Crackdown on bank pay eyed in US, Europe

Geert Vanden Wijngaert/AP
Swedish Prime Minister Fredrik Reinfeldt (right) shared a word with European Central Bank President Jean-Claude Trichet during an European Union summit in Brussels Thursday. EU leaders issued a proposal urging the G20 nations to agree to binding rules on bonuses for bankers.

What would have seemed unthinkable two years ago is happening: The US and major European governments are moving to regulate bankers pay and bonuses.

The moves are not only overdue, they knock out a central pillar of the financial firms' justification for huge bonuses in the first place: If we don't offer big incentives, they say, the talent will move to places where they do.

Well, sorry New York, London, Paris, Frankfurt, Tokyo. The proposals now being worked on at the Federal Reserve and pushed by the European Union for next week's G20 summit differ. But if they are harmonized into some kind of international system, then there won't be anywhere else for the talent to go.

In the United States, the likely overseer would be the Federal Reserve. The central bank is working on proposals that would allow it to veto a bank's compensation policies, according to The Wall Street Journal:

Bureaucrats wouldn't set the pay of individuals, but would review and, if necessary, amend each bank's salary and bonus policies to make sure they don't create harmful incentives.

The final proposal is still a few weeks away.

In the European Union, leaders have come together around a draft statement urging the Group of 20 nations to set rules on bankers' bonuses. Banks' boards would be able to reduce compensation if their bank's financial performance declined.

The statement reads: “The G20 summit should commit to agreeing to binding rules for financial institutions on variable remunerations, backed up by the threat of sanctions at the national level.”

In essence, the major economies are moving in fits and starts toward setting an international standard for what is acceptable pay for bankers. It's breathtaking. But since the private sector clearly failed to set the right standards on compensation, with such obvious ramifications for the rest of us, even some die-hard capitalists are conceding that maybe a little pay oversight wouldn't be so bad.
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