Do any restrictions on remuneration policies apply?
Banking & Finance (2nd edition)
Israel has an extensive legislation regarding remuneration policy and restrictions on remuneration of senior officers, in particular with respect to financial and banking corporations.
According to the Israeli Companies law, 1999 (the “Companies Law”), banking corporations, which are publicly traded companies, are required to adopt a remuneration policy for their senior officers. The remuneration policy needs to take into account certain considerations as stipulated in the Companies Law, inter alia, regarding the company's objectives; the company's long term strategy; the company's risk management policy; the company's size and nature of operation, etc. In addition, the remuneration policy needs to include references to certain matters and guidelines with respect to variable terms of employment (cash and equity), retirement grants, the relationship between the senior officer's remuneration and the remuneration of other company's employees, etc. The Companies Law stipulates that the board of directors shall approve the remuneration policy following the recommendation of the remuneration committee and afterwards the approval of the shareholders by a special majority (50% of the shareholders who are not the controlling shareholders and who have no personal interest). Under special circumstances, the remuneration committee and the board of directors may approve the remuneration policy despite the objection of the company’s shareholders. The Companies Law also sets provisions regarding the approval of remuneration for senior officers.
The Remuneration of Officeholders in Financial Corporations (Special approval and inadmissibility of expense for tax purposes in respect of irregular remuneration Law, 2016 (the “Remuneration Law”), includes extensive restrictions regarding remuneration on banking corporation. The Remuneration Law applies to "Financial Corporations" which include various financial institutions such as banking corporation and in certain circumstances their controlling corporations but excludes foreign banks and other foreign financial bodies. According to the Remuneration Law, remuneration to senior officers or employees of a Financial Corporation paid to them in connection with their employment both by the Financial Corporation and by its affiliates, for which the projected expense calculated as of the date of the approval of the remuneration in accordance with GAAP, is expected to exceed NIS 2.5 million per year, may not be approved unless the ratio between (i) such expected expense (on a full time basis), and (ii) the expense for the lowest remuneration paid (on a full time basis) by the Financial Corporation to its employee, directly or indirectly (including to a person employed by a manpower contractor or a services contractor), during the year prior to the approval (the "Employee Ratio"), is lower than 35. This is an absolute cap on the remuneration (with no exemption).
Subject to compliance with the Employee Ratio, the approval of remuneration to senior officers or employees of a Financial Corporation, exceeding NIS 2.5 million per year, shall require a strict approval mechanism. Engagement with respect to Remuneration, which was not approved in accordance with the Remuneration Law, shall not be valid for both the Financial Corporation and the senior officer or employee. In addition, according to the Remuneration law, in general, any expense regarding the remuneration of employee of a Financial Corporation exceeding the sum of NIS 2.5 Million per year shall not recognized as remuneration expanses for tax purposes.
PMB 301A, issued by BoI, applies to banking corporations and to their subsidiaries. The 301A Directive is based mainly on the FSF/FSB documents, on the "Principals for Sound Compensation Practices and Implementation Standards, Basel Committee recommendation (January 2010), Compensation Principles and Standards Assessment Methodology" and the European Directive 2013/36/EU. According to the 301A Directive, the banking corporation's board of directors is required to determine, at least once every three years, a remuneration policy for all its employees, as well as principles for the remuneration policy in its subsidiaries. The remuneration policy shall apply to all employees, focusing on key employees. The 301A Directive also sets restrictions, mainly regarding the remuneration for key employees. Such restrictions include, among others, that the maximum variable remuneration shall not exceed 100% of the fixed remuneration (subject to extraordinary circumstances); claw back provisions; deferral arrangements attributed to a key employee granted for a calendar year; restrictions regarding payment of variable component for directors etc.
Requirements for remuneration policies and practice of credit institutions licensed in Austria are set out in the Banking Act (Articles 39, 39b and Annex to Article 39b Banking Act). This set of rules is refined by guidelines governing remuneration policies and practices. The FMA shall take these into account according to the European convergence in respect of supervisory tools and supervisory procedures. In this respect, the guidelines and recommendations (and other measures) that are issued by the European Banking Authority (“EBA”) must be applied. Therefore, Annex to sec 39b BWG, the circular letter (re-)issued by the FMA in January 2018 (“Grundsätze der Vergütungspolitik und –praktiken; Rundschreiben der FMA zu §§ 39 Abs. 2, 39b und 39c BWG”) and the Guidelines from the EBA considering remuneration policies e.g., Guidelines on sound remuneration policies under Articles 74(3) and 75(2) of Directive 2013/36/EU and disclosures under Article 450 of Regulation (EU) No 575/2013 (EBA/GL/2015/22) contain the main rules for restrictions on remuneration.
In accordance with the CBC Governance Directive, the following restrictions apply on remuneration policies:
- The remuneration policy must be consistent with and endorse effective risk management. It should not encourage engaging in risk management as well as risk-taking that exceeds the level of risk which the institution can tolerate.
- The remuneration policy must be in line with the institution’s objectives, values, strategy, and interests. It should also implement measures in order to prevent conflicts of interest.
- The general principles of the remuneration policy should be adopted in the supervisory functions of the management body of the institution which should be responsible for overseeing the remuneration policy’s implementation.
- The remuneration policy’s implementation shall be reviewed at least once a year so as to ensure that it complies with the remuneration policies and procedures adopted by the management body in its supervisory function.
- The staff that in the control functions shall be independent from the business units they supervise, they should have the requisite authority, and should be remunerated in accordance with the performance of the objectives related to their functions, independent of the performance of the areas of the business they manage.
- The remuneration committee must oversee the remuneration of the senior officers in the control functions. This is done by combined nomination and remuneration committee.
- The remuneration policy distinguishes between criteria for setting basic fixed remuneration - which should mainly reflect significant professional experience and organisational responsibility - and variable remuneration - which should reflect a risk adjusted and sustainable performance as well as performance that exceeds that needed to fulfil the employee's job description as part of the terms of employment.
The Finnish Act on Credit Institutions includes provisions on remuneration and sets out the general requirements for remuneration policies. A remuneration policy must be in line with the business strategy, objectives, values and long-term interests of the institution and its consolidation group. A remuneration policy must also be in line with the risk management of the credit institution and its consolidation group and must not encourage risk-taking that exceeds the level of tolerated risk of the credit institution.
The Act on Credit Institutions includes certain further provisions relating to the separation of fixed and variable compensations. Under MiFID II, credit institutions that provide investment services to clients must ensure that staff is not remunerated and their performance is not assessed in a way that conflicts with the duty to act in the best interests of the clients. EBA has further issued regulatory technical standards, guidelines and recommendations with respect to remuneration policies for staff members of credit institutions. The FFSA supervises the development of remuneration policies and market practice, and forwards information to the EBA in such matters.
The management is responsible for the supervision of the remuneration policies.
G-SIIs and other systemically important institutions (O-SIIs) must establish a remuneration committee that assists the board of directors in managing the remuneration policies and assisting with guidance decisions.
Banking institutions must adopt remuneration policies and practices that enable and promote sound and effective risk management.
In that way, they must implement a global remuneration policy regarding the persons effectively running the business, risk takers, staff engaged in control functions and any employee receiving total remunera-tion that takes them into the same remuneration bracket as senior management and risk takers, the pro-fessional activities of whom have a significant incidence on the risk profile of the bank or the group of which it is a part.
The Guide on Good Remuneration Practices at Banks (the “Remuneration Guide”) sets forth criteria for the establishment of remuneration policies to ensure efficient risk management.
Remunerations for non-executive members of board of directors and remuneration committee members shall be fixed to avoid any conflicts of interest. Any variable remunerations; such as performance based bonuses and premiums, to executive members of the board of directors and senior management should be based on objective criteria and not affect the bank’s corporate values negatively, as per the CG Regulation.
Payments to employees of internal systems units should be mainly fixed and determined independently of the performance of the operational units audited, supervised or controlled by the same.
Fixed and variable components of total remunerations granted to the specialized employees having a material impact on the bank’s risk profile shall be determined based on the performance of (i) the respective employee; (ii) such employee’s unit and (iii) the bank, considering negative and positive consequences of the assumed risk. Moreover, the percentage of the fixed components in the total remunerations for specialized employees shall be high enough, enabling the bank to refrain from paying the variable component, where necessary. No performance-based payment amount should be guaranteed in advance (other than sign-on bonuses).
Systemically important banks shall also comply with the following requirements on remuneration practices with respect to their specialized employees: (i) at least 40% of the variable remuneration shall be paid by spreading the same to periods; provided that the deferring period is not less than three years, (ii) at least 50% of the variable remunerations shall be paid with non-cash instruments listed in the Remuneration Guide; (iii) an appropriate retention time during which the specialized employees cannot dispose of the said non-cash instruments shall be determined; and (iv) variable remunerations shall be made available subject to cancellation and redemption agreements. Additionally, systematically important banks are required to make annual public disclosures on certain qualitative and quantitative details regarding their respective remuneration policies. Banks other than systemically important banks shall comply with the above-mentioned remuneration restrictions as well as the disclosure requirements; to the extent possible based on their own practices, risk structures and strategies.
Yes. The German Remuneration Regulation for Institutions (Institutsvergütungsverordnung – “InstitutsVergV”) sets forth the statutory requirements for remuneration and is drafted in a way to reflect the European Banking Authority’s guidelines on sound remuneration policies. The main features are:
- All remuneration must be classified as fixed or variable. A third category of remuneration is not permitted.
- Allowances for staff working abroad or in a different position may qualify as fixed remuneration subject to certain conditions (including for the purposes of calculating the applicable bonus cap) and are therefore not subject to the risk adjustment provisions of the InstitutsVergV.
- As an additional ex post risk adjustment instrument, significant institutions must have the following instruments for the purposes of complying with malus criteria:
- The ability to reduce retained bonus components.
- In addition, in cases of serious personal misconduct, the ability for a defined period to demand repayment of variable remuneration components already paid (clawback).
- Explicit rules govern the payment of a portion of the variable remuneration in instruments eligible for bail-in – namely to link part of the remuneration paid to the subsequent performance of the institution.
- Within the prudential scope of consolidation, the provisions of the InstitutsVergV also apply to the remuneration schemes of those employees whose professional activities materially affect the group's risk profile (group risk bearers).
- The principle of proportionality continues to be implemented at institution and employee levels in the form of thresholds (total assets and level of variable annual remuneration, respectively). Where those thresholds are reached or exceeded, the special requirements for the risk adjustment of the variable remuneration of risk bearers must be applied.
Swiss regulatory compensation rules are contained in a FINMA-Circular 2010/1 "Minimum standards for remuneration schemes of financial institutions" (Compensation Circular). The scope of the Compensation Circular generally applies to the remuneration of all persons (institution-wide) who are employed by firms that are subject to Swiss financial market supervision (each a Relevant Firm) or by an affiliate of such Relevant Firm and who are remunerated for work performed in respect of the Relevant Firm, including persons entrusted with the executive management (Senior Management (Geschäftsleitung)) and persons responsible for the overall direction, oversight and control (Board of Directors).
The Compensation Circular is mandatory for Relevant Firms that are required to maintain minimum equity capital of CHF 10 billion (stand-alone or consolidated). Where this threshold is not met, adherence to the Compensation Circular merely is recommended as best practice guidelines. The Compensation Circular must be adhered to (or be considered as best practice, as the case may be) by the Relevant Firms' do-mestic and foreign subsidiaries and branches which are mandatorily included in consolidation.
Yes, restriction on remuneration apply and are incorporated in the AOB. A bank shall apply the remunera-tion principles to i) all members of the bank’s statutory body and supervisory board; ii) senior employees in charge of risk management and in charge of transaction processing; iii) employees responsible for risk management, including employees authorized to set limits or exceed limits in managing the risks faced by the bank; iv) the head of the bank’s internal control and internal audit unit; and v) other employ-ees who are responsible for risk management and whose professional activities have a material impact on the bank’s risk profile.
In accordance with these remuneration principles, banks shall apply the following remuneration components:
a) a guaranteed fixed remuneration component, specifically;
b) a basic wage or salary for employees;
c) a fixed remuneration component for statutory body members and supervisory board members; and
d) a variable remuneration component.
The remuneration principles has to be consistent with the bank’s effective risk management system, business strategy and long-term objectives, and are to include measures for the prevention of conflicts of interest.
Remuneration restrictions under the AOB do not apply to foreign banks conducting banking activities through its branch and their employees.
Yes. Under the Banking (Corporate Governance) Regulations 2005, a local bank must have a Remuneration Committee. It will be the function of the Remuneration Committee to recommend a framework for determining the remuneration of directors of the bank, as well as for the remuneration of the executives of the bank. The remuneration framework for executives has to be consistent with a prescribed statutory criteria (including the specific job function of the executive, input from control job functions, alignment with risks, linkage to performance of the executive and the overall performance of the bank, and the need for justification in relation to the mix of cash, equity and other incentives). The Remuneration Committee has to review the bank’s remuneration practices annually to ensure alignment with the regulations.
The FSA’s Supervisory Guidelines require a bank to establish an independent committee to set its remuneration policy, assess whether the policy harms its financial soundness and capital adequacy, coordinate with the bank’s risk control divisions and monitor the remuneration. The guidelines also require the bank to determine the remuneration of its risk control and compliance divisions independently from other divisions, ensure that any performance-based bonus does not harm its financial soundness, and remedy any remuneration structure that is harmful to risk control.
Additionally, the bank must make available to the public certain matters relating to its remuneration policy.
A remuneration committee must be established by the BOD and be comprised of, where appropriate, a majority of independent members. It may also include external advisors for consultation purposes. Its members should have sufficient knowledge, skills and experience required for making independent and objective policies and decisions on compensation and remuneration practices. It is the function of the BOD to approve and implement remuneration policies, as recommended by the remuneration committee. The BOD should also oversee any update or amendment to the compensation policies.
Remuneration should be consistent with the risk profile and the bank’s overall performance, including taking into account indicators of profitability, liquidity, capital adequacy and operational performance. Employee compensation must be consistent with their performance and efforts to fulfill their responsibilities and the bank’s overall performance. The remuneration framework should take account of all officer and employee levels, to maintain a cohesive approach.
All appropriate factors should be considered as part of the process of approving the bank’s compensa-tion framework (as well as individual remuneration packages) for the bank’s group as a whole such that total income or profit should not be the only performance parameter. The compensation policy should be based on objective performance parameters to evaluate and measure staff performance at all levels. The remuneration of management should be based on their performance and should be consistent with the bank’s long-term performance and policies. The remuneration of the BOD members shall be based on the performance of the bank and shall be determined in accordance with applicable laws.
Banks should maintain transparency by disclosing all information about their compensation policies and practices in a clear and comprehensive way, whether in the bank’s financial statements or otherwise. Members of BOD compensation payments must be disclosed. Any large or unusual payouts should be described in detail if they form part of any officer’s or employee’s compensation package.
Article 19 of the Corporate Governance Code for the Commercial Banks approved by the Decree №215/04 of the President of the National Bank of Georgia introduces restrictions on remuneration poli-cies. In particular, the bank’s remuneration structure should support sound corporate governance and risk management incentivizing good performance, acceptable risk-taking behavior, reinforcing the bank operating and risk culture that should be in line with the business and risk strategy, objectives, values and long-term interests of the bank. Remuneration Policy must ensure that the structure of the remuneration of control function personnel, including performance-based components, if any, does not compromise the independence of this personnel in carrying out their functions. For the purposes of ensuring the independence of control functions, the remuneration of staff should not be based on financial results of the business line they oversee or monitor.
The code provides specific restrictions with respect to remuneration of the supervisory board, the board of directors and the staff. The restrictions, inter alia, include the following:
- Incentives embedded within remuneration structures should not incentivize staff to take excessive risk.
- Remuneration of supervisory board members should only include fixed compensation.
- The difference between the compensation of the board members, which are members of committees, or chairs or deputy chairs, and other board members, who do not hold such positions, should not be more than 30%.
- Remuneration system for the directors and other material risk takers should include at least: a) fixed remuneration, which should primarily reflect relevant professional experience and organizational responsibility; and b) variable remuneration, which should reflect risk-adjusted performance.
- Remuneration for the directors and other material risk takers should depend on the whole year’s results.
The CRD IV/CRR provisions on remuneration apply, which cover the remuneration of certain employee categories and high-income personnel, fixed and variable remuneration as well as organizational aspects.
Yes. The remuneration restrictions applicable in Luxembourg stem from directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms ("CRD IV"), as transposed into Luxembourg law by way of an amendment to the Financial Sector Law (Articles 38 to 38-12 thereof).
The restrictions in question are applicable to credit institutions and investment incorporated under Luxembourg law and the Luxembourg branches of third-country CRR institutions firms (the "CRR institutions", an each a "CRR institution") and can be summarised as follows:
- the remuneration policies of CRR institutions have to comply with the principles set out in Article 38-5 of the Financial Sector Law and, including, amongst others, being consistent with and pro-moting sound and effective risk management and not encouraging risk-taking that exceeds the level of tolerated risk of the CRR institution;
- a clear distinction between fixed and variable remuneration is made, and the ratios between the two are clarified (Article 38-6 of the Financial Sector Law), in particular: (i) a bonus cap must not exceed 100% of fixed remuneration; and (ii) the shareholders are only allowed to increase the variable part of remuneration to a maximum of 200% of fixed remuneration following a special procedure set out in Article 38-6 of the Financial Sector Law and subject to special notification requirements to the CSSF, as set out in the CSSF's circulaire 15/622.
- the remuneration policies are supervised by the CSSF.
Portuguese law requires that credit institutions shall have in place remuneration policies for all their staff:
a) Members of the management and supervisory bodies;
c) Risk takers;
d) Staff engaged in control functions;
e) Employees receiving total remuneration that takes them into the same remuneration bracket as the above categories, whose professional activities have a material impact on the institution’s risk profile.
The implementation of the remuneration policy shall be subject to central and independent internal review by the remuneration committees (if existing), by the non-executive members of the management body or the members of the supervisory body, at least on an annual basis. Remuneration committees are mandatory in credit institutions that are significant in terms of their size, internal organisation and the nature, scope and complexity of their activities.
The remuneration policy of credit institutions shall comply with five principles in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities:
a) to promote sound and effective risk management and not to encourage risk-taking that exceeds the level of tolerated risk of the institution;
b) to be in line with the business strategy, objectives, values and long-term interests of the institution, and to incorporate measures to avoid conflicts of interest;
c) staff engaged in control functions to be independent from the business units they oversee, have appropriate authority, and be remunerated in accordance with the achievement of the objectives linked to their functions, independent from the performance of the business areas they control;
d) to establish that the remuneration of the senior officers in the risk management and compliance functions is directly overseen by the remuneration committee or, if such a committee has not been established, by the management body in its supervisory function;
e) to make a clear distinction between criteria for setting basic fixed remuneration, which should primarily reflect relevant professional experience and organizational responsibility as set out in an employee's job description as part of the terms of employment, and variable remuneration, which should be based on sustainable and risk-adjusted performance as well as fulfillment of tasks beyond what is required as part of the terms of employment.
Therefore, the remuneration practices and policies of credit institutions must be flexible and they should reflect the financial situation of the institution.
The rules on remuneration practices and policies shall not be waived, particularly through hedging mechanisms.
Credit institutions shall set the appropriate ratios between the fixed and the variable component of the total remuneration of their staff, where the fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components. This may include the possibility to pay no variable remuneration component. As a general rule, the variable remuneration component shall not exceed the total amount of the fixed component for each staff member.
In the case of credit institutions that benefit from extraordinary public financial support, the remuneration policy shall be subject to the following principles during the intervention period:
a) no variable remuneration is paid to members of the management body of the institution unless there are serious and objective reasons that would justify such payment;
b) remuneration shall be restructured in a manner aligned with sound risk management and long-term growth of the credit institution, including establishing limits to the remuneration of the members of the management body;
c) variable remuneration is strictly limited as a percentage of net revenue where it is inconsistent with the maintenance of a sound capital base and timely exit from extraordinary public financial support
Credit institutions have the duty to inform Banco de Portugal of the number of staff members who receive the remuneration of EUR 1,000,000.00 or more per financial year, including their job responsibilities, the business area involved and the main elements of fixed and variable remuneration and contributions to discretionary pension benefits.
The remuneration policy shall be publicly available at the credit institution's website.
As part of the internal governance framework, a licensed credit institution should have in place a Board approved structure regarding its policies for the remuneration and compensation of its management and staff members. The absence of a coherent and adequate remuneration policy generates potential risks for a licensed credit institution that need to be adequately analysed and contained.
When establishing and applying the total remuneration policies, credit institutions shall comply with the principles and regulatory technical standards promulgated by CEBS (as it then was) and the EBA, in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities.
The remuneration policy, taking into account national criteria on wage setting, makes a clear distinction between criteria for setting: (a) basic fixed remuneration, which should primarily reflect relevant professional experience and organisational responsibility as set out in an employee’s job description as part of the terms of employment; and (b) variable remuneration which should reflect a sustainable and risk adjusted performance as well as performance in excess of that required to fulfil the employee’s job description as part of the terms of employment. Although, the establishment of the latter is no straightforward task – the measures used to determine the variable remuneration are expected to mirror performance which is risk-adjusted and hence, reflective of risks which have not yet materialized. These risks are almost impossible to establish precisely owing to their inherently unpredictable nature and this may thus pose an obstacle in the establishment of the variable portion of remuneration.
Ultimately however, in the case of the variable elements of remuneration, the following principles and restrictions shall apply:
- where remuneration is performance related, the total amount of remuneration is based on a combination of the assessment of the performance of the individual and of the business unit concerned and of the overall results of the credit institution and when assessing individual performance, financial and non-financial criteria are taken into account;
- the assessment of the performance is set in a multi-year framework in order to ensure that the as-sessment process is based on longer-term performance and that the actual payment of perfor-mance-based components of remuneration is spread over a period which takes account of the un-derlying business cycle of the credit institution and its business risks;
- the total variable remuneration does not limit the ability of the credit institution to strengthen its capital base;
- guaranteed variable remuneration is not consistent with sound risk management or the pay-for-performance principle and shall not be a part of prospective remuneration plans;
- guaranteed variable remuneration is exceptional, occurs only when hiring new staff and where the credit institution has a sound and strong capital base and is limited to the first year of employment;
- fixed and variable components of total remuneration are appropriately balanced and the fixed com-ponent represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy, on variable remuneration components, including the possibility to pay no varia-ble remuneration component;
- institutions shall set the appropriate ratios between the fixed and the variable component of the total remuneration, whereby the following principles shall apply: (a) the variable component shall not ex-ceed 100% of the fixed component of the total remuneration for each individual; (b) shareholders of the credit institution may approve a higher maximum level of the ratio between the fixed and variable components of remuneration provided the overall level of the variable component shall not exceed 200% of the fixed component of the total remuneration for each individual; (c) credit institutions may apply the discount rate referred to in the second subparagraph of this point to a maximum of 25% of total variable remuneration provided it is paid in instruments that are deferred for a period of not less than five years.
- payments related to the early termination of a contract reflect performance achieved over time and do not reward failure or misconduct;
- remuneration packages relating to compensation or buy out from contracts in previous employment must align with the long-term interests of the credit institution including retention, deferral, perfor-mance and clawback arrangements;
- the measurement of performance used to calculate variable remuneration components or pools of variable remuneration components includes an adjustment for all types of current and future risks and takes into account the cost of the capital and the liquidity required;
- the allocation of the variable remuneration components within the credit institution shall also take into account all types of current and future risks;
- a substantial portion, and in any event at least 50%, of any variable remuneration shall consist of an appropriate balance of the following: (a) shares or equivalent ownership interests, subject to the legal structure of the credit institution concerned or share-linked instruments or equivalent non-cash instruments, in case of a non-listed credit institution, and (b) where possible, other instruments within the meaning of Article 52 or 63 of the CRR or other instruments which can be fully converted to Common Equity Tier 1 instruments or written down, that in each case adequately reflect the credit quality of the credit institution as a going concern and are appropriate to be used for the purposes of variable remuneration;
- a substantial portion, and in any event at least 40%, of the variable remuneration component is de-ferred over a period which is not less than three to five years and is correctly aligned with the nature of the business, its risks and the activities of the member of staff in question. Remuneration payable under deferral arrangements shall vest no faster than on a pro-rata basis. In the case of a variable remuneration component of a particularly high amount, at least 60% of the amount shall be deferred. The length of the deferral period shall be established in accordance with the business cycle, the nature of the business, its risks and the activities of the member of staff in question.
- the variable remuneration, including the deferred portion, is paid or vests only if it is sustainable ac-cording to the financial situation of the credit institution as a whole, and justified on the basis of the performance of the credit institution, the business unit and the individual concerned;
- up to 100% of the total variable remuneration shall be subject to malus or clawback arrangements. Credit institutions shall set specific criteria for the application of malus and clawback. Such criteria shall in particular cover situations where the staff member: (a) participated in or was responsible for conduct which resulted in significant losses to the credit institution; and (b) failed to meet appropriate standards of fitness and propriety;
- the pension policy is in line with the business strategy, objectives, values and long-term interests of the credit institution;
- staff members are required to undertake not to use personal hedging strategies or remuneration- and liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements;
- variable remuneration is not paid through vehicles or methods that facilitate the non-compliance with the Banking Act and any regulations and Banking Rules issued there under transposing the CRD, or with the CRR.
Additionally, there shall be a Remuneration Committee constituted in a manner so as to enable it to exer-cise competent and independent judgement on remuneration policies and practices and the incentives created for managing risk, capital and liquidity. Its responsibilities shall primarily relate to the taking of decisions relating to remuneration, including those which have implications on the risk management of the bank. For reasons of independence and transparency, the members of the Remuneration Committee shall be directors who do not have an executive role in the bank concerned and at all times, whenever making any decisions in relation tio such remuneration, the Committee shall regard highly the long-term interests of shareholders, investors and other stakeholders in the bank and the overall public interest.
Ideally, information on the process of setting compensation and the amount awarded to top executives should be publicly disclosed by the bank at least annually, especially where the bank is significant in size, internal organisation, and nature, scope and complexity of its activities. To this effect, process-related information ought to include the composition of a Remuneration Committee and ensure that the criteria relied upon when setting compensation, include both performance measurement and risk adjustment. Quantum-related information should include the total amount (including the breakdown into various components), paid to all senior executives and material risk-takers.
Principle 4 of the Guidelines stipulates that one of the main committees of the board of directors is the Compensation and Remuneration Committee, which shall at a minimum support overseeing the following:
- Ensure that the remuneration policies, which must be approved by the board, is consistent with the relevant best international banking practices, for the chairman and members of board and all senior management including the CEO. Oversee the application of such policy and review it annually. Comply with the rules and policies of remuneration as mentioned under Principle (9).
- Ensure that remuneration policy considers all types of risks exposed while allocating remunerations, in such a way that there should be alignments between profits gained and degree of risk for all banking business and activities. Comply with the policy above mentioned in item (1).
- Ensure that the period of remuneration should be aligned with the actual income, particularly from the long-term performance.
- Remuneration committee should work together with Risk Management Committee or Chief Risk Officer, regarding assessment of incentives under risk assessment based remuneration system.
Indeed, Principle 9 of the Guidelines provides for the Compensation System in order for the board of directors to be able to enhance corporate governance and sound compensation practices. The following priciples and controls are listed by way of an example, in which the board of directors shall be fully responsible to comply with, which may not be delegated to the senior management:
- The board shall approve and follow up implementation of remuneration policies, as recommended by the compensation committee. It should also oversee any update or modification of the compensation policies, and the related recommendation by the compensation committee.
- Remuneration policy should be designed to attract and retain employees with sufficient knowledge, experience, skills and expertise required by the bank.
- Qatar Central Bank maintains the right, when necessary, to restrain or limit the aggregate variable remuneration to a percentage of the net profits, or as it may deem appropriate, if the bank does not comply with the related supervisory requirement of capital adequacy or proven to carry out incorrect banking practices.
In accordance with EBA guidelines, the remuneration policy should contain the following:
- The performance objectives for the institution, business areas and staff;
- The methods for the measurement of performance, including the performance criteria;
- The structure of variable remuneration, including where applicable the instruments in which parts of the variable remuneration are awarded;
- The ex ante and ex post risk-adjustment measures of the variable remuneration.
With respect to the restrictions on remuneration policy, all EU level restrictions apply (e.g. CRD IV requirements, EBA guidelines).
If a control determines that the bank operated contrary to regulations or standards of cautious banking business, or that solvency of the bank is jeopardized in any other way, the National Bank of Serbia may order the bank, by way of decision, to reduce its operating costs, including the amounts of bonuses and rewards depending on the level of achievement of business targets, paid to the members of the Managing Board, Executive Board or employees.
Yes. The PRA has issued a supervisory statement setting out the expectations for firms in relation to the following:
- material risk takers (MRTs);
- application of clawback to variable remuneration;
- governing body/remuneration committees;
- risk management and control functions;
- remuneration and capital;
- risk adjustment (including long-term incentive plans);
- personal investment strategies;
- remuneration structures (including guaranteed variable remuneration, buy-outs and retention awards);
- deferral; and
- breaches of the remuneration rules.
The Dodd-Frank Act prohibits incentive-based payment arrangements that encourage inappropriate risks by certain financial institutions. The US federal banking agencies have proposed a rule to implement these limitations, which has not yet been finalized. There are also restrictions, in connection with failed financial institutions, on the operation of “golden parachute” plans, in which the former senior management benefits from certain kinds of financial arrangements established by the failed institution. Other limitations on compensation apply in certain other contexts as well, depending on the bank charter and the activities or person in question.
Banks must adopt remuneration systems in line with the values, strategies and long-term corporate objectives, related to the company results, adjusted in order to take into account all the risks, consistent with the levels of capital and liquidity required to perform the activities undertaken.
The Bank of Italy Circular no. 285/2013 (“Circular 285”), accordingly to EU legislation (CRD IV and European Banking Authority and Financial Stability Board policies) contains the provisions on remuneration and incentive policies and practices for banks and banking groups, which state, inter alia, that:
(i) all remunerations must be divided in a fixed and a variable component;
(ii) the ratio between fixed and variable component cannot exceed 100 per cent. (the ratio may be increased up to 200 per cent. if so provided in the by-laws and approved by a shareholders’ resolution with a qualified quorum);
(iii) the variable component is parameterized to performance indicators and measured net of the risks and its overall amount (i.e. bonus pool) is based on effective and lasting results; it must take into account the risks and the results of the bank or of the group considered as a complex and of those of the single business units;
(iv) the variable remuneration is subject to mechanism of ex post risk adjustment (malus and claw back).
The above requirements must be applied by banks taking into account their size and features, based on their classification as major, middle or minor banks.
The essence of the Notifications mentioned in item 10 above is to enhance the responsibilities of directors and senior executives in overseeing risks and promoting good corporate governance in the organizations, for instance, building and fostering a risk culture, which includes having a remuneration policy that reflects the risk culture.
The board of directors has the duty and responsibility to formulate the important strategies and policies and oversee that the financial institution has appropriate remuneration policy so that it attracts and helps maintain quality staff, and ensures staff loyalty, while the remuneration structure must also promote the risk culture. Duties and responsibilities of the board of directors relating to an effective remuneration structure are also specified in the Notifications.
According to the Slovenian Banking Act, a bank has to formulate remuneration policies at the level of the group, parent company and subsidiaries, including those established in areas with more favourable tax regimes (tax havens). Provisions regarding formulation of remuneration policies are general and are stipulated in the Slovenian Banking Act. Generally it can be said that the remuneration policy has to be compatible with prudent and effective risk management, and should promote such risk management without encouraging exposure to risk that exceeds the acceptable level of risk for the bank.
Additionally bank’s supervisory board has to appoint the remuneration committee, which has to serve as an advisory body to the supervisory board. Remuneration committee should carry out technical and independent assessments of remuneration policies and practices, and formulate initiatives for measures on the basis thereof with the aim of improving the management of the risks to which the bank is exposed, its capital and liquidity. Remuneration committee should also draw up proposals for decisions by the governing body regarding the remuneration of employees, including remuneration that impacts the risks to which the bank is exposed and the management thereof. Remuneration committee should also control the remuneration of members of senior management who perform risk management functions and ensure the compliance of operations.