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

2. 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

3. 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!

4. 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

5. 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

6. 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 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

7. 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

8. 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
Source: EBA

9. 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

10. 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

11. 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

12. Thank you for your attention!