On 28.7.2016, the European Commission released a report on the remuneration rules for banks and investment firms. It finds that the remuneration rules(inspired by the Principles for Sound Compensation Practices by the Financial Stability Board) are generally effective in curbing excessive risk-taking behaviour and short-termism (by impacting on the incentives for the so-called ”material risk takers”). These were precisely the reasons why the rules were introduced in the aftermath of the financial crisis. In carrying out its assessment of the CRD remuneration rules, the Commission’s evaluation strategy consisted of a mix of stakeholders’ engagement, own research, input from EBA and the study commissioned to iff. Overall the Commission evaluation found the relevance, effectiveness, efficiency and acceptability of these provisions to be beneficial overall, but revealed shortcomings in the particular cases of small and non-complex institutions and of staff with low levels of variable remuneration which suggest lack of coherence in the absence of implementation flexibilities (proportional implementation of the rules). Especially the remuneration requirements which existed prior to CRD IV were positively assessed, whereas the assessment of the effectiveness and impacts of the bonus cap introduced by CRD IV was made difficult by the scarce evidence to date and and the need to revisit the issue when more practical experience is gained.
The iff study (delivered in January 2016 and carried out by a team led by Prof. Dr. Udo Reifner and Prof. Dr. Doris Neuberger together with partners from the UK, Italy, Sweden and Canada) was also published along with the Commission’s Review documents. Below is the abstract of the Study on the remuneration provisions applicable to credit institutions and investment firms (iff, January 2016):
”Variable remuneration in credit institutions and investment firms can encourage excessive risk-taking behaviour. The present research investigates the impact of the Capital Requirement Directive and Regulation (CRD IV package) on this type of behaviour. The research shows that the Directive has had a significant effect on risk management. Deferral of variable pay, malus arrangements and a maximum ratio for the variable pay of risk-taking personnel are seen to be effective incentives even at this early stage. Competitive disadvantages with regard to attracting and retaining staff from unregulated sectors could not be verified. Problems have been found with regard to clawback clauses in the context of national employment law. Other problems concern the need for rules that are better adapted to the business scale. The rules work well in the case of big and significant institutions. For small and non-complex institutions, which are less engaged in risky activities and which pay out low amounts of variable remuneration, the relatively high implementation cost of deferral and pay-out in instrument are of concern. Member States have made wide use of exclusions. Regulating the extent, process and identification of such exclusions at the EU-level would further harmonise remuneration policies in the member states.”
Background Info on the CRD IV package: Following the 2008 financial crisis, the EU has introduced binding rules on corporate governance and remuneration for credit institutions and investment firms, reflected in the CRD IV package which lay down rules for banks and investment firms including on: Effective risk management; Tasks, requirements and composition of the boards; Remuneration for executives and employees considered „material risk takers“ –including a „bonus cap“ (maximum ratio between variable and fixed compensation); and disclosure related to corporate governance and remuneration.
Links to documents associated with the Commission report on remuneration under the CRD/CRR (July 2016):
- Under Article 161(2) of Directive 2013/36/EU the Commission carried out a review of the CRD/CRR remuneration rules.: Commission Report on the assessment of remuneration rules under CRD/CRR (July 2016)
- Press release
- Commission Staff Working Document on detailed assessment of remuneration rules under CRD/CRR (July 2016)
- Commission Staff Working Document on evaluation of deferral and pay-out in instruments rules under CRD/CRR (July 2016)
- Public consultation on impacts of maximum remuneration ratio and overall efficiency of CRD IV remuneration rules (October 2015 – January 2016)
- Stakeholders Meeting – Fact-finding on remuneration under CRD/CRR (December 2015)
- External iff-study on remuneration provisions under CRD/CRR (January 2016)