Eu Regulation of Remuneration in Banks and Hedge funds Financial markets, governance, and regulation 2014-2015 Eu Regulation of Remuneration in Banks and Hedge funds Professor: Pierre Francotte Baldinucci Stephanie, Mehovic Mersud, Scheer Christophe

Agenda Remuneration in banks and hedge funds Type of remuneration Problems on the onset of the financial crisis and objectives Growth statistics EU Regulation of Remuneration Main regulations and respective authorities Main measures implemented 3) Assessing the efficacy of regulations and current problems 4)Conclusion

Excessive risk taking and short terminism Remuneration Eu Regulation Efficacity and problems Conclusion How are they paid? Fixed vs. variable salary related on performance Golden parachutes, Sign on bonuses Problems on the onset of the financial crisis: Excessive risk taking and short terminism Mispricing of risk management of the link between risk and remuneration Mismatch between pay and performance and reward for failure Misalignment of incentives : actions contrary to the long term viability of the firm 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 Need for regulation!

Efficacity and problems Remuneration Eu Regulation Efficacity and problems Conclusion Importance of variable payments through time: In 2008 for the EU: 50% base salary, 21% total bonuses, 19% equity, 10% other

Efficacity and problems Remuneration Eu Regulation Efficacity and problems Conclusion Main regulations and respective authorities: Common measures for both sectors at the beginning Banking sector adapts first CRD III was the first binding measure

Material impact on the risk profile of the financial institution Remuneration Eu Regulation Efficacity and problems Conclusion Scope : credit institutions and investment firms at group, parent and 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 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 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

Efficacity and problems 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

Efficacity and problems 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

Efficacity and problems Remuneration Eu Regulation Efficacity and problems Conclusion Impact of the deferral, malus and claw backs and equity guidelines 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

Efficacity and problems 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

Conclusion 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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