financial markets, governance, and regulation 2014-2015 professor: pierre francotte baldinucci...
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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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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
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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
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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 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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Remuneration Eu Regulation Efficacity and problems Conclusion
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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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
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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Remuneration Eu Regulation Efficacity and problems Conclusion
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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