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ESBG Summary of Comments on CEBS Consultation on Draft High-Level Principles of Remuneration Policies (CP23)

Core Content

The European Savings Banks Group (ESBG) provided feedback on the CEBS consultation regarding the Draft high-level principles of Remuneration Policies (CP23), issued in April 2009. The ESBG expressed its support for the initiative, emphasizing the importance of aligning remuneration policies with long-term profitability and firm-wide interests. However, the group also highlighted the need for a pragmatic and targeted approach to remuneration reform, especially in light of the ongoing financial crisis.

Main Points

1. Importance of Long-Term Profitability

• The ESBG agrees that remuneration policies should support long-term, firm-wide profitability.
• It acknowledges that compensation structures and levels may contribute to short-termism and excessive risk-taking, but stresses that these are not the main causes of the crisis.
• The group calls for a balanced policy response that considers the broader regulatory and policy context.

2. Focus on Specific Inappropriate Incentives

• While the ESBG supports the principle of aligning remuneration with long-term interests, it argues that the core concerns lie in high bonuses for top executives and traders.
• A broad-brush approach to remuneration reform would be unfair to the majority of staff who are not responsible for these risky behaviors.
• The group suggests that regulatory focus should be on specific areas of remuneration that lead to inappropriate incentives.

3. Preservation of Contractual Freedom and Non-Interference

• The ESBG supports the idea that remuneration policies should be determined by institutions and shareholders.
• It emphasizes the importance of preserving contractual freedom and non-interference in setting remuneration levels and structures.
• The group also highlights that CEBS should consider national labor legislation when implementing its principles.

4. Self-Regulation and Industry-Specific Nature

• The ESBG believes that remuneration policies are highly institution-specific and should be governed by self-regulation within the industry.
• It supports the principles-based approach of CEBS and calls for global adoption of these principles, especially considering the presence of non-EU firms in the European market.

5. Performance-Related Remuneration

• The ESBG agrees that remuneration should be based on a combination of individual, unit, and company performance.
• However, it argues that the principle cannot apply universally to all departments and staff members.
• The group suggests a clear differentiation between staff whose performance is linked to significant risks and those who are not.

6. Bonus Structure and Risk Management

• The ESBG supports the idea of a proportionate ratio between base pay and bonus.
• It recommends that significant bonuses should be deferred and include flexible components that reflect the risk horizon of the underlying performance.
• The group views bonuses as a risk management tool, particularly when they are tied to firm-wide performance, rather than solely to individual or short-term targets.

Key Information

• ESBG's Role: Represents one of the largest European retail banking networks, with total assets of €5,215 billion as of January 1, 2006.
• Member Banks: Typically savings and retail banks, often organized in decentralized networks and offering services in their respective regions.
• Corporate Social Responsibility: ESBG members are known for their responsible reinvestment and serve as a benchmark for CSR activities.
• Recommendation: The ESBG recommends that compliance with remuneration principles should be addressed under Pillar 2 of the supervisory framework, emphasizing the need for more explicit guidance on the scope of CEBS' principles.

Conclusion

The ESBG supports the CEBS consultation on remuneration policies but advocates for a targeted and realistic approach to reform. It emphasizes the importance of long-term incentives, pragmatic regulation, and preserving contractual freedom, while calling for greater focus on specific risk-related compensation practices. The group also highlights the need for global adoption of these principles and the importance of self-regulation within the financial sector.