EU Issues Final Bankers' Remuneration Policy

by Ulrika Lomas, LawAndTax-News.com, Brussels

14 December 2010

The Committee of European Banking Supervisors (CEBS) has published its final guidelines on remuneration policies and practices, which include tougher-than-expected restrictions on bankers’ bonuses.

The European Commission adopted in July 2009 a proposal to amend further the European Union’s Capital Requirements Directive (CRD) addressing, amongst other things, remuneration policies. In July this year, the European Parliament voted and approved the, so-called, CRD III; followed by European Council approval in October. Member states are to implement this directive from January 1, 2011.

Under CRD III, CEBS is required to elaborate and issue guidelines on sound remuneration policies in the financial sector in order to facilitate the compliance of its remuneration principles. Financial institutions are required to ensure that their remuneration policies and practices are consistent with their organisational structure and promote sound and effective risk management.

CEBS has said that it benefited from the views gathered from a wide spectrum of market participants and from academia. Having considered that feedback, it has revised its initial proposal in order to address the main issues and concerns raised.

It has set out some specific numerical criteria, which would have the effect that senior bankers (those whose professional activities have a material impact on the institution’s risk profile) would be able to receive only between 20% and 30% of their bonuses in immediate cash.

There is to be a minimum bonus deferral period of three to five years; a minimum portion of 40% to 60% of bankers’ bonuses that should be deferred, depending on the impact the staff member can have on the risk profile of the institution; and a minimum portion of 50% of those bonuses that should be paid in other alternative instruments.

Alternative instruments are those, such as shares, that put the employee receiving the bonus into an owner-like position in order to align the employee’s interests with those of the company’s stakeholders, and incentivise the employee to increase the institution´s value.

In addition, guaranteed bonuses can be applicable only for the first year of employment and in the context of hiring new staff. Institutions will no longer be able to guarantee multi-year bonuses over, for example, two or three years.

Regarding financial institutions that still benefit from exceptional government intervention, priority should be given to building up their capital base and providing for recovery of taxpayer assistance. It is emphasised that any bonus payments should reflect those priorities, and should not prevent an orderly and adequate payback of the government support.

In its reaction to the CEBS’ guidelines the British Bankers’ Association (BBA) said that “these rules mean that for the key people, whatever is paid in bonus is half in shares, mostly locked away for several years, and any cash will go straight to the tax man. This represents a huge change away from the bonus arrangements of the past.”

It points out that, given that the CEBS’s rules go beyond the present international standard, “we maintain that reform of the remuneration system in financial services must be globally coordinated. A global industry needs to conform to global standards, as any jurisdiction which takes a lighter approach will attract business and staff. We now need other jurisdictions, notably the US and emerging markets, to coordinate their reforms with the European Union’s rules.”

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