Remuneration policies in the financial services sector

SUMMARY OF:

Recommendation 2009/384/EC — remuneration policies in the financial services sector

WHAT IS THE AIM OF THE RECOMMENDATION?

It aims to set out general principles applicable to remuneration practices in the financial services sector which aim at avoiding any excessive risk-taking in this sector, particularly by banks and investment firms.

KEY POINTS

The recommendation applies to:

financial companies with their registered office or their head office in the territory of an EU country;
remuneration of those categories of staff whose professional activities have a material impact on the risk profile of the company.

The recommendation does not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities.

Remuneration policy

Remuneration policy should be in line with the business strategy, objectives, values and long-term interests of the financial company, such as sustainable growth prospects or the protection of clients and investors in the course of services provided.
The remuneration policy should be the result of a balance between fixed and variable components. The fixed component should represent a sufficiently high proportion of the total remuneration allowing the undertaking to operate a fully flexible bonus policy.
The structure of the remuneration policy should be updated regularly so that it corresponds to the development of the company.
Where remuneration is performance-related, it should be evaluated according to current or future risks without omitting to take into account the cost of the capital employed and the liquidity required.
The procedures followed should be clear, documented and internally transparent.
The supervisory board should establish the general principles of the remuneration policy of the financial undertaking and be responsible for its implementation.
Control functions, human resources departments and external experts should also be involved in the design of the remuneration policy.
Remuneration policy should, at least annually, be subject to central and independent internal review by control functions for compliance with policies and procedures defined by the supervisory board.

Disclosure

Information on the remuneration policy should be disclosed by the undertaking in the form of an independent statement or a periodic disclosure and should list:

information on the decision-making process which defines the remuneration policy chosen;
information on the link between pay and performance;
performance measurement criteria;
the performance criteria on which the entitlement to shares, options or variable components of remuneration is based;
the main parameters and rationale for any annual bonus scheme and any other non-cash benefits.

Supervision

The competent authorities should carry out supervisory activities, taking into account:

the size of the company;
the nature of its activities;
the complexity of its activities.

Financial companies should, in addition, send the competent authorities a statement indicating the level of compliance with the principles given above concerning remuneration policy.

BACKGROUND

Remuneration practices in the financial sector, particularly in banks and investment firms, have led to excessive risk-taking. These practices contributed, to a certain extent, to significant losses suffered by large financial undertakings and were partly responsible for the October 2008 financial crisis. The communication ‘Driving the European recovery’, published by the European Commission in spring 2009, presented a plan which aimed to restore and maintain a stable and reliable financial system. This recommendation on remuneration policies was part of the strategy proposed by the plan.

MAIN DOCUMENT

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector (OJ L 120, 15.5.2009, pp. 22–27)