The Committee of European Banking Supervisors (CEBS) published a finalised set of principles for remuneration policies on 20 April 2009, following a one-month public consultation period and a public hearing.
The principles vary from the draft principles we described HERE, with improvements on many of the issues we identified in that article.
The CEBS principles cover remuneration policies applying throughout a financial institution rather than focusing exclusively on executive pay or severance pay.
They focus on key aspects of remuneration policies, and in particular:
- alignment of institutional and individual objectives; – transparency to internal and external stakeholders;
- governance with respect to oversight and decision-making;
- performance measurement; and
- forms of remuneration.
In summary, the principles are:
- The financial institution should adopt an overall remuneration policy that is in line with its business strategy and risk tolerance, objectives, values and long-term interests. It should not encourage excessive risk-taking. The remuneration policy should cover the institution as a whole and contain specific arrangements that take into account the respective roles of senior management, risk takers and control functions. Control functions should be adequately rewarded to attract skilled individuals.
- The remuneration policy should be transparent internally and adequately disclosed externally.
- The management body, in its supervisory function, should determine the remuneration of the management body in its management function. In addition the management body, in its supervisory function, should approve the principles of the overall remuneration policy of the institution and maintain oversight of their application. (Guerdon Associates note – while we understand this, it may be too opaque for most. Call us if you want an interpretation!) The implementation of the remuneration policy should be subject to central and independent review.
- Where the pay award is performance related, remuneration should be based on a combination of individual and collective performance. When defining individual performance, factors apart from financial performance should be considered. The measurement of performance, as a basis for bonus awards, should include adjustments for risks and the cost of capital.
- The relation between base pay and bonus should be of reasonable proportion. Employees should not have to rely on bonuses. Where a significant bonus is paid, the bonus should not be a pure up-front cash payment but contain a flexible, deferred component; it should consider the risk horizon of the underlying performance.
Implementation of these guidelines by institutions is expected by the end of Q3 2009 in order for supervisors to make a first assessment of progress.
In drafting the guidelines, CEBS has cooperated closely with other bodies working on remuneration, in particular the FSF and CESR. The principles and accompanying commentary can be found HERE.
On the 29 April 2009 the European Commission released its guidelines, which are largely similar. They can be found HERE.
Details of proposed revisions to APRA’s remuneration governance requirements for institutions it regulates will be released this week. Based on consultations Guerdon Associates (and others) had with APRA last week we are confident that their new prudential standards and accompanying guidelines will be better than those released by other regulators so far.© Guerdon Associates 2022 Back to all articles