Executive bonuses

The European Union executive also issued tighter rules, on Wednesday, for managing high-risk alternative investment funds, such as hedge funds.

The moves were prompted by the global financial crisis, which has in part been blamed on short-term profit-taking and lax financial regulation. The proposals are part of a push by the EU to increase financial regulation in a bid to bring confidence back to financial markets.

"Up to now, there have been far too many perverse incentives in place in the financial services industry. It is neither sensible nor sane that pay incentives encourage excessive risk-taking for short-term gain," said EU Internal Market Commissioner Charlie McCreevy while unveiling his proposals.

According to the commissioner, managers' salaries should reflect "sound and effective risk management" rather than short-term gains, while the payment of bonuses should be linked to the long-term performance of the company.

Moreover, a company's remuneration policy should be "adequately disclosed to stakeholders" and properly supervised.

Finally, banks should be allowed to claw back bonuses paid on the basis of data "which proved to be manifestly misstated," officials in Brussels said in a statement.

Undeserved bonuses

"Our message is very clear: directors' remuneration must be clearly linked to performance and not rewards for failure," McCreevy said.

Data published by the commission in March showed that many of Europe's chief executive officers enjoyed ballooning salaries between 2003 and 2007, with average bonuses surging from an equivalent of 70 percent of their base salaries to 151 percent.

In issuing his recommendations, McCreevy also urged financial firms to limit the benefits they pay to fired executives - the so-called "golden parachutes" - to no more than double their basic salary. Severance pay should be banned in case of failure.

The guidelines are non-binding, but McCreevy said at least some of them could be incorporated in the commission's revised Capital Requirements Directive, due to be unveiled in June.

Wednesday's proposed directive on bringing hedge funds under greater supervisory scrutiny would be binding if it were approved by both the European Parliament and the finance ministers of the EU's 27 member states.

Pros and cons

Commission officials said Alternative Investment Fund Managers (AIFM), which include the managers of hedge funds and private equity funds, controlled around 2 trillion euros ($2.65 trillion) in assets in the EU at the end of 2008.

The bulk of AIFMs are based in London, and Wednesday's proposal is seen as a compromise between the hard-line stance of countries such as Germany and France, and that of countries such as Britain, which argue that stricter regulation could drive financial firms away from Europe.

The proposal disappointed advocates of tighter regulation, such as Poul Nyrup Rasmussen, head of the Party of European Socialists, who described the directive as having "more holes than a Swiss cheese."

McCreevy acknowledged divisions, saying "For some, these proposals go too far, for others they do not go far enough."

Wednesday's proposals take into account recent discussions held in London by the leaders of the world's 20 most powerful nations. European Commission President Jose Manuel Barroso said the EU was leading the way in the global drive to prevent further financial crises from occurring.

"(The proposals) will tackle systemic risks created by a lack of transparency and excessive risk-taking. Now we hope that others can join us," Barroso said.