Proportionate remuneration policies
An investment firm should have a remuneration policy that is proportionate to the size, internal organisation and nature of the firm and the scope and complexity of its activities. The policy must comply with a number of principles, including that it is gender neutral (i.e. based on equal pay for male and female workers for equal work or work of equal value), it promotes sound and effective risk management, it contains measures to avoid conflicts of interest, it encourages responsible business conduct and it promotes risk awareness and prudent risk taking.
The remuneration requirements apply in respect of staff, such as senior management and employees with comparable remuneration, whose professional activities have a material impact on the risk profile of the firm or the assets that it manages. The EBA, in consultation with ESMA, will develop draft regulatory technical standards which will specify the criteria firms should use in identifying their "material impact" staff. In doing so, the ESAs will take account of the existing remuneration guidelines which exist under MiFID II, AIFMD and UCITS.
Variable to fixed ratios
The remuneration requirements of IFR/IFD are modelled on those in the CRR/CRD IV, although they fall short of making investment firms subject to that regime's so-called "bankers' bonus cap" – i.e. the mandatory limit on the ratio of variable remuneration to fixed remuneration that may be paid to relevant staff.
However, firms will be required to set - and publish - appropriate ratios themselves, ensuring that the fixed component represents a "sufficiently high proportion" of the total remuneration to enable the operation of a fully flexible policy on variable remuneration components – including the right not to pay any variable remuneration at all. In setting these ratios, the firm must take into account the business activities of the firm and the associated risks as well as the impact that different categories of staff have on the risk profile of the firm.
Any variable remuneration must comply with a number of requirements, including when assessing the performance of the individual, taking into account both financial and non-financial criteria.
In terms of allocation, at least 50% of such remuneration must consist of one or more of the following instruments:
- shares (or equivalent ownership interests);
- share linked instruments (or equivalent non-cash instruments);
- additional Tier 1 instruments (e.g. preferred shares, contingent convertible securities (CoCos));
- Tier 2 instruments (e.g. subordinated debt) or other instruments fully convertible into Common Equity Tier 1 instruments; and
- non-cash instruments which "reflect the instruments of the portfolios managed" by the firm.
It appears that, except in the case of those instruments reflecting instruments in managed portfolios, such instruments must be linked to the employer group (as opposed to, for example, awarding units in a fund product).
At least 40% of the variable remuneration must be deferred over a three to five year period. In the case of particularly high variable remuneration (not defined, but could be EUR 500,000 or more) this deferral percentage rises to at least 60%.
Where an employee leaves the firm before retirement age, the firm must also hold any discretionary pension benefits for a period of five years in the form of the instruments listed above and, once paid out, these benefits will be subject to a five-year retention period by the employee.
Exemption from the allocation and mandatory deferral requirements
The requirements for variable remuneration to be deferred and to be payable in non-cash assets do not apply:
- to firms with on- and off- balance sheets assets equal to or less than EUR 100 million averaged over the four year period preceding the relevant financial year; or
- to an individual member of staff for whose annual variable remuneration component is no more than EUR 50,000 and which does not represent more than 25% of their total annual remuneration.
Member States have the discretion to increase the EUR 100 million threshold to up to EUR 300 million in certain cases (e.g. where the investment firm is not one of the three largest firms in the relevant jurisdiction, it is subject to simplified (or no) recovery and resolution requirements and its on- and off balance sheet trading book business is EUR 150 million or less). They also have the right to remove the individual member of staff exemption in relation to particular individuals based on the specificities of national remuneration practices in the relevant market or based on the nature of an individual's job profile or responsibilities.
The exemption will not therefore be available to certain entities with higher asset levels, such as some CLO collateral managers and some other fund managers which make investments from the balance sheet of the regulated entity.
Malus and clawback
Significantly, up to 100% of the variable remuneration should be reduced or withheld in times of financial stress for the firm, including by way of malus (reducing or cancelling deferred remuneration that has not yet vested) or clawback arrangements, taking account of an individual's complicity in the firm's losses and/or issues going to fitness and properness.
Firms with on- and off- balance sheet assets of over EUR 100 million (subject to the discretion to raise that threshold to EUR 300 million (see above)) must establish an independent and gender balanced remuneration committee to consider the remuneration policies and incentives. This may be established at group level and, where employee representation is required in management bodies under national law, shall include employee representatives.
Remuneration disclosures and regulatory reporting
Firms will be required to make public specified information regarding their remuneration policy and practices. This will include aspects related to gender neutrality and the gender pay gap. While the remuneration-related disclosures will not require individuals to be named, it will involve more granular disclosures than those with which MiFID firms are currently familiar. This will include, in addition to disclosure of the important characteristics of the policy and the ratios between fixed and variable remuneration, aggregate quantitative remuneration information, broken down by senior management and "material impact" staff, indicating things such as: the split between fixed and variable remuneration, the amounts of variable remuneration broken down into the allowable types, the amounts of deferred remuneration awarded and due to vest and details regarding severance payments.
In addition, firms will be required to provide their supervisors with information on the number of natural persons who are remunerated EUR 1 million or more per financial year, presented in pay brackets of EUR 1 million. The disclosure will need to include information broken down in relation to job responsibilities, business area and the elements of salary, bonus, long-term award and pension contribution.