European Union lawmakers and member states agreed to the world's toughest curbs on bank bonuses on Tuesday, in the face of warnings from bankers that the crackdown would backfire and land them bigger basic pay packets.
Representatives from European Union states and the European Parliament are set to push ahead with their plans to cap bankers' bonuses at no more than their annual salary after Britain, home to the region's biggest financial hub, failed to block the proposal after months of wrangling.
The lawmakers, supported by Germany and France, argue that imposing caps on bankers' bonuses will prevent the sort of excessive risk-taking that contributed to the financial crisis.
It will also play well with austerity-weary voters, who take a dim view of senior bankers continuing to take lottery-sized bonuses from an industry still propped up by trillions of euros of taxpayers' money.
"This is a question of justice," said Sven Giegold, a German lawmaker in the European Parliament.
"If you are a good football player, then you get a lot of money because you play good football. But in finance, you get a high income whether your performance is average or worse."
The banking industry has pushed for months to influence the rules, flooding lawmakers with suggested amendments. Regulations such as that on pay and capital has fuelled a dramatic mushrooming of financial lobbyists in Brussels, some of whom can themselves earn more than €400,000 ($534,000 U.S.) a year.
In London, home to some of the biggest dealing rooms on the planet, bankers said the new regime would prompt a move to higher basic pay rather than a shift away from the skyscrapers of Canary Wharf and the City of London financial district.
But a focus on basic pay would give banks less flexibility on costs and less ability to influence behaviour, they said.
Switching the focus to basic pay could perversely encourage more risk-taking, as bankers' remuneration would be less dependent on performance and could not be deferred or clawed back if things go sour.
"It's the logic of the thing that mystifies me," said one senior banker, who declined to be named because of the sensitivity of the topic. "All you're going to do is convert bonus to fixed salary. You can't stop that. It's bound to happen.
"From a prudential point of view, that doesn't make sense to me. If you give someone a bonus it can be deferred over a number of years, there's a clawback provision, you can incentivize compliance with regulations and objectives."
Isabel Pooley, a lawyer at CMS Cameron McKenna, agreed the reforms could backfire: "The outcome is likely to be the opposite of what politicians desire: an increase in the fixed element of pay, which is not risk-adjusted, rarely falls when performance is poor and cannot be clawed back."
Banks contacted by Reuters, including UBS AG, Credit Suisse Group, Barclays Bank PLC, HSBC Holdings PLC, Société Générale de Belgique SA and DBS declined to comment for this story.
Shareholder advisory firm PIRC, however, whose clients run more than £1.5-trillion ($2.3-trillion) in assets, said a bonus cap could lead to more conscientious stewardship from fund managers, many of whom have nodded through controversial executive pay deals that their clients might have objected to.
"If the emphasis is put back on base pay, and banks continue to try and push it up, this may, finally, trigger a response from investors," PIRC said.
European wrangling over bankers' pay has held up an EU law meant to implement a global bank capital accord known as Basel III, one of the world's most important regulatory responses to the financial crisis.
Privately, officials in Brussels were optimistic that a deal on bonuses could be reached by the end of talks, due to conclude today, paving the way for the eventual implementation of Basel III.
While London has accepted that the cash bonus should be no higher than a banker's annual salary, it says a bonus paid in share options, for example, should be allowed to exceed that limit as it can be clawed back.
The European Parliament would also agree to lifting the bonus cap to twice annual salary on condition that a bank's shareholders are in favour.
Any deal on Tuesday would need endorsement from member states and the full parliament.
Even some banking insiders agree the industry's remuneration levels have to be tackled.
The former chief executive of Switzerland's UBS told a British parliamentary committee last month that "mercenaries" in his bank's dealing rooms were to blame for a rate-rigging scandal that has cost the lender $1.5-billion and damaged its reputation.
Under pressure from regulators and shareholders, banks have cut bonus pools and awards are increasingly deferred for longer periods, subject to clawbacks and sometimes paid in ways that mean there is no payout if the bank's fortunes falter.
Unlike some continental European countries, which are less reliant on tax revenues from financial services, Britain has not capped bankers' basic pay.
London dominates the market for foreign exchange and derivatives trading and its property market, luxury stores and jobs pool is heavily dependent on high-spending investment bankers.
Prime Minister David Cameron's failure to block a possible European bonus cap on banks is a further sign of Britain's waning ability to influence European financial sector reforms as the euro zone inches towards a banking union.