Response to consultation on Guidelines on sound remuneration policies
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- Clarity should be provided as to the frequency of the shareholder vote e.g. whether shareholders should vote on such ratio in consecutive years in case such ratio has been set at higher level year after year.
- The general principles as implicitly referred to in the introductory part of Article 92(2) CRD can in no way justify the non-application of one or the other rule contained in that provision, or indeed in Article 94(1) CRD. This applies in particular to the provisions referring to the deferral arrangements, the pay-out in instruments and the application of malus. Such provisions lay down clear rules and leave no room for exceptions or exemptions.”
- Already within the previous CRD III, Article 22 (2) CRD III included a proportionality principle, referring to the nature, scale and complexity of the credit institution’s activities. In addition, the CRD III provided that some general requirements (such as the establishment of a remuneration committee) and more specific ones (such as deferral in equity) could be fully neutralized in the case of non-complex organizations and for low-risk employees. On the whole, the scope for neutralization was already rather limited at the time, making EU rules on bankers’ bonuses more rigorous than the underpinning global (FSB) and US regulation.
- The current CRD IV and related EBA principles not allowing any neutralization may be seen contrasting with the EU objective of the market reforms, which has been to generate a single rule-book and, to the extent relevant, to remove national options and discretions.
- Therefore, some additional flexibility, giving option to neutralization, needs to be enabled, specifically for special circumstances and for small and non-complex institutions."
‘Institutions facing problems with the soundness of their capital base particularly needing to enforce such mechanisms and adopting careful assessments of the identified staff performance ahead of applying them.’
- The categories of remuneration should additionally make reference to the termination plans, including severance payments and retirement plans, which also constitute elements of compensation.
- Paying out a variable component above 100% of the fixed component in cash should also be very well reasoned and approved as part of the remuneration policy (which is specifically subject to shareholder approval).
- Clarification should be made as to the meaning of “shareholding requirement“, i.e. referring to shareholder ownership requirements. - It is stated that:
It is stated that: "The institution should specify how the variable remuneration reacts to performance changes and the performance levels where variable remuneration decreases down to zero. Unethical or non-compliant behaviour should lead to a significant reduction of staff member’s variable remuneration."
- These priovisions should be carefully reviewed.
Whilst a decrease in performance should lead to a decrease in variable remuneration down to nil (mechanism known as “malus”), unethical or non-compliant behavior of the individual should lead to the non-payment / withdrawal of the variable remuneration (mechanism known as “clawback”), and not just a significant reduction in payment, which would mean the individual would still be awarded incentives in case of misbehaviour.
- As to the policy on fixed remuneration, the Guidelines should make provisions that discourage banks from establishing so-called “role-based allowances” without appropriate reasoning but as a means to circumventing the law (as experienced recently in the UK banking sector). In case the institution decides to implement such allowances, thus increasing the fixed pay of the executive(s), such policy must be well reasoned and explained.
It is stated that: "The pay out of fixed remuneration in instruments, if any, should not impair the ability of the institution to apply a fully flexible policy on variable remuneration."
- More clarity should be provided in this regard, in particular as to what type of ‘instruments’ can make up the fixed remuneration.
- As to the ratio between fixed and variable remuneration, more clarity is needed as to what constitutes the variable remuneration, i.e. “as the sum of all variable components of remuneration that could be awarded as a maximum in a given performance year”. It is unclear from the respective provisions (180-185) whether the variable remuneration includes vested awards resulting from equity or other financial instruments, relative to the performance year."
- The definition is relevant, however the structure of the Guidelines does not fully follow it.
For the purpose of providing a proper overview of the Risk Alignment process and approach, the pay-out process, which discusses the ex-post risk-adjustment mechanisms, can not be separated from the ex-ante risk-adjustment mechanisms. Institutions should make qualitative ex-ante risk adjustments when determining the bonus pool and staffs’ remuneration. Therefore, ex-post risk-adjustments should be placed under the umbrella of Risk Alignment Process, thus in the same Chapter/Section."
- The conditions for awarding variable remuneration should be directed towards the timeline of the implementation of the restructuring plan for the institution rather than the timing of the return of the government support; rather than giving an "or" option between the two conditions, in order to reflect the real progress of the plan and the contribution of the individual in such progress.
- Termination payments should also be addressed within the policy of the institutions benefiting from exceptional government support."
Q 2: Are the guidelines in chapter 5 appropriate and sufficiently clear?
NAQ 3: Are the guidelines regarding the shareholders’ involvement in setting higher ratios for variable remuneration sufficiently clear?
- Detailed information on remuneration policies and on their modifications should include, besides the points already listed, information as o the link between compensation and short-term performance, as well as sustainable performance.- Clarity should be provided as to the frequency of the shareholder vote e.g. whether shareholders should vote on such ratio in consecutive years in case such ratio has been set at higher level year after year.
Q 4: Are the guidelines regarding remuneration policies and group context appropriate and sufficiently clear?
- Clarification as to the application of shareholder voting rights on the remuneration policy and higher ratio should be provided in reference to third countries, considering that the regulatory system in EU is different from non-EU jurisdictions in this regard.Q 5: All respondents are welcome to provide their comments on the chapter on proportionality, with particular reference to the change of the approach on ‘neutralisations’ that was required following the interpretation of the wording of the CRD. In particular institutions that used ‘neutralisations’ under the previous guidelines for the whole institution or identified staff receiving only a low amount of variable remuneration are asked to provide an estimate of the implementation costs in absolute and relative terms and to point to impediments resulting from their nature, including their legal form, if they were required to apply, for the variable remuneration of identified staff: a) deferral arrangements, b) the pay out in instruments and, c) malus (with respect to the deferred variable remuneration). In addition those institutions are welcome to explain the anticipated changes to the remuneration policy which will need to be made to comply with all requirements. Wherever possible the estimated impact and costs should be quantified, supported by a short explanation of the methodology applied for their estimation and provided separately for the three listed aspects.
It is stated that: “Although the former CEBS Guidelines on Remuneration Policies and Practices allowed for the so- called ‘neutralisation’ of some provisions in small and less complex institutions. The terms of the CRD do not explicitly grant for such a right and therefore the preliminary assessment of the EBA is that a full waiver of the application of even a limited set of remuneration principles for smaller and non‐complex institutions would not be in line with the CRD.- The general principles as implicitly referred to in the introductory part of Article 92(2) CRD can in no way justify the non-application of one or the other rule contained in that provision, or indeed in Article 94(1) CRD. This applies in particular to the provisions referring to the deferral arrangements, the pay-out in instruments and the application of malus. Such provisions lay down clear rules and leave no room for exceptions or exemptions.”
- Already within the previous CRD III, Article 22 (2) CRD III included a proportionality principle, referring to the nature, scale and complexity of the credit institution’s activities. In addition, the CRD III provided that some general requirements (such as the establishment of a remuneration committee) and more specific ones (such as deferral in equity) could be fully neutralized in the case of non-complex organizations and for low-risk employees. On the whole, the scope for neutralization was already rather limited at the time, making EU rules on bankers’ bonuses more rigorous than the underpinning global (FSB) and US regulation.
- The current CRD IV and related EBA principles not allowing any neutralization may be seen contrasting with the EU objective of the market reforms, which has been to generate a single rule-book and, to the extent relevant, to remove national options and discretions.
- Therefore, some additional flexibility, giving option to neutralization, needs to be enabled, specifically for special circumstances and for small and non-complex institutions."
Q 6: Are the guidelines on the identification of staff appropriate and sufficiently clear?
NAQ 7: Are the guidelines regarding the capital base appropriate and sufficiently clear?
- It is understood that institutions which do not have a sound capital basis or where the soundness of the capital base is at risk should apply certain measures, including malus and clawback. Meanwhile, as also provided for within the main regulatory framework of these Guidelines, the two measures are risk-adjustment mechanisms that need to be adopted by institutions regardless of the state of the capital base. Therefore this provision may be better explained as:‘Institutions facing problems with the soundness of their capital base particularly needing to enforce such mechanisms and adopting careful assessments of the identified staff performance ahead of applying them.’
Q 8: Are the requirements regarding categories of remuneration appropriate and sufficiently clear?
- The Guidelines provide detailed explanations on the fixed component of remuneration; however they do not provide explanations on the breakdown of variable remuneration i.e. short- and long- term incentives.- The categories of remuneration should additionally make reference to the termination plans, including severance payments and retirement plans, which also constitute elements of compensation.
Q 9: Are the requirements regarding allowances appropriate and sufficiently clear?
- Provisions as to disclosure of determining such allowances should be added to the current Guidelines, in order to facilitate understanding of this pay element by the shareholders during the approval process.Q 10: Are the requirements on the retention bonus appropriate a sufficiently clear?
NAQ 11: Are the provisions regarding severance payments appropriate and sufficiently clear?
NAQ 12: Are the provisions on personal hedging and circumvention appropriate and sufficiently clear?
NAQ 13: Are the requirements on remuneration policies in section 15 appropriate and sufficiently clear?
It is stated that: Where institutions consider paying out less than 100 % of the fixed component in cash, this decision should be well reasoned and approved as part of the remuneration policy."- Paying out a variable component above 100% of the fixed component in cash should also be very well reasoned and approved as part of the remuneration policy (which is specifically subject to shareholder approval).
- Clarification should be made as to the meaning of “shareholding requirement“, i.e. referring to shareholder ownership requirements. - It is stated that:
It is stated that: "The institution should specify how the variable remuneration reacts to performance changes and the performance levels where variable remuneration decreases down to zero. Unethical or non-compliant behaviour should lead to a significant reduction of staff member’s variable remuneration."
- These priovisions should be carefully reviewed.
Whilst a decrease in performance should lead to a decrease in variable remuneration down to nil (mechanism known as “malus”), unethical or non-compliant behavior of the individual should lead to the non-payment / withdrawal of the variable remuneration (mechanism known as “clawback”), and not just a significant reduction in payment, which would mean the individual would still be awarded incentives in case of misbehaviour.
- As to the policy on fixed remuneration, the Guidelines should make provisions that discourage banks from establishing so-called “role-based allowances” without appropriate reasoning but as a means to circumventing the law (as experienced recently in the UK banking sector). In case the institution decides to implement such allowances, thus increasing the fixed pay of the executive(s), such policy must be well reasoned and explained.
It is stated that: "The pay out of fixed remuneration in instruments, if any, should not impair the ability of the institution to apply a fully flexible policy on variable remuneration."
- More clarity should be provided in this regard, in particular as to what type of ‘instruments’ can make up the fixed remuneration.
- As to the ratio between fixed and variable remuneration, more clarity is needed as to what constitutes the variable remuneration, i.e. “as the sum of all variable components of remuneration that could be awarded as a maximum in a given performance year”. It is unclear from the respective provisions (180-185) whether the variable remuneration includes vested awards resulting from equity or other financial instruments, relative to the performance year."
Q 14: Are the requirements on the risk alignment process appropriate and sufficiently clear?
It is stated under Risk Alignment Process that: The risk alignment process includes the performance and risk measurement process (section 16.1); the award process (section 16.2); and the pay-out process (section 17)."- The definition is relevant, however the structure of the Guidelines does not fully follow it.
For the purpose of providing a proper overview of the Risk Alignment process and approach, the pay-out process, which discusses the ex-post risk-adjustment mechanisms, can not be separated from the ex-ante risk-adjustment mechanisms. Institutions should make qualitative ex-ante risk adjustments when determining the bonus pool and staffs’ remuneration. Therefore, ex-post risk-adjustments should be placed under the umbrella of Risk Alignment Process, thus in the same Chapter/Section."
Q 15: Are the provisions on deferral appropriate and sufficiently clear?
NAQ 16: Are the provisions on the award of variable remuneration in instruments appropriate and sufficiently clear? Listed institutions are asked to provide an estimate of the impact and costs that would be created due to the requirement that under Article 94(1)(l)(i) CRD only shares (and no share linked instruments) should be used in parallel, where possible, to instruments as set out in the RTS on instruments. Wherever possible the estimated impact and costs should be quantified and supported by a short explanation of the methodology applied for their estimation.
NAQ 17: Are the requirements regarding the retention policy appropriate and sufficiently clear?
NAQ 18: Are the requirements on the ex post risk adjustments appropriate and sufficiently clear?
- EBA should consider the clawback mechanism also for fixed payment including benefits, in certain cases of misconduct such as fraud and other negative situations affect the business. Major misconduct from the part of the leadership of the banking institution must be punished severely, in order to avoid critical mass negative impact on the business and the actual survival of the institution.Q 19: Are the requirements in Title V sufficiently clear and appropriate?
It is stated that: The relevant competent authority may require the institution not to award any variable remuneration to members of the management body as long as the exceptional government support is not yet paid back, or until a restructuring plan for the institution is implemented or accomplished."- The conditions for awarding variable remuneration should be directed towards the timeline of the implementation of the restructuring plan for the institution rather than the timing of the return of the government support; rather than giving an "or" option between the two conditions, in order to reflect the real progress of the plan and the contribution of the individual in such progress.
- Termination payments should also be addressed within the policy of the institutions benefiting from exceptional government support."