Dividend and Remuneration Policy

Bank dividend policy – ECB recommendation

Recommendation of the European Central Bank on dividend distribution policies (ECB/2015/49)

This is a recommendation from the European Central Bank (ECB) on bank dividend policy. It aims to ensure that banks are able to meet capital requirements after paying out dividends.

KEY POINTS

Banks should adopt a conservative and prudent dividend policy. This is to ensure they can meet the applicable capital requirements after paying out dividends.

The capital requirements are:

Pillar 1 requirements (minimum requirements): Common Equity Tier 1 capital ratio of 4.5%, Tier 1 capital ratio of 6% and a total capital ratio of 8%
capital requirements imposed under the ECB’s Supervisory Review and Evaluation Process, which go beyond the Pillar 1 minimum requirements
countercyclical capital and systemic buffers
the ‘fully loaded’* Pillar 1 requirements and the countercyclical capital and systemic buffers by the full phase-in date.

These requirements should be met both at a consolidated group level and on an individual basis, unless requirements for the latter have been waived.

The ECB issued 3 recommendations for dividends paid out in 2016 for the financial year 2015:

Banks that satisfy the capital requirements and have reached their ‘fully loaded’ ratios by 31 December 2015 should distribute dividends conservatively so that they can continue to fulfil all requirements even if economic and financial conditions deteriorate.

Banks that satisfy the capital requirements, but have not reached their ‘fully loaded’ ratios by 31 December 2015 should also distribute dividends conservatively so that they can continue to fulfil all requirements even if economic and financial conditions deteriorate, but in addition only to the extent that a linear progress towards their ‘fully loaded’ ratios within 4 years is secured.

Banks that fail to meet the requirements should not distribute any dividends.

BACKGROUND

Banks need to satisfy certain capital requirements and buffers. The challenging macroeconomic and financial environment puts pressure on banks’ profitability and their ability to build up their capital bases.

The ECB recommends that banks adopt policies that enable them to meet the capital requirements after paying out dividends.

fully loaded: the applicable ratios and buffers as they will be calculated from the relevant full phase-in date after the expiry of the transitional provisions (set out in Title XI of Directive 2013/36/EU and Part Ten of Regulation (EU) No 575/2013).

DOCUMENTS

Recommendation ECB/2015/49 of the European Central Bank of 17 December 2015 on dividend distribution policies (OJ C 438, 30.12.2015, pp. 1-3)

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, pp. 1-337)

Successive amendments to Regulation (EU) No 575/2013 have been incorporated into the original document. This consolidated version is of documentary value only.

Regulation (EU) No 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM Framework Regulation) (ECB/2014/17) (OJ L 141, 14.5.2014, pp. 1-50)

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, pp. 338-436)

Remuneration policies in the financial services sector

Recommendation 2009/384/EC — remuneration policies in the financial services sector

It aims to set out general principles applicable to remuneration practices in the financial services sector which aim at avoiding any excessive risk-taking in this sector, particularly by banks and investment firms.

KEY POINTS

The recommendation applies to:

financial companies with their registered office or their head office in the territory of an EU country;
remuneration of those categories of staff whose professional activities have a material impact on the risk profile of the company.
The recommendation does not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities.

Remuneration policy

Remuneration policy should be in line with the business strategy, objectives, values and long-term interests of the financial company, such as sustainable growth prospects or the protection of clients and investors in the course of services provided.
The remuneration policy should be the result of a balance between fixed and variable components. The fixed component should represent a sufficiently high proportion of the total remuneration allowing the undertaking to operate a fully flexible bonus policy.

The structure of the remuneration policy should be updated regularly so that it corresponds to the development of the company.

Where remuneration is performance-related, it should be evaluated according to current or future risks without omitting to take into account the cost of the capital employed and the liquidity required.

The procedures followed should be clear, documented and internally transparent.
The supervisory board should establish the general principles of the remuneration policy of the financial undertaking and be responsible for its implementation.
Control functions, human resources departments and external experts should also be involved in the design of the remuneration policy.
Remuneration policy should, at least annually, be subject to central and independent internal review by control functions for compliance with policies and procedures defined by the supervisory board.

Disclosure

Information on the remuneration policy should be disclosed by the undertaking in the form of an independent statement or a periodic disclosure and should list:

information on the decision-making process which defines the remuneration policy chosen;
information on the link between pay and performance;
performance measurement criteria;
the performance criteria on which the entitlement to shares, options or variable components of remuneration is based;
the main parameters and rationale for any annual bonus scheme and any other non-cash benefits.

Supervision

The competent authorities should carry out supervisory activities, taking into account:

the size of the company;
the nature of its activities;
the complexity of its activities.
Financial companies should, in addition, send the competent authorities a statement indicating the level of compliance with the principles given above concerning remuneration policy.

BACKGROUND

Remuneration practices in the financial sector, particularly in banks and investment firms, have led to excessive risk-taking. These practices contributed, to a certain extent, to significant losses suffered by large financial undertakings and were partly responsible for the October 2008 financial crisis. The communication ‘Driving the European recovery’, published by the European Commission in spring 2009, presented a plan which aimed to restore and maintain a stable and reliable financial system. This recommendation on remuneration policies was part of the strategy proposed by the plan.

DOCUMENTS

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector (OJ L 120, 15.5.2009, pp. 22–27)

Successive amendments to Regulation (EU) No 575/2013 have been incorporated into the original document. This consolidated version is of documentary value only.

Communication for the spring European Council — Driving European recovery `— Volume 1 (COM(2009) 114 final, 4.3.2009)

last update 31.07.2018

Regime for the remuneration of directors of listed companies

Recommendation 2009/385/EC in regard to the remuneration of company directors

It supplements existing EU guidance by giving additional recommendations on the way in which best practices can be defined in order to prepare an appropriate remuneration policy for directors of companies listed on the stock exchange. To this end, it deals with some aspects of the structure of the remuneration of directors and governance thereof.

Remuneration policy

Structure of the policy on directors’ remuneration

In order to ensure that remuneration is performance-related, the new recommendation requires a balance to be established between fixed and variable remuneration and makes the allocation of the variable component conditional upon predetermined and measurable performance criteria.

In order to promote the long-term sustainability of companies, the recommendation also provides for:

a balance between long-term and short-term performance criteria;
deferment of payment of the variable component;
a minimum period for the vesting of share options and shares (the time for which a director must serve a company in order to fully own their options and shares);
the retention of a minimum number of shares until the end of the mandate.

Termination payments (‘golden parachutes’) are also subject to quantified limitations and should not be paid in the event of failure. It is suggested that payments do not exceed the equivalent of 2 years of the non-variable component of the remuneration.

The recommendation also introduces the principle of proportionality of remuneration within the company. That would be a rating which compares the remuneration of directors to that of other executive directors on the board and employees or executives of the company.

As a last resort, companies should reclaim variable components of remuneration which were paid on the basis of data which later proves to be manifestly misstated.

Governance of the policy on directors’ remuneration

Disclosure of the policy on directors’ remuneration

This recommendation is based on Recommendation 2004/913/EC which stipulates that each listed company must publish a statement on its remuneration policy. The new recommendation goes further by stating that this statement must be clear and easily understandable.

The statement on remunerations should also provide information on:

the choice of performance criteria;
the methods applied to determine whether performance criteria have been fulfilled;
the payment of variable components of the remuneration;
the payment of termination payments;
the vesting of share-based rights to remuneration;
the policy on the retention of shares (fixed, for example, at twice the total annual remuneration);
the composition of peer groups of companies whose remuneration policy has been examined in relation to the establishment of the remuneration policy of the company concerned.

Shareholders’ vote

In order to improve transparency, shareholders should participate in board meetings and use their voting rights with regard to directors’ remuneration.

Remuneration committees

Remuneration committees play a key role in establishing a responsible remuneration policy. In order to strengthen the functioning and responsibility of the remuneration committee, the recommendation suggests that at least one of its members should have sufficient expertise in remuneration matters.

The recommendation also contains an obligation for members of the remuneration committee to attend the board meeting at which the statement on remuneration is on the agenda in order to be able to provide explanations to shareholders.

Lastly, in order to avoid conflicts of interests for remuneration consultants, it requires that consultants who advise the remuneration committee must not also advise other departments of the company.

Remuneration of non-executive directors or members of the supervisory board

In order to avoid conflicts of interests, the recommendation provides that the remuneration of non-executive board members or members of the supervisory board should not include share options.

BACKGROUND

The financial crisis of October 2008 revealed more and more complex remuneration structures. They are often based on short-term performance, which can lead to excessive remuneration of directors, not justified by performance. This recommendation complements and strengthens Recommendations 2004/913/EC and 2005/162/EC, which constitute the EU’s set of rules for the remuneration of directors of listed companies. It was published in parallel with Recommendation 2009/384/EC on remuneration policies in the financial sector.

DOCUMENTS

Commission Recommendation 2009/385/EC of 30 April 2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies (OJ L 120, 15.5.2009, pp. 28-31)

Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Report on the application by Member States of the EU of the Commission 2009/385/EC Recommendation (2009 Recommendation on directors’ remuneration) complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies (COM(2010) 285 final, 2.6.2010)

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector (OJ L 120, 15.5.2009, pp. 22-27)

Commission Recommendation 2005/162/EC of 15 February 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board (OJ L 52, 25.2.2005, pp. 51-63)

Commission Recommendation 2004/913/EC of 14 December 2004 fostering an appropriate regime for the remuneration of directors of listed companies (OJ L 385, 29.12.2004, pp. 55-59)

Regime for the remuneration of directors of listed companies

Recommendation 2009/385/EC in regard to the remuneration of company directors

Remuneration policy

Structure of the policy on directors’ remuneration

In order to promote the long-term sustainability of companies, the recommendation also provides for:

As a last resort, companies should reclaim variable components of remuneration which were paid on the basis of data which later proves to be manifestly misstated.

Governance of the policy on directors’ remuneration

Disclosure of the policy on directors’ remuneration

The statement on remunerations should also provide information on:

Shareholders’ vote

In order to improve transparency, shareholders should participate in board meetings and use their voting rights with regard to directors’ remuneration.

Remuneration committees

Remuneration of non-executive directors or members of the supervisory board

In order to avoid conflicts of interests, the recommendation provides that the remuneration of non-executive board members or members of the supervisory board should not include share options.

BACKGROUND

DOCUMENTS

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector (OJ L 120, 15.5.2009, pp. 22-27)

Commission Recommendation 2004/913/EC of 14 December 2004 fostering an appropriate regime for the remuneration of directors of listed companies (OJ L 385, 29.12.2004, pp. 55-59)