Fears of pay hikes may scupper attempt to cap bankers’ bonuses

Legislation to limit bonuses to 100 per cent of salary was proposed earlier this year by members of the European Parliament in response to public outrage over pay packages following the financial crisis.

However, it is understood that the proposals are now being opposed by bureaucrats in Brussels and Berlin after the banking sector argued that overseas rivals would poach the most talented dealers from Europe, while big American banks have said they would be forced to move jobs out of London.

Investors also opposed the move, arguing that restricting bonuses to a percentage of basic pay will allow bankers to demand higher salaries, which would push up costs and dent shareholder returns. A climbdown would be a major victory for the City and would remove one of the biggest threats to the bonus culture in banking.

Big bonuses were blamed for contributing to the financial crisis by giving bankers an incentive to take risks.

They have sparked mounting anger in recent years after Royal Bank of Scotland and Lloyds Banking Group were bailed out by the taxpayer as the wider UK economy struggles to cope with austerity measures.

RBS chief executive Stephen Hester gave up his bonus for 2011 – worth nearly £1 million – in response to the public outcry. He is also to forgo his 2012 bonus, worth up to £2.4m, in an attempt to calm anger over a lengthy IT meltdown that left thousands of customers without access to cash.

The pay proposals were to be tacked on to a new piece of European legislation that contains stringent rules about how much capital banks must hold to cut the chances of future bailouts.

But a number of European governments have raised concerns over the principle of allowing Brussels to interfere in private sector pay and German officials are worried it could be deemed illegal by the constitutional court.

Consultancy firm Johnson Associate expects Wall Street bonuses to rise moderately this year, but has revised its forecasts down because of Libor rigging and other scandals at the big banks. The firm has predicted increases of up to  5 per cent, lower than the forecast of up to 15 per cent it made in May.

Last year, the US adopted “say on pay” laws that force companies to hold a shareholder vote at least once every three years on remuneration for the chief executive, finance director, named executives and the three other most highly-paid directors.

Tough new laws were also introduced in Australia last year that gave shareholders the power to axe a board if they were unhappy with the pay regime. Under the “two strikes” rule, if more than 25 per cent of shareholders vote down the executive pay scheme for two consecutive years, the board can be thrown out and new elections held.

Bosses of some major Australian firms, including Alan Joyce at Qantas and BHP Billiton’s Marius Kloppers, are foregoing their bonuses this year.

Australian Shareholders’ Association chief executive Vas Kolesnikoff said: “It isn’t a magnanimous gesture to hand back a bonus. It’s more of an acknowledgement that the contract and bonus structure is fundamentally flawed.”