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ABI Response to CEBS' Draft of High-Level Principles on Remuneration Policies Summary

I - General Comments

• Welcome and Context: The Italian Banking Association (ABI) welcomes the opportunity to comment on the CEBS consultation regarding draft high-level principles on remuneration policies.
• International and National Efforts: ABI acknowledges the significant work already done at both international (FSF, European Commission, IIF) and national levels in EU Member States, including measures taken within banks' assistance programs.
• Global Coordination: The ABI emphasizes the importance of a global and coordinated approach to remuneration policies, as the banking industry operates in a global environment. Initiatives that only affect European-based banks may lead to a competitive disadvantage.
• Principles-Based Approach: Any application of these principles should be based on a principles and risk-based approach. A "one size fits all" approach is not appropriate due to differences in business practices across banks (e.g., investment vs. retail banks, large vs. small banks).
• Focus on Governance: Regulators should focus on ensuring good governance rather than designing remuneration structures. The main objective is to assess whether remuneration practices pose unacceptable risks to financial institutions.
• Retention of Talent: The banking industry must retain highly talented staff and avoid undermining Europe's competitive position relative to other international financial centers.

II - Specific Comments

General

• Alignment with Business Strategy: Remuneration policies should align with the institution's business strategy, risk tolerance, objectives, values, and long-term interests. They should not encourage excessive risk-taking.
• Comprehensive Coverage: The policy should cover the entire institution and include specific arrangements for senior management, risk takers, and control functions. Control functions should be adequately rewarded.
• Competitiveness and Governance: Appropriate remuneration and incentive mechanisms can enhance competitiveness and governance. Compensation for key roles should attract and retain skilled individuals.
• Alignment with Risk and Strategy: Remuneration schemes must not conflict with prudent risk management or long-term strategy. Equity-based incentives and performance-linked pay should consider the risk and cost of capital.

Transparency

• Internal and External Transparency: The remuneration policy should be transparent internally and adequately disclosed externally.
• External Disclosure Focus: ABI supports external disclosure but believes it should be directed primarily towards supervisors. It should not involve disclosing individual remuneration details, except for standard disclosures applicable to other listed companies.
• Internal Flexibility: Internal disclosure should be flexible, depending on the audience. Different levels of disclosure are permitted to protect the company's strategic interests.

Governance

• Management Oversight: The management body should determine its own remuneration and have oversight of the overall remuneration policy. The implementation should be subject to central and independent review.
• Support for Principle: ABI supports this governance principle.

Performance Measurement

• Performance-Based Pay: When pay is performance-related, it should be based on a combination of individual, business unit, and company-wide performance.
• Non-Financial Factors: Non-financial factors should be considered in performance assessment. These include technical skills, leadership, teamwork, customer relationships, and strategic execution.
• Risk Adjustment: Performance measurement should include an adjustment for risk and cost of capital.
• Incentive Alignment: Qualitative indicators linked to company values and ethics should be used to ensure compliance and align behavior with long-term goals.
• Incentives for Directors: Directors should not receive variable remuneration tied to financial performance. Compensation is not provided in cases of resignation or removal without just cause.
• Long-Term Motivation: Top management incentives should promote continuous performance improvement to ensure company stability and motivate key personnel.

Form of Remuneration

• Proportionality: There should be a proportionate ratio between base pay and bonus. Significant bonuses should not be paid upfront in cash but should include a deferred, flexible component.
• Equity Compensation: ABI believes that equity compensation schemes already meet the criteria for performance-adjusted deferred compensation.
• Flexibility for Companies: The form of remuneration should be flexible and primarily a matter for the company itself.
• Appropriateness Approach: ABI suggests an appropriateness approach to this principle.
• Transition Period: A transition period should be specified to minimize the impact on existing employment contracts.