The country's two largest banks, AIB and Bank of Ireland, have told the government that lucrative bonuses for several senior executives, middle managers and traders cannot be scrapped for contractual reasons, despite plans by Brian Lenihan to pump €7bn of taxpayers' money into the institutions on Tuesday.


The government told the banks in the last week it still wants to see changes at the top levels of management, although this will not form part of the announcement on Tuesday. AIB chief executive Eugene Sheehy is resisting any calls for him to step aside or retire and the bank says he has the "full support" of his board.


But a government source said yesterday: "We have a preference for changes of management in the medium term at the main institutions."


The government will also insist that the banks release credit to businesses as a "quid pro quo" for its investment. "It will be a condition of the deal. This money is being put in to circulate, not to hoard," one government source said.


Another senior government figure said it would not simply be a case of putting pressure on the banks to lend. "It will be a lot more than that. There are ways [of ensuring it]," he added.


Last week, Taoiseach Brian Cowen said the recapitalisation plan would involve cuts of at least 25% in executive salaries and directors' fees. Even if this goes through, Irish bank executives would still be earning more than the pay ceiling being proposed by US president Barack Obama.


The US president is proposing that any bank executive heading up an institution receiving public money will not be able to earn over $500,000 a year, not including share awards. A 25% cut in the overall remuneration of AIB chief executive Eugene Sheehy would leave him earning about €1.5m ($1.9m), in salary and bonus. This is based on figures for 2007, with 2008 numbers yet to be published. However, if Sheehy forgoes his entire bonus of €850,000, this figure would tumble.


During discussions over the last fortnight on a new recapitalisation plan, bank representatives told the government that a substantial number of employees have contracts, which include bonuses that are non discretionary. While the pay of chief executives, chairmen and executive directors can be reduced or capped, the banks said contractual issues meant a large number of staff cannot have their pay reduced as part of the recapitalisation plan. Some employees must be paid bonuses once they achieve personal targets set for them in their contracts of employment. Traders in lucrative areas such as foreign exchange and derivatives must be paid their bonuses once these targets are met, a source said. While it may be possible to defer bonuses for some of these staff, the monies will still be accumulated in a pool and will have to paid out at some point or else the bank will face legal action.