The European Commission has a message to business executives raking in billions of Euro in bonuses while their companies are failing: the party’s almost over. The EU responded to popular anger about perceived managerial greed in the midst of a global recession by recommending curbs on company pay and bonuses and also issued tighter rules on the management of high-risk alternative investment funds, such as hedge funds.

Action on both issues has been prompted by the financial crisis, which has in part been blamed on short-term profit-taking and lax financial legislation. “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 in 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, he said.

“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 have enjoyed a surge in their salaries in recent years. This was in large part due to an increase in their bonuses, which used to be equivalent to 70 percent of their base salaries in 2003, but hit 151 per cent in 2007. 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. 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.

By contrast, the commission’s proposed directive designed to bring hedge funds under greater supervisory scrutiny would be binding if it were approved by both the European Parliament and the finance ministers of the 27-member EU. Commission officials said Alternative Investment Fund Managers (AIFM), which include the managers of hedge funds and private equity funds, controlled around two trillion Euro (USD 2.65 trillion) in assets in the EU at the end of 2008. The bulk of AIFMs were based in Britain.

The proposals take into account recent discussions held in London by the leaders of the world’s 20 most powerful nations (G20,) after US President Barack Obama limited the bonuses of American managers whose companies received federal bail-out funds. McCreevy said the EU was the first jurisdiction in the world to go ahead with such proposals and said he expected other countries to follow. It was prompted by the global financial crisis, which has in part been blamed on short-term profit-taking and lax legislation.