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EU moves to limit banker bonuses as part of an effort to eliminate corporate excess

125px-Flag_of_Europe.svgAs part of an effort to eliminate corporate and banking excess, the European Parliament and member states of the European Union recently reached a deal that would prohibit bonuses that exceed a banker’s fixed salary.

The move is intended to cut incentives to participate in risky behavior that contributed to the global financial crisis. Flexible pay, however, may increase to two times the fixed salary but only under with shareholder approval, The Wall Street Journal reports.

Voters in Switzerland are scheduled to vote on a controversial proposal, known as the “rip-off” initiative, that would allow shareholders to ban “golden parachutes,” block salaries, and require increased transparency on executive and director loans and pensions. Violations could result in prison time and financial penalties.

The pay limits would be applicable to all European banks, including their operations abroad, and would also apply to foreign bank subsidiaries in the EU. Officials from member states and Parliament said that the provision may be up for review in a few years, according to The Wall Street Journal.

Bankers have lobbied against the proposal, saying that it would hinder their ability to hire talented staff members and would put them at a competitive disadvantage.

Negotiators said that the rules will likely take effect next January if they receive approval from the full Parliament and EU finance ministers, and if the rules can be written into law in all member states in time, The Wall Street Journal reports.

The proposal is also aimed at encouraging banks to carry sufficient capital under the Basel III accord, though bankers’ pay was not part of the agreement. The European Parliament insisted on limiting pay incentives based on short-term profits because they were assumed to have encouraged bankers to take on excessive risks in the time leading up to the crisis.

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