On April 29, the European Commission announced two Recommendations on remuneration: a Recommendation on remuneration in the financial services sector (FS Remuneration Recommendation) and a Recommendation on the regime for the remuneration of directors of listed companies (Directors' Pay Recommendation). Neither Recommendation has yet been published. So far the Commission has only published press releases and frequently asked questions (FAQs) in relation to the two Recommendations.
The FS Recommendation invites Member States to ensure that financial institutions have remuneration policies for risk-taking staff that are consistent with and promote sound and effective risk-management.
The FS Recommendation covers four areas:
- Structure of pay: Remuneration policies for risk-taking staff should be consistent with and promote sound and effective risk management. Financial institutions should strike an appropriate balance between basic pay and bonuses. The payment of the major part of any bonus should be deferred in order to take into account risks linked to the underlying performance through the business cycle. Performance measurement criteria should emphasize longer-term performance adjusted for risk, cost of capital and liquidity. There should be provisions for clawback of bonuses based on misstated data.
- Governance: The remuneration policy should be transparent internally, should be clear and properly documented and should contain measures to avoid conflicts of interest.
- Disclosure: There should be clear and easily understandable disclosure of the core elements of the remuneration policy; its design and operation should be disclosed to stakeholders.
- Supervision: Supervisors of financial institutions should ensure that sound remuneration policies are applied and are consistent with effective risk management.
In June, the FS Recommendation will be followed up by proposals to revise the Capital Requirements Directive to ensure that regulatory capital adequately covers the risks inherent in remuneration policies as well as banks' trading books and securitization positions.
The Directors’ Pay Recommendation applies to directors of listed companies. It supplements previous Recommendations 2004/913/EC and 2005/162/EC. The new Directors’ Pay Recommendation introduces limits on severance pay and bans severance pay in case of failure.
Further specific recommendations include the extension of existing disclosure requirements to improve shareholder oversight of remuneration policies; prohibiting non-executive directors from receiving share options as part of their remuneration to avoid conflict of interests; and strengthening the role of remuneration committees.
For more information on the FS Remuneration Recommendation, click here.
For more information on the Directors' Pay Recommendation, click here.