Financial markets, governance, and regulation
2014-2015
Professor: Pierre Francotte
Baldinucci Stephanie, Mehovic Mersud, Scheer Christophe
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1) Remuneration in banks and hedge funds
• Type of remuneration
• Problems on the onset of the financial crisis and objectives
• Growth statistics
2) EU Regulation of Remuneration
• Main regulations and respective authorities
• Main measures implemented
3) Assessing the efficacy of regulations and current problems
4)Conclusion
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Remuneration Eu Regulation
Efficacity and problems
How are they paid?
• Fixed vs. variable salary related on performance
• Golden parachutes, Sign on bonuses
Problems on the onset of the financial crisis:
Misalignment of incentives : actions contrary to the long term viability of the firm
Mismatch between pay and performance and reward for failure
Need for regulation!
Mispricing of risk management of the link between risk and remuneration
Conclusion
European
Commission’s 4 main objectives:
(1)To align pay with long-term performance
(2)To give the right incentives to reduce excessive risk taking
(3)To improve corporate governance
(4)To increase power of supervisory authorities
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Remuneration Eu Regulation
Efficacity and problems
Importance of variable payments through time:
Conclusion
In 2008 for the EU: 50% base salary, 21% total bonuses, 19% equity, 10% other
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Remuneration Eu Regulation
Efficacity and problems
Main regulations and respective authorities:
Conclusion
• Common measures for both sectors at the beginning
• Banking sector adapts first
• CRD III was the first binding measure
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Remuneration Eu Regulation
Efficacity and problems
Scope :
• credit institutions and investment firms at group, parent and
Conclusion subsidiary levels
Identified staff :
• Material impact on the risk profile of the financial institution
• EBA regulatory standards (qualitative and quantitative):
• Remuneration higher than 500 000 per year
• 0.3 % of staff gaining most
• Superior or equal salaries as senior managers or risk takers
Proportionality: implement measures in a way that is proportional to their size and to the scope and complexity of their actions
Bloc I : Risk alignment
Variable/fix ratio of 100%
(200% with approval)
At least 50% of variable: equity and equity like instruments
Deferral of 40 to 60% of variable remuneration for 3 to 5 years
Malus and claw back
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Remuneration Eu Regulation
Efficacity and problems
Conclusion
Bloc II: Governance
• Management body in its supervisory function
• Remuneration committee and control functions
Bloc III : Transparency :
• Disclosure of general and specific requirements
• Additional rules for individuals earning more than 1 mio per year
Example:
• 50 % equity
• 50% cash
• 40% deferral
• Malus and claw backs
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Remuneration Eu Regulation
Efficacity and problems
Conclusion
Impact of Variable fix ratio on excessive risk-takings
• Structural shift to fixed payment
• Loss of talented people, which reduces the European competitiveness
• Risk taking decreases due to the cap of the variable payment
2012 2011 2010
Source: EBA
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Remuneration Eu Regulation
Efficacity and problems
Conclusion
• No impact of claw backs on fixed income
• Limited focus on short-term
• Better alignment with the pay and the long term performance
• Being paid in shares increases the long term incentives
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Remuneration Eu Regulation
Efficacity and problems
Conclusion
Current problems:
• "creative" compensation arrangements and introduction of ‘role-based allowances’
• ambiguous interpretations
• EBA has to act as the watchdog
Effect of allowances on the ratio between components of remuneration
Source: EBA
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Problems in the remuneration structure highlight the need for regulation
Successful adoption of various measures:
Reduction in excessive risk-taking and link pay with long-term performance
Some drawbacks:
Structural shift to fix, drive away talents from Europe and creative compensation schemes
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