EU Moves to Curb Executive Pay at Bailed-Out Banks

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Executives at Royal Bank of Scotland and other European banks that receive fresh state support would wave goodbye to seven-figure salaries under new EU rules that peg their pay to average wages.

The cap sets a new bar in the EU's clampdown on financial sector pay and is included in Brussels' revised rules on state aid for failing lenders, which automatically come into force from next month under its executive powers.

Senior staff at banks receiving new state funds will earn, as a general rule, no more than the higher of 15 times the national average salary or 10 times the wages of the average worker at the bank. Bonuses will also be capped at twice fixed salary, replicating a measure that will apply to all EU banks from next year.

(Read More: Hester's Departure From RBS Called 'Plain Stupid')

Britain privately opposed the restrictions and such stringent conditions complicate the options for George Osborne, UK chancellor, in potentially restructuring RBS and finding a new chief executive.

Mr Osborne is examining whether to break up RBS, a move that is almost certain to require EU approval under the revised guidelines if new forms of state support are granted.

The exact conditions would depend on the type of intervention. But if the pay curbs were imposed in full, senior RBS staff including the chief executive would see their total pay including bonuses and share awards capped at about £471,000 – 15 times the UK national average salary of £31,413.

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Stephen Hester, the outgoing head of RBS, earned £1.2 million in fixed salary alone, which is closer to 38 times the average wages in Britain and 35 times those of RBS staff.

The European Commission hope the curbs – which also demand the removal of executives at failed banks – will protect against moral hazard and motivate bailed-out banks to pay back taxpayers promptly.

"There should be incentives for banks' managements to undertake far-reaching restructuring in good times and, thereby, minimize the need to recourse to state support," the guidelines state. The restrictions apply until the end of a bank's restructuring plan or the repayment of state support.

(Read More: 'Big Challenge' Looms for Bank of England: PwC)

The exact peg is similar to restructuring plans in place at some rescued banks. In Germany, absolute pay caps of €500,000 were enforced at HSH, NordLB and BayernLB.

The approach will come as a shock to the financial sector, particularly at investment banks where scores of staff could see their pay cut to a fraction of current levels. RBS argues that unless it pays competitive rates it will be left without the expertise to operate a highly complex bank, making it harder to repay taxpayers.

State aid rules are the only common framework in the EU to handle bank rescues. Since 2008, €1.6 trillion of taxpayer money has been pumped into banks and the commission has overseen the restructuring or winding down of about 60 lenders, accounting for more than a fifth of all EU banking assets.

The revamped rules for banks also raises the minimum amount of pain creditors must suffer once a bank fails. Before taxpayer support is approved, the commission will, as a rule, require shareholders to be wiped out and junior creditors to bear heavy losses.