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Remuneration Policies Summary

Introduction

The document outlines the draft high-level principles of remuneration policies for financial institutions, emphasizing the importance of having coherent and adequate remuneration policies to mitigate risks associated with excessive risk-taking. It highlights that the responsibility for developing and maintaining these policies lies with the institutions themselves, and where applicable, with their shareholders.

Scope

The guidelines are intended for both regulators and regulated firms, focusing on the entirety of the remuneration policy within the firm, including senior employees and risk-takers and managers. The remuneration policy must cover all levels and categories of employees.

• The implementation of the policy should be tailored to the nature, scale, and complexity of the firm's activities.
• The supervisory review and evaluation process (SREP) should assess risks related to remuneration policies, and supervisors should consider measures under Pillar 2 to address and mitigate these risks.

General Principles

i. Alignment with Business Strategy and Risk Tolerance

• The remuneration policy should align with the company's business strategy, risk tolerance, objectives, values, and long-term interests.
• It should not encourage excessive risk-taking and must ensure that long-term interests are prioritized.
• Control functions (e.g., Risk Controls, Compliance, Internal Audit) should be adequately rewarded to attract skilled individuals.
• Severance pay and other forms of pay linked to scenarios like mergers and acquisitions should be based on achieved performance over time and not reward failure.

ii. Transparency and Disclosure

• The remuneration policy should be transparent internally and adequately disclosed externally.
• Employees should be informed in advance of the criteria used to determine their remuneration.
• The appraisal process should be documented and transparent to the employee.
• Relevant external stakeholders should be provided with clear and understandable information on the remuneration policy.
• The policy should be articulated clearly to the supervisory authority upon request, such as through a remuneration policy statement that is regularly reviewed.

Governance Principles

iii. Oversight and Decision-Making

• The management body (supervisory function) should determine the remuneration of its members and have oversight of the overall remuneration policy.
• A central and independent review of the remuneration policy should be conducted.
• Independent Remuneration Committees or similar bodies should be established to report to the management body.
• Centralized decision-making ensures better alignment of individual pay with the company's overall performance.
• Shareholders, control functions, and HR should be involved in the process, especially to avoid conflicts of interest.

Performance Measurement for Remuneration

iv. Performance-Based Remuneration

• When pay is performance-related, it should be based on a combination of individual, business unit, and company-wide performance.
• Non-financial factors (e.g., compliance, ethics, customer behavior) should be considered in performance measurement.
• Poor non-financial performance should override good financial performance, ensuring that unethical or non-compliant behavior is not rewarded.
• Bonuses or bonus pools should be adjusted for risks and cost of capital, ideally using a firm's economic capital model.
• The goal is to reflect sustainable growth prospects and long-term interests of the company.
• Non-executive directors should not be remunerated based on short-term results but on other factors like time invested and responsibilities.

Form of Remuneration

v. Proportionality and Deferred Payments

• There should be a reasonable proportion between base pay and bonus.
• Significant bonuses should not be purely upfront cash payments but should include deferred components (e.g., shares, options, trust funds).
• The deferred component should be linked to future performance and consider the risk horizon of the underlying activities.
• Upfront bonuses should be subject to claw back if they result from fraudulent activities.

Key Takeaways

• Risk management is central to effective remuneration policies.
• Transparency and disclosure are essential for both internal and external stakeholders.
• Governance ensures that remuneration decisions are made independently and in line with the company's strategy.
• Performance measurement should be comprehensive, considering both financial and non-financial aspects.
• Deferred and flexible payment structures help align incentives with long-term goals and prevent excessive risk-taking.