On 30 March 2011, Bank of Italy published a set of supervisory provisions concerning banks’ remuneration and incentive policies and practices (the “New Regulations”) with the purpose to implement the European Directive 2010/76/EC of 24 November 2010 (“Capital Requirements Directive III” or “CRD III Directive”). CRD III Directive, together with the guidelines approved by the Committee of European Banking Supervisors (“CEBS”), are construed in the context of the measures applied to face up to the financial crisis that stroke global markets over the
last few years.
In line with European regulation standards, the New Regulations lay down the fundamental principles whereby credit institutions are required to ensure that their remuneration policies and practices are consistent with their
organisational structure and promote sound and effective risk management. In particular, the New Regulations strengthen inter alia the following principles:
(a) transparency and disclosure of information on remuneration policies and practices: relevant information is
required to be distributed, analysed and further checked by the competent corporate bodies;
(b) structure of variable remuneration: variable remuneration (especially with regard to selected categories of
employees) has a full set of provisions well separated from those applicable to the fixed remuneration;
(c) risk alignment: in this respect, the employees’ remuneration, to a given extent, may be paid out in shares (or other financial instruments); furthermore, deferred payments are also provided, as well as ex-post correction mechanisms.
Below a brief summary of the contents of the New Regulations.
2. Subjected entities
The New Regulations shall apply to banks and banking groups (“Banks”) subjected to the authority of the Bank of Italy including, without limitation, foreign branches of Italian banks and Italian branches of foreign banks. Many of the provisions set forth in the New Regulations shall be applicable in accordance with the principle of proportionality: in this respect, among other issues, the New Regulations shall apply in full to major Banks only (i.e., those having certain prerequisites, such as total assets equal to, or greater than, Euro 40 billion etc.), while some of the relevant provisions shall not apply to minor Banks and financial intermediaries.
The New Regulations aim at causing banks to adopt adequate remuneration and incentive measures which may help improving competitiveness and good governance, in accordance with long-term strategies and sound and effective risk
management, particularly with regard to share-based incentives.
4. Employees’ remuneration
The New Regulations provide for remuneration being paid directly by the employing bank (not by vehicles etc.), and for the employees to refrain from seeking any coverage (e.g. insurance) on remuneration, which may affect their risk alignment.
Pursuant to the New Regulations, employees include (i) the members of the company’s bodies having functions connected with strategic supervision, management and control; (ii) employees and collaborators; (iii) workers in external distribution networks. Furthermore, the Bank must identify the “most relevant personnel”, i.e. the members of staff whose professional activities have, or may have, a material impact on the Bank’s risk profile.
The following categories, unless the Bank proves that they have no material impact on its own risk profile, are considered as “most relevant personnel”: (a) executive members of the Bank’s managing body; (b) direttore generale and other managers who are responsible for heading significant business lines or functions or regional areas; (c) staff which is responsible for independent control functions; (d) “other risk takers”, defined as staff members who assume, either individually or collectively, material risks, provided that their earnings are above certain given thresholds (i.e. Euro 200,000.00 p.a., or a variable part exceeding 20% of the total remuneration); and (e) other employees, whose total remuneration takes them into the same remuneration bracket as those mentioned in (b) and (d) above. Remuneration and incentive systems with regard to categories (a) to (c) are determined by the body with strategic supervisory functions.
5. Fixed/variable remuneration
The whole remuneration shall be divided into a fixed and a variable portion, which shall be separated and balanced, taking into account that the fixed portion shall be high enough to remunerate the employee in case the variable portion
contracts itself or is even cancelled in light of the results.
The variable remuneration shall be linked to performance criteria based on a multi-year time horizon, and shall take into account also a combination of the performance of the individuals and the relevant business unit. Furthermore, appropriate correction mechanisms reflecting actual performance shall be provided, thus possibly decreasing or cancelling the variable remuneration in whole or in part.
Non-executive board members should not benefit from any incentive mechanisms (or at least not to a significant extent). Members of internal control functions should have an adequate fixed remuneration in respect of their responsibilities, and any possible incentives pertaining to them should not be based on the business results of the units which are under their control.
5.1 Variable remuneration paid out in shares
At least 50% of the variable remuneration shall be adequately balanced between shares and equivalent financial instruments, and such ratio shall be complied with both in the upfront and in the deferred payments of the variable remuneration. Such shares or financial instruments shall be subject to a retention policy, by means of a
lock-up. The lock-up period shall not be shorter than 2 years in relation to upfront payments although, in relation to deferred payments, its length may be shorter but shall be determined case by case under the appropriate
At least 40% of the variable remuneration shall be subject to deferral for a period of at least 3 to 5 years, in order to align remuneration with the risks assumed by the Bank. With reference to executive directors whose variable
remuneration may be particularly significant in size, the respective deferred portion amounts to at least 60% of the aggregate. Between the end of the evaluation period (so-called accrual) and the first payment at least one year shall
6. Role of corporate bodies
Some features of the corporate bodies of a bank are newly designed by the New Regulations, also with a view of allowing information on remuneration to be distributed, analysed and checked by the competent corporate bodies without limitations. In particular:
6.1 Shareholders’ Meeting
The by-laws of Banks with a traditional model of management and control shall provide for the ordinary shareholders’ meeting inter alia to (i) determine the amount of the remuneration granted to the members of the body appointed by it; (ii) approve the remuneration policy in favour of the employees and of the members of the bodies having supervisory, management and control functions; (iii) approve the share-based incentive plans, such as stock-option plans. In this respect, the shareholders’ meeting must be provided with clear and complete prior information on remuneration policies and practices to be adopted, as well as further subsequent information, on a yearly basis, on the terms of
implementation of the above policies.
6.2 Supervisory functions and remuneration committee
The body having strategic supervision functions examines and adopts, at least on a yearly basis, the remuneration policy and is responsible for its implementation. Competent business functions must be involved (particularly,
functions related to risk management, compliance, human resources, strategic planning). Within the body having strategic supervisory functions in holding companies of major banking groups, as well as listed Banks, a remuneration
committee shall be appointed, consisting of non-executive members, the majority of which shall be independent. Nonetheless, non-listed Italian subsidiaries, branches etc. of European banks can refrain from appointing the remuneration committee, if such committee is appointed within their respective foreign holding company. The New Regulations set forth in detail the roles of the remuneration committee.
6.3 Control functions
Internal control functions (particularly, compliance and internal audit) of Banks inter alia cooperate and check that the
remuneration systems are effective and in accordance with the relevant policies.