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Response to consultation on Guidelines on sound remuneration policies
Go backQ 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?
Eumedion welcomes that the guidelines extend and strengthen the guidance on shareholders’ involvement. Eumedion agrees with the approach as proposed in draft guideline 36. However, Eumedion is not sure whether the word ‘institution’ in the first sentence of draft guideline 36 (b) will give sufficient legal certainty about the situations in which 36 (b) should be applied. We experience that some of the largest Dutch listed financial institutions tend to interpret the wording of 36 (b) literally. Eumedion believes that the general assembly of shareholders of the parent undertaking of an institution, should – in the end – have the final say on the increase of the maximum level of the ratio between variable and fixed remuneration within the subsidiary of the institution regardless whether the parent undertaking itself is an institution. Another interpretation of 36 (b) would undermine the role of the general assembly of shareholders of the parent undertaking of the institution, would impair the intended – external – shareholder oversight on (excessive) risk taking by executives and certain employees of financial institutions and would leave room for circumvention of the CRD IV rules (the result of inserting a parent undertaking which is not an institution would result in the non-applicability of draft guideline 36 (b)). To avoid this uncertainty Eumedion suggests considering an alternative wording of the first sentence of 36 (b). One possible alternative would be replacing the word ‘institution’ by: ‘parent undertaking’. This should also be reflected in draft guideline 36 (d).
Furthermore, Eumedion would like to make a minor remark regarding the wording of draft guideline 36 (c). Eumedion believes that in case draft guideline 36 (b) (ii) is applied, the information mentioned in draft guideline 36 (c) should also be provided to the general assembly of shareholders of the parent undertaking in advance of the shareholders meeting mentioned in 36 (b) (ii).Q 4: Are the guidelines regarding remuneration policies and group context appropriate and sufficiently clear?
Eumedion concurs with the proposed approach. Eumedion would like to make a minor remark regarding the wording of draft guideline 68. Eumedion believes that the approval of the maximum level of the ratio between variable and fixed remuneration within an institution in a third country should also be subject to the requirements of draft guideline 36 (b). Therefore Eumedion suggests to add the underlined text in the last sentence of draft guideline 68: ‘Where these branches want to implement a ratio between the variable and fixed components of remuneration higher than 100 %, they should demonstrate to the competent authority that the shareholders of the institution, or where applicable the shareholders of the parent undertaking, in the third country have approved the higher ratio.’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.
NAQ 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?
NAQ 8: Are the requirements regarding categories of remuneration appropriate and sufficiently clear?
Draft guideline 117 gives criteria to determine whether a component of remuneration should be considered as fixed remuneration. The fixed remuneration may consist of different elements: cash and non-cash elements. Eumedion believes that fixed remuneration should include regular payments in the form of shares (where such shares are awarded without consideration of any performance criteria and the number of shares is predetermined). We would like to suggest to reflect this position in the guidelines of section 11 (this should also be reflected in draft guideline 162 (d)).Q 9: Are the requirements regarding allowances appropriate and sufficiently clear?
NAQ 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?
NAQ 14: Are the requirements on the risk alignment process appropriate and sufficiently clear?
NAQ 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.
CRD requires that at least 50% of the variable remuneration comprise a balance of shares, equivalent ownership rights, share linked or equivalent non-cash instruments, in the case of a non-listed institutions and, where possible, certain eligible other instruments. Eumedion concurs with the proposed approach of EBA that institutions should prioritise the use of instruments rather than award variable remuneration in cash (draft guideline 258). The institution itself is primary responsible to determine the right balance between the different types of instruments (draft guideline 258) thereby taking into account the interests of shareholders, creditors, bondholders and other stakeholders (draft guideline 252). The right balance may vary from institution to institution. It is rather difficult for competent authorities to determine in general what the best balance is. Eumedion therefore believes that the competent authorities should not be too prescriptive in this respect. Eumedion concurs with EBA that competent authorities should not limit the possibility to use instruments to such an extent that institutions cannot establish an appropriate balance between instruments of article 94(1)(l) of CRD. This is without prejudice to the requirement that at least 40% of the variable remuneration component should be deferred 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 (this is comparable to the requirements of article 94 (1) (m) CRD IV) and to the requirement that the shares shall be subject to an appropriate retention policy designed to align incentives with the longer-term interests of the institution (article 94 (1) (l) CRD IV and draft guidelines 259-264).Q 17: Are the requirements regarding the retention policy appropriate and sufficiently clear?
See our answer to Q 16.Q 18: Are the requirements on the ex post risk adjustments appropriate and sufficiently clear?
NAQ 19: Are the requirements in Title V sufficiently clear and appropriate?
NAQ 20: Are the requirements in Title VI appropriate and sufficiently clear?
NAQ 21: Do institutions, considering the baseline scenario, agree with the impact assessment and its conclusions?
NAQ 22: Institutions are welcome to provide costs estimates with regarding the costs which will be triggered for the implementation of these guidelines. When providing these estimates, institutions should not take into account costs which are encountered by the CRD IV provisions itself.
NAName of organisation
Eumedion Corporate Governance Forum
