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Remuneration policies in the financial services sector

The October 2008 financial crisis revealed the use of risky practices in financial services. It is therefore necessary to set out clear and transparent principles to be applied to remuneration policies in this sector in order to limit as far as possible risk-taking which contributes to weakening the financial system as a whole.

ACT

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector.

SUMMARY

This Recommendation sets out general principles applicable to remuneration practices in the financial services sector which aim at avoiding any excessive risk-taking in this sector, particularly by banks and investment firms.

The Recommendation applies to:

  • financial undertakings having their registered office or their head office in the territory of a Member State;
  • remuneration of those categories of staff whose professional activities have a material impact on the risk profile of the financial undertaking.

The Recommendation does not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities.

Remuneration policy

Remuneration policy should be in line with the business strategy, objectives, values and long-term interests of the financial undertaking, such as sustainable growth prospects or the protection of clients and investors in the course of services provided.

The remuneration policy should be the result of a balance between fixed and variable components. The fixed component should represent a sufficiently high proportion of the total remuneration allowing the undertaking to operate a fully flexible bonus policy.

The structure of the remuneration policy should be updated regularly so that it corresponds to the development of the company.

In the event that remuneration is performance-related, it should be evaluated according to current or future risks without omitting to take into account the cost of the capital employed and the liquidity required.

The procedures followed should be clear and documented and internally transparent.

The (supervisory) board should establish the general principles of the remuneration policy of the financial undertaking and be responsible for its implementation.

Control functions, human resources departments and external experts should also be involved in the design of the remuneration policy.

Remuneration policy should, at least on an annual basis, be subject to central and independent internal review by control functions for compliance with policies and procedures defined by the (supervisory) board.

Disclosure

Information on the remuneration policy should be disclosed by the undertaking in the form of an independent statement or a periodic disclosure and should list:

  • information on the decision-making process which defines the remuneration policy chosen;
  • information on linkage between pay and performance;
  • performance measurement criteria;
  • the performance criteria on which the entitlement to shares, options or variable components of remuneration is based;
  • the main parameters and rationale for any annual bonus scheme and any other non-cash benefits.

Supervision

The competent authorities should carry out supervisory activities and take into account when doing so parameters such as:

  • the size of the financial undertaking;
  • the nature of its activities;
  • the complexity of its activities.

Financial undertakings should, in addition, send the competent authorities a statement indicating the level of compliance with the principles given above concerning remuneration policy.

Context

Remuneration practices in the financial undertakings sector, particularly in banks and investment firms, have led to excessive risk-taking. These practices contributed, to a certain extent, to significant losses suffered by large financial undertakings and were, partly, at the origin of the October 2008 financial crisis. The Communication “Driving the European recovery”, published in spring 2009, presents a plan which aims at restoring and maintaining a stable and reliable financial system. This Recommendation on remuneration policies is part of the strategy proposed by the plan.

RELATED ACT

Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Report on the application by Member States of the EU of the Commission 2009/384/EC Recommendation on remuneration policies in the financial services sector [COM(2010) 286 final - Not published in the Official Journal].
This Report concerns the application of Recommendation 2009/384/EC in the different Member States.
It notes disparities in the application of the principles laid down in the Recommendation. At present, only 16 Member States have fully or partly applied the Recommendation and 7 Member States apply the measures advocated in the Recommendation across the financial services sector.
Moreover, the Report also notes the reluctance of financial institutions to modify their remuneration practices. These institutions are continuing to filter most of the information relating to their individual remuneration practices.

In view of these still considerable obstacles, the Commission intends to pursue the action undertaken and to contribute to the introduction of global rules on remuneration policy in the financial services sector within the context of the G20 and the FSB.

Last updated: 14.09.2010
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