Financial markets, governance, and regulation 2014-2015 Professor: Pierre Francotte Baldinucci Stephanie, Mehovic Mersud, Scheer Christophe 1

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Financial markets, governance, and regulation2014-2015

Professor: Pierre Francotte

Baldinucci Stephanie, Mehovic Mersud, Scheer Christophe

Eu Regulation of Remuneration in Banks and Hedge funds

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Agenda

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 problems4)Conclusion

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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

Remuneration Eu Regulation Efficacity and problems Conclusion

How are they paid?• Fixed vs. variable salary related on performance• Golden parachutes, Sign on bonusesProblems 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

Need for regulation!

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Importance of variable payments through time:

In 2008 for the EU: 50% base salary, 21% total bonuses, 19% equity, 10% other

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Main regulations and respective authorities:

• Common measures for both sectors at the beginning• Banking sector adapts first• CRD III was the first binding measure

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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 Proportionality: implement measures in a way that is proportional to their

size and to the scope and complexity of their actions

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

Bloc I : Risk alignment

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Bloc II: Governance • Management body in its supervisory function• Remuneration committee and control functionsBloc 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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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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Impact of the deferral, malus and claw backs and equity guidelines

• Limited focus on short-term• Better alignment with the pay

and the long term performance • Being paid in shares increases

the long term incentives

• No impact of claw backs on fixed income

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Effect of allowances on the ratio between components of remuneration

Source: EBA

Current problems: • "creative" compensation arrangements and

introduction of ‘role-based allowances’• ambiguous interpretations• EBA has to act as the watchdog

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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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Thank you for your attention!

Documents

Financial markets, governance, and regulation 2014-2015 Professor: Pierre Francotte Baldinucci Stephanie, Mehovic Mersud, Scheer Christophe 1