The European Parliament and Council have, this week, announced proposed amendments to the Capital Requirements Directive, aimed to tackle the "excessive and imprudent risk-taking in the banking sector". The amendments include provisions governing the payment of bonuses to employees of certain EU financial institutions.
The rules are due to go to the full European Parliament next week for a vote and, once finalised, those relating to bonuses will come into force from 1 January 2011.
The new rules will have the effect of accelerating the provisions of the Alternative Investment Fund Managers Directive relating to remuneration which, if implemented, would regulate the way in which remuneration for hedge funds and asset managers is structured.
Among the key provisions will be requirements for deferral of at least 40% of bonuses for at least 3 years and the requirement for at least 50% of the non-deferred element to be paid in contingent capital (shares or equivalent instruments which will be called upon first in the case of financial difficulties). Consequently, the rules provide for the capping of up-front cash bonuses at 30% of the total bonus in most cases. Fixed salaries will need to represent a sufficiently high proportion of employees' total remuneration to allow the operation of a fully flexible variable remuneration policy. Where remuneration is performance-related, this should be in a multi-year framework of at least 3 to 5 years (linked to both individual and financial performance as well as non-financial criteria).
The precise scope of the rules is not entirely clear but the wording suggests that regulatory authorities will have some discretion in the application of the rules, particularly for smaller institutions. The principles also allow institutions to apply the provisions in different ways according to their size, internal organisation and the nature, scope and the complexity of their activities.
The picture will become clearer when the FSA provides further guidance on implementation.
We will circulate a fuller briefing which discusses the issues in more detail shortly.
Key contacts
Steve Bell
Managing Partner - Employment, Industrial Relations and Safety (Australia, Asia), Melbourne
Emma Rohsler
Regional Head of Practice (EMEA) - Employment Pensions and Incentives, Paris
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