"The rules will put an end to the culture of excessive bonuses, which encouraged risk-taking for short-term gains," said Jose Manuel Barroso, president of the European Commission.
"This is a question of fairness. If taxpayers are being asked to pick up the bill after the financial crisis, banks must also make a contribution," Barroso said.
The cap on bonuses is set at the level of one-year's base salary, although it can be doubled if shareholders agree to do so, The New York Times reported
In addition, any bonus pay above the cap of one-year's base salary will have to be deferred for five years.
The long delay before bankers can actually cash in their deferred pay is meant to allow bank boards time to assess the risky bets bankers take to secure high bonuses. In theory, with a long delay, bonus pay will be based on safer investments, because bonus pay based on risks that soured could be withdrawn or "clawed back."
Compensation analysts quickly assumed that banks would re-balance their pay structures by increasing base salaries, so that total compensation would not decline.
"Inevitably there will be an increase in fixed pay. Banks will see their costs rise because they will have to pay higher base salaries," Nicholas Squire, an employment partner at the law firm Freshfields Bruckhaus Deringer in London, told the Times.
Others were concerned that the new rule would drive bankers from financial centers in the European Union, which could change the economic landscape of cities like London, where bankers currently flourish.
"An obvious concern is the impact this rule could have on the ability of banks in the City (London) to attract and retain key talent from other non-E.U. locations with different rules," said Paul Fontes, a partner at the Eversheds law firm in London.
"The long-term effect on the City remains to be seen but as it now stands, these non-EU jurisdictions look to have a significant recruitment edge," Fontes said.