30 Apr 2009, David Benyon, Operational Risk & Regulation
BRUSSELS - The European Commission has come out with principles on remuneration for risk-taking staff within financial services institutions, recommending that bonuses be consistent with sound risk-management.
The recommendation sets out guidelines on pay structures, the design and implementation process of remuneration policies, and the role of supervisory authorities in the review of such policies at financial institutions.
The Commission has also adopted a recommendation on directors' pay, in line with policy already issued by several EU member states - such as the guidance of the UK Financial Services Authority.
"Up to now, there have been far too many perverse incentives in place in the financial services industry. It is neither sensible nor sane that pay incentives encourage excessive risk-taking for short-term gain," said EU internal markets commissioner Charlie McCreevy.
The Commission's principles also follow international agreement on the broad guidelines tabled by the Financial Stability Forum ahead of April's G-20 summit in London, where the 20 heads of state pledged compliance with the FSF principles.
"The Commission is leading the way. Incentives need to be aligned with long-term, firm-wide profitability. Of course, remuneration levels should continue to be based on performance," said McCreevy. "But performance criteria should be risk-adjusted and take into account cost of capital and liquidity. Design and oversight of remuneration policies should remain the responsibility of the board and not be delegated to senior management. An increased role of supervisory authorities in the review of remuneration practices is also needed to promote sound remuneration practices in financial institutions."
The Commission says it will follow up with legislative proposals for supervision of remuneration policies. These will form part of June proposals to revise the Capital Requirements Directive to ensure regulatory capital addresses the risks inherent in trading books, securitisation positions and remuneration policies.
The full text of the Commission guidance can be read here.