, 2010),

The European Parliament approved the new limits on bank bonuses by an overwhelming majority: 625 members voted in favor, 28 against, and 37 abstained. The EU finance ministers are expected to approve the rules on July 13, 2010, and they will become effective as of January 1, 2011. EU Internal Market Commissioner, Michel Barnier, affirmed that “[t]here will be no return to business as usual. The EU is leading the way in curbing unsound remuneration practices in banks.” He continued by stating, “[b]anks will neeed to change radically their practices and the mentality that has led in many cases to excessive risk-taking and contributed to the financial crisis.” (EU Lawmakers ApproveTough Caps on Bank Bonuses, EURACTIV (July 8, 2010),