DUBLIN (Reuters) - Ireland’s central bank told lenders yesterday to overhaul pay practices and link bonuses to sound risk management or face fines and disqualification for individual executives.

Irish banks’ big bonus culture and token boardroom oversight fuelled a disastrous property bubble that brought the sector to it knees and forced the state to seek emergency assistance from the IMF and the EU this month.

“It is clear that boards need to become much more objective and independent in their monitoring of remuneration and less accommodating in their bargaining with employees and potential employees,” the bank said in a letter sent to bank bosses.

While most lenders had started to implement reforms, the central bank said the findings of a review into pay policies had been discouraging and that only one bank had taken an obvious lead. “If a bank is not employing the right financial incentives, it is not managing its risks - it’s as simple as that. We expect banks to have dealt with these issues when we review their remuneration practices again in 2011,” Jonathan McMahon, head of financial institutions supervision at the central bank, said in a statement.

In its letter, the central bank warned that under new European and domestic rules, from 2011 it would be able to punish banks for failing to improve their pay practices.

The central bank can fine banks a maximum of 5 million euros ($6.5 million) or individuals a maximum of 500,000 euros but is currently unable to apply those penalties in relation to pay. From next year it will be able to punish non-compliant lenders and is seeking to beef up its arsenal of penalties.

The central bank warned that senior bankers’ pay was still not directly linked to risk management, meaning that the state, which has guaranteed Ireland’s largely broken banking sector, could be exposed to future reckless lending.

“The majority of banks were found to have given little or no consideration to preparing for the implementation of impending European requirements and guidance on remuneration, which will become effective in Ireland on January 1, 2011,” the central bank said.

Non-executives need to step up their scrutiny of pay practices and the reasoning behind remuneration decisions needs to be transparent, the central bank said. Corporate governance has come under close scrutiny in Ireland, where a close-knit business community created a cosy network of board members.

During the boom years, top banking executives were able to side-step their boards and build private property empires using loans from their own banks.

Lenders have tightened up their approach to guaranteed bonuses and severance packages, but more needed to be done, the central bank said.

The former chief executive of Irish Nationwide Building Society, Michael Fingleton retired a year ago with a controversial one million euro bonus, and former executives at collapsed Anglo Irish Bank, some of whom have fled overseas, have become hate figures in the media.

A bailout of Ireland’s crippled banking sector is costing Irish taxpayers and the IMF tens of billions of euros after lenders aggressively pursued property developers during the go-go years of the “Celtic Tiger” economic boom.