The New Remuneration Practices under the CRD V

The Directive needs to be implemented by the end of the year, but many aspects are still unclear like the remuneration rules. An overview of the CRD V remuneration practices and how it is going to change the existing framework.

Last year, the European Union published the finalized fifth Capital Requirements Directive or short CRD V (EU Directive 2019/878[1]) in the Official Journal. The latest chapter in the CRD story brings amendments to its predecessor regarding exempted entities, financial holding companies, mixed financial holding companies, supervisory measures and powers, capital conservation measures and remuneration. It is the way bankers get paid that is now determined in the different member states of the Union. The CRD V entered into force twenty days after its publication in the Journal, but unlike regulations that apply directly, directive set out the necessary measures that the EU members states are to adopt and publish to transpose it into national law and in the case of the CRD V this had to be done by 28 December 2020 (with a few exceptions though).

The salaries of finance professionals have long been a controversial subject. In particular in light of the Global Financial Crisis[2] showed a distortion between remuneration, responsibility and accountability on a large scale. Executive pay arrangements contributed to excessive risk-taking[3] during the run-up to the financial crisis in 2007/2008 and regulators set out to fix a broken system. Still, in a report[4] on high earners in EU banks the European Banking Authority (EBA) saw a significant increase year-on-year.

In that sense, the amendments introduced by the CRD V are only the latest attempt to set up a structure that rewards bankers appropriately for doing a good job. To do this, the Directive foresees a number of changes to the existing framework:

  • In order to uniformly implement the principle of proportionality, a total balance sheet limit of five billion euros is specified for the classification as an important institution. Accordingly, financial institutions whose total assets have generally been less than five billion euros in the past four years can refrain from applying the special risk taker requirements for variable remuneration. However, under certain conditions, the member states can raise this value up to 15 billion euros.
  • Public development banks are excluded from the scope of the Capital Requirements Regulation and are thereforeautomatically exempt from the individual requirements regarding severance payments or the disclosure of remuneration information.
  • The remuneration regulations and practices have to be gender-neutral.
  • In order or to strengthen the adequacy of the remuneration policy as part of risk management systems, it becomes a principle of good corporate governance.

A substantial portion, i.e. at least 40 %, of the variable remuneration component is deferred over a period of at least four to five years. It must be correctly aligned with the nature of the business, its risks and the activities of the staff member concerned. For members of the management body and senior management of institutions that are significant in terms of their size, internal organisation and the nature, scope and complexity of their activities, the deferral period has to be at least five years.

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