On 30 October 2018 the Bank of Italy published a revised version of its regulation on remuneration policies in Italian banks and groups of banks, in order to comply with the Guidelines on remuneration policies issued by the European Banking Authority in December 2015 to implement directive 2013/36/EU.
Some of the most significant amendments are set out below.
Categories of remuneration
The regulation introduces more specific criteria to differentiate correctly between fixed and variable remuneration and clarifies that allowances (e.g. those linked to the employee’s role) must also be considered remuneration.
Provisions to dissuade attempts to circumvent the regulation on remuneration policies have been strengthened.
The procedure for identifying risk takers within banks has to be carried out every year and its outcome has to be properly documented. Banks also have to adopt a policy on the process used to identify risk takers that includes clear information on any additional criteria used, with regard to the provisions of EU Regulation 604/2014 (on identifying staff whose activities have an impact on an institution’s risk profile).
Limit on cash remuneration
The revised regulation confirms that no more than 50% of variable remuneration may be paid in cash and it provides that deferred variable remuneration has to be paid mostly through financial instruments where more than 50% of variable remuneration is awarded in instruments. The aim of these amendments is to reinforce mechanisms that align the variable remuneration of risk-takers with the banks’ interests in the medium and long run.
Minimum retention period
The minimum retention period applied to variable remuneration paid in instruments is set at one year. Only where variable remuneration is deferred for up to five years can the retention period of the deferred instruments be reduced to six months (except for certain categories of staff). This is to ensure consistency in regulations and equal competitive conditions throughout the European Union.
The revised regulation confirms that retention bonuses fall within the scope of variable remuneration but do not need to be linked to performance targets. They must however be justified by documented reasons why the bank has to retain its staff for a certain period (e.g. a restructuring process or an extraordinary operation) and may be paid only at the end of this period.
Long-Term Incentive Plans
Long-Term Incentive Plans are regulated in more detail and it is provided that:
- they must be consistent with the targets and the duration of the bank’s strategic plan;
- the period for performance evaluation (accrual period) has to cover more than one year after the beginning of the plan and at least the year before;
- performance results must be verified before variable remuneration is awarded;
- the plan is subject to all the rules on variable remuneration, including those on risk adjustment;
- the deferral period has to be at least one year after the end of the plan.
Payments made in connection with the termination of the employment relationship or with the end of a period in office (‘golden parachute’) have to be regulated so that they will be granted only if their payment is justified by results and the conduct of the beneficiary. They must also reflect the economic and financial situation of the bank. These amounts are also subject to all the limitations provided for variable remuneration such as clawback and malus mechanisms (under which employees can be required to reimburse an element of variable pay for poor performance).
These payments are also now included within the cap on variable remuneration. There is an exception for compensation under a non-compete agreement: the part of this compensation that does not exceed gross annual salary for each year of the agreement can be excluded.
The new restrictions on remuneration policies described in this article pursue the understandable purpose of setting out (in the interests of all stakeholders) remuneration policies that are in line with the long-term values, strategies and goals of the banks and avoiding incentive structures that may drive risk-takers to take decisions that breach legislation or that may entail a too high a level of risk for the bank and the whole financial system.
However, some of the new restrictions have already given rise to doubts as to their consequences on the relationship between banks and their staff.
By way of example, as regards payments made in connection with the end of an employment contract, if the parties are negotiating a settlement amount for a dismissal, this should be determined based on the risks in potential judicial proceedings; however any payment will now be limited by the rules on variable remuneration and these two parameters may not align. Also, the application of mechanisms such as clawback and malus clauses make finding an agreement even more difficult.
In non-compete clauses, an uncertain level of compensation may not be compatible with Italian regulation and case law, according to which compensation proportionate with the non-compete obligations accepted is an essential element of a non-competition agreement.
The next month may therefore be challenging for banks, who have to approve remuneration policies in line with the new regulation, at the latest, in the general assembly called to approve the 2018 financial statement.