Has the regulator implemented rules in relation to remuneration paid by banks to its staff?
Yes. The Italian Central Bank (Banca d’Italia) implemented the EU Capital Requirements Directive III (CRD III) in July 2012 and in November 2014 it implemented the EU Capital Requirements Directive IV (CRD IV). Both these Directives contain rules in relation to remuneration paid by banks to its staff.
What categories of staff are caught by the regulator’s rules?
All categories of staff are caught by the regulator’s rules. The more stringent rules apply only to bank employees who are classified as “risk takers,” as defined by the EU Commission Delegated Regulation n. 604 on March 4, 2014 (the Risk Takers).
What are the key regulatory rules?
The key regulatory rules are:
- Remuneration regulations in the Italian legal framework, banks are classified as “big,” “mid-sized” or “small,” depending on their size and the complexity of their business. Small banks are subject to less stringent rules and regulations regarding employee remuneration, as compared to mid-sized or big banks.
- Remuneration policies must be in line with the “objectives, values, long term strategies and policies” of the bank’s risk management policies, which must be prudent.
Remuneration packages that include financial instruments, such as stock options, or that are linked to the bank’s performance, must: (i) be consistent with the bank’s risk appetite framework (so-called “RAF”); (ii) be consistent with the bank’s risk management policies; (iii) take into account the capital and liquidity requirements of the bank; and (iv) be structured to avoid any conflict with the bank’s long term interests.
- The bank must have a strategic supervisory body (Organo con funzione di supervisione strategica), which has an obligation to review the bank’s remuneration policy at least once a year.
- The parent company of a banking group has an obligation to review a single, comprehensive document that contains information regarding the remuneration policies and incentive schemes of each company in the group (the Documento sulle politiche di remunerazione e incentivazione).
Are bonuses subject to the regulator’s rules?
Yes. The following are some of the key rules regarding bonuses, also commonly referred to as “variable remuneration:”
- A bank must make a clear distinction between the criteria it uses for determining fixed remuneration (salary) and variable remuneration (bonus) for all of its employees.
- Guaranteed variable remuneration is forbidden under Italian law, except in limited circumstances (see question 5 below), since it is contrary to the provisions set forth by Banca d’Italia regarding the necessary links between performance, remuneration, risk and incentive.
- All variable remuneration is subject to malus or claw-back arrangements.
- For bank employees who are classified as Risk Takers, the ratio between variable and fixed remuneration cannot exceed 100 percent (ratio of 1:1). This means that for each Euro paid to the Risk Taker as salary he or she can receive one Euro in bonus. The ratio can only be increased to a maximum of 2:1, giving the Risk Taker the right to receive a bonus that is twice his or her salary. However, this is allowed only if provided for by the Company’s By-laws and if approved by the shareholders of the bank. Shareholder approval is obtained if 66 percent vote in favor (with a quorum of 50 percent of the shareholders voting) or if 77 percent vote in favor (in the event the 50 percent quorum minimum is not reached).
- Bonuses must be linked to performance indicators and be consistent with the risk undertaken by the bank. Adequate performance indicators include: RAROC (Risk-Adjusted Return on Capital, RORAC (Return on Risk-Adjusted Capital), RARORAC (a combination of RAROC and RORAC) or EVA (Economic value added). On the contrary, profits, revenue, shares’ market price or shares’ total yield are not adequate indicators of long-term’s risks.
- A bank must evaluate the performance of each employee at least annually (preferably bi-annually). In making these evaluations, the banks are encouraged to take into account a wide range of factors, including changes in the risks undertaken by the bank during the relevant period of evaluation.
- For a Risk Taker, at least 50 percent of his or her bonus must be comprised of:
- stocks or stock-linked instruments or, for banks not listed on a stock exchange, instruments whose value reflects the economic value of the bank; and
- other financial instruments provided for by EU Delegated Regulation n. 527 of March 12, 2014.
- For a Risk Taker, at least 40 percent of his or her bonus must be deferred for a period of time ranging from three to five years. For employees in the “top manager” category, such as Executive Directors or General Managers (employees typically receiving a sizable variable remuneration), the deferral period is five years and the amount deferred can not be less than 60 percent of the total bonus.
What is the position concerning role based allowances?
Neither the Italian Government nor the Banca d’Italia has an official position concerning role based allowances, but these provisions are indicative:
- As noted above in question 4, guaranteed variable remuneration is generally not allowed in Italy, because it does not consider the necessary links between performance, remuneration, risk and incentive. It is, however, allowed if three specific conditions are met: one time only per employee, if the employee is newly hired, and if he or she is in the first year of employment. When these three conditions are met, guaranteed variable remuneration is permissible, and the rules regarding bonuses will not apply; nevertheless, the amount paid under a guaranteed variable remuneration scheme is relevant to determining the allowable ratio between fixed and variable remuneration (as referred to in question 4).
- If the remuneration is designed to compensate a newly hired employee of a potential loss deriving from a former employment arrangement (such as a consequence of a malus or claw back), then the remuneration must be considered as variable remuneration, subject to the relevant rules and regulations set forth by Banca d’Italia.
Do the regulator’s rules on remuneration have extraterritorial effect?
The EU remuneration requirements implemented in Italy in 2014 by the Banca d’Italia apply to Italian banks (wherever they do business) and to the Italian subsidiaries of non-EU banks.
Do you anticipate further reform in this area?
Yes, further reform is expected in this area, especially following the submission of the EU Commission’s report and legislative proposal to the European Parliament and to the Council of the EU by the end of June 2016.
Must an institution’s remuneration policy be disclosed to the regulator?
Yes, using the bank’s website.
Banks must publish certain information regarding their remuneration policy on their website, including a statement regarding the execution of the remuneration rules set forth by the Banca d’Italia. The remuneration of top managers, such as the Chairman, members of the strategic supervision body, the General Manager and any Co-General Manager, must also be published on the bank’s website.
In compliance with EBA guidelines (issued in application of Article 75 CRD IV), the Banca d’Italia collects information on remuneration practices from banks and uses this information to understand trends and general market practices. The Banca d’Italia also collects information on the number of people employed by a bank who are remunerated in excess of €1 million per year (the so-called “High Earners Report”).