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The action was a response to public outrage in the face of bonuses widely seen as excessive during the global financial crisis.
But the banking industry has warned that the restrictions could hurt Europe's competitiveness to the benefit of rival financial centres from Wall Street to Hong Kong.
Pascal Canfin, a Green MP from France, said that the caps on bonuses imposed by the European Parliament were "the most ambitious in the world" and would end "extravagant bonuses synonymous with extravagant risks."
The new EU rules will mean a far lower proportion of cash in the bonus, which would be much less payable upfront. Remaining sums would be "contingent" on subsequent company performance as well as directly linked to salaries.
From January 2011, 60% of bonuses should be variable and for future payment only, with at least 40% of such revenue locked away for three years, according to the legislative text.
Cash payments are capped at up to 30% of the total bonus.
The European Parliament voted 594-24 in favour of the legislation, which followed a deal between EU members states and lawmakers on June 30.
"Financial experts agree that a high-risk, short-term bonus culture, combined with a lack of capital, were at the heart of the global financial crisis in 2008," said British Labour European MP Arlene McCarthy.
"Despite claims by the banks that they have learned lessons, they have actually increased salaries and bonuses as a proportion of revenues," she said.
US also takes aim
"When governments are cutting budgets and people suffer reduced services and support, we cannot accept a banking culture that puts pay and perks above sustaining capital and credit for Europe's economic recovery."
But the banking community has warned that the measures could reduce the competitiveness of the European financial sector.
"We believe the agreement goes too far, because at the international level, there are already some principles" in the form of recommendations made by the Financial Stability Board, Guido Ravoet, secretary-general of the European Banking Federation, said recently.
"We believe that this is not up to public authorities to put in place figures, percentages," said Ravoet, who advocates self-regulation by banks.
"If the recommendations aren't followed at the international level, financial centres like New York, Singapore and Hong Kong will benefit."
The EU move follows a series of national initiatives targeting financial sector pay.
In Britain, a newly-introduced 50% tax rate already applies to all bank employee bonuses above
£25 000.
Chief executives at Britain's five biggest banks - Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered - said in March they had spurned bonuses for last year worth millions of pounds.
Top managers at Dutch banks and insurance companies may also soon become liable to pay back "unreasonable" bonuses under legal amendments proposed by the government.
Across the Atlantic, US authorities last month issued new banking guidelines - though no specific caps - aimed at countering excessive pay and bonus practices.
- AFP
