European Parliament Undermines Banker Bonuses

It is as if Kenneth Feinberg, former U.S. pay czar and currently overseer of BP's $20 billion escrow account, had found a place in the European Parliament: The legislative body has moved to undermine the decades-old system of paying investment bankers in Europe.

According to a number of media sources, the legislators have approved new rules that will require between 40% and 60% of bank bonuses to be deferred for at least three years. In addition, "The rules state that a maximum of 30% of the total bonuses can be paid in cash upfront, with that proportion dropping to 20% for 'particularly large bonuses.' In addition, at least 50% of the total payout must be in the form of shares and contingent capital -- funds that can be called upon by the bank if it gets into difficulties," according to MarketWatch. The new rules are set to take effect early in 2011.

The new system is a banker's worst nightmare. It not only cuts the 100% cash payout which was often given at the end of a financial firm's calendar year, it gives the government "claw back" ability if a bank gets into trouble. In essence, bankers could lose bonus money if their employers make mistakes that severely damage their balance sheets.

The same sort of program has been proposed for American financial firms, but at this point, it has not made it into the financial reform bill soon to be voted on by the Senate. But Europe has set a precedent, and it is one other regions may eventually follow.