Introduction

Also on 7 July 2010, the European Parliament adopted a proposal for an EU directive (CRD III) 'amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies'. The proposed directive – which must next be approved by the European Council – contains rules on, among other things, the remuneration policies of banks. According to the European Parliament it is possible that these rules will enter into force in January 2011.

Broad outlines

With regard to banks' remuneration policies, the broad outlines of the proposed directive are as follows:

  • The Committee of European Banking Supervisors (CEBS) and the national supervisors in EU member states should carry out comparative studies of remuneration in the financial sector. In addition, the national supervisors should collect information on the number of individuals whose remuneration amounts to EUR 1 million or more. This information should be forwarded to the CEBS, which will draw up and publish a report on it.
  • The national supervisors will have the power to require banks to limit variable remuneration to a certain percentage of the relevant bank's total net revenues if the level of the latter is not consistent with the maintenance of a sound capital base.
  • Banks should have robust governance arrangements which include remuneration policies and practices that are consistent with and promote sound and effective risk management. The remuneration policies should in any event apply to the remuneration of senior management, risk takers and control functions, as well as individuals receiving remuneration comparable to that of the preceding categories of staff. The policies should cover total remuneration, i.e. not only salaries but also, for example, discretionary pension benefits. When establishing and applying their remuneration policies, banks should comply with, among other things, the following principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities:
    • The total amount of performance-related remuneration should be based on a combination of the assessment of the performance of the individual and of the relevant business unit, as well as the bank's overall results. When assessing individual performance, both financial and non-financial criteria should be taken into account. The assessment of performance should be set in a multi-year framework.
    • Individuals in control functions should be remunerated in accordance with the achievement of the objectives linked to their functions, without regard to the performance of the business areas they control.
    • There should be an appropriate balance between the fixed and variable components of total remuneration. The CEBS will set guidelines for determining the appropriate ratios in this regard.
    • At least 50% of any variable remuneration should consist of an appropriate balance of, in brief, (i) shares (or, in the case of an unlisted bank, share-linked instruments or other equivalent non-cash instruments) and (ii) other long-dated financial instruments that adequately reflect the bank's credit quality, including for example instruments which, in the event that the bank has severe financial problems, are converted into equity or otherwise written down. If the bank does not issue long-dated financial instruments as referred to in (ii), it will be permitted to issue this part of the variable remuneration in shares or the other instruments referred to in (i).
    • Variable remuneration should be paid on the basis of long-term performance. A substantial portion – at least 40%, or 60% in the case of particularly high amounts – should be deferred over a period that is at least three to five years and is correctly aligned with the business cycle, the nature of the business, its risks and the activities of the relevant individual.
    • Variable remuneration should be paid or should vest only if it is sustainable according to the financial situation of the bank as a whole and is justified according to the performance of the bank, the relevant business unit and the relevant individual.
    • Guaranteed variable remuneration is permissible only upon the entry into service of the relevant individual and should be limited to the first year.
    • Severance payments should reflect the performance achieved by the relevant individual and should be designed in a way that does not reward failure.
    • In the case of banks that are eligible for government support, additional rules should apply to the granting of variable remuneration. Such remuneration should be strictly limited to a percentage of net revenues and be consistent with the maintenance of a sound capital base and a timely exit from government support. No variable remuneration should be paid to the bank's directors unless this is justified.