EU261/2004 does not actually deal with baggage incidents. This is the remit of the Montreal Convention.
With regards to the level of compensation one can expect, here's the relevant article of the said convention:

Article 22 - Limits of Liability in Relation to Delay, Baggage and Cargo

2. In the carriage of baggage, the liability of the carrier in the case of destruction, loss, damage or delay is limited to 1,000 Special Drawing Rights for each passenger unless the passenger has made, at the time when the checked baggage was handed over to the carrier, a special declaration of interest in delivery at destination and has paid a supplementary sum if the case so requires. In that case the carrier will be liable to pay a sum not exceeding the declared sum, unless it proves that the sum is greater than the passenger's actual interest in delivery at destination.

As per paragraph 1 of the same article, 4000SDRs is the maximum liability of the carrier in the case of damage caused by delay in the carriage by air of passengers, baggage or cargo.

Confused ????