Cash bonuses for top bankers should be capped at the size of their salaries, German Finance Minister Wolfgang Schaeuble said on Friday, lending powerful clout to a European push to tighten curbs on banker pay.
Schaeuble's proposal could help end the stalemate over tight limits on banker bonuses which the European parliament wants to include in financial regulation. EU states like Britain, home to the world's biggest financial centre, are strongly opposed.
A focus on the cash component of bonuses, however, as suggested by Schaeuble, would be a less stringent approach than demands tabled by the European parliament to cap total bonuses, including cash and shares, at the same level as salary.
"We need to set incentives for managers to act in the long-term interest of their banks," Schaeuble said in an opinion piece in the Financial Times, in which he also called for shareholder approval for longer-term incentive plans.
"Immediate cash bonuses for top bank executives should not exceed their fixed pay. And why not give a large quorum of shareholders the last say on setting these executives' long-term variable pay as soon as it exceeds a given level?" Schaeuble said.
The EU is finalising rules to implement the global Basel III accord that will force banks to hold more capital from January. The European Parliament and EU states have joint say.
The lawmakers want to insert a ratio into the rules so that bankers' bonuses cannot be higher than fixed salaries, a so-called 1:1 ratio.
The move, opposed by many EU states, has alarmed banks who say the 27-country bloc already has the toughest pay curbs in the world, going beyond what was agreed at the global level and would put them at a disadvantage to U.S. and Asian rivals.
The bloc's financial services chief Michel Barnier is also trying to persuade parliament to ditch its ratio plan, suggesting an alternative approach of introducing more pay curbs in a separate corporate governance law later this year.
"Parliament is not in the mood to back down on this," a parliamentary source said.
A compromise is expected, perhaps keeping a softer version of the curb, such as Schaeuble's middle way, in return for parliament easing back on some of its other demands.
The clash over the pay ratio has helped delay a deal on the new bank capital rules until after the summer, forcing banking regulators to put back some of the new rules.
Negotiations between representatives of parliament and member states start again on Sept. 5 with the aim of a final deal in October.
Banks in the EU already have to cap upfront cash at 25 percent of a bonus so that most hand out such rewards in shares. They now also defer big chunks of bonuses over several years.
One side-effect of these rules has been a rise in salaries at banks, as firms try to compensate their employees with cash in other ways. Banks are warning that salaries would only rise further were bonus caps and salary ratios to be introduced.
That would add to banks' fixed cost base, making it harder to slash spending on pay in bad years.
"They are very concerned that if introduced as suggested, you're going to get massive salary inflation," said Chris Wheeler, analyst at Mediobanca.
He added that if a cap came about, it would lead to "a major rethink of how people are rewarded, and banks will be thinking of other ingenious ways to pay people they want to keep appropriately."
Tying only the cash component of a bonus to salaries would still allow banks to pay out much bigger overall bonuses, but in other formats such as shares.
At Europe's banks, variable pay averaged about 122 percent of fixed pay for executives, a European Banking Authority survey showed earlier this year.
Get all the latest news and videos in your inbox. Register FREE