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The Bonus Risk

CHICAGO – In its July session, the European parliament approved some of the strictest rules in the world on the bonuses paid to bankers. The aim is to curb risk-taking by financial institutions.

The new rules require that no more than 30% of bankers’ bonuses be paid in cash, that between 40% and 60% be deferred for at least three years, and that at least 50% be invested in “contingent capital,” a new form of debt that converts to equity when a financial company is in distress. The most innovative aspect of these new rules is that the limits do not apply only to financial institutions’ chief executive officers, but to all the top managers (though the definition of top managers is delegated to national parliaments).