The cap fits

Brussels hits right note on bankers' pay for once

Brussels is hitting the right notes on banker pay. The EU Commission's forthcoming reform of state aid for failed banks will cap remuneration at lenders requiring taxpayer injections. Bankers will squeal. But compared to well-intentioned and flawed moves to cap their bonuses, the incentives are much better aligned.

Banks that fell over during the 2008 financial crisis mostly ended up firing their chief executives. But in general they continued paying their other staff over the odds. The need for the likes of state-owned Royal Bank of Scotland to pay top dollar for investment bankers probably cost more in bad public relations than it generated in higher earnings.

The Commission's rules, due to come into force on August 1, should change this. If a bank receives government money, the total remuneration of any individual - salary, bonus and pension rights - will not be able to exceed 15 times that particular country's average salary, or 10 times the average salary of the bank's employees. For RBS, that would have meant £471,000 and £340,000, respectively.

The new system would only apply to future bailouts, and is designed as a strong incentive for bankers to restructure or raise capital in time, before being forced to go hat in hand to the government. Bosses may accept lower returns if a more painful salary cut lies around the corner.

But the new system isn't perfect. Lenders that do receive state support in future will still face recruitment problems if they are barred from paying potential executives at market rates. This could be particularly bad since bailed-out institutions need competent bankers to take them out of the hole. The Commission might want to amend its rules and allow for some flexibility for new executives being hired - perhaps by devising creative ways to incentivise them, while avoiding pay distortions between the old and the new teams of managers.

Most importantly, the new system's purpose is to make it less likely that banks end up in state hands in the first place. It has a chance to reach that goal.