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Variable compensation of financial market professionals : Implementation of the French system

The FBF (French Banking Federation) has published the professional operating rules referred to in the government regulation of the 3rd of November 2009 relating to the compensation of personnel whose activities may have a material impact on banks' risk exposure, and which clarify the provisions therein. These professional rules, applicable as from the 2009 financial year for compensation paid at the beginning of 2010, set out the principles adopted by the G20 on 24 and 25 September 2009.

French banks are therefore the first to implement these international principles just as they were already in the forefront in making commitments on market professionals' variable compensation as from February 2009, commitments which were supplemented in August.


These professional rules define the governance of compensation policies and the rules applicable to market professionals' variable compensation, notably with the implementation of a bonus-malus system. They apply to banking groups (1) for financial market professionals whose activities may have a material impact on their risk exposure. The system aims to avoid excessive risk-taking by strengthening the coherence between the behaviour of staff concerned and the company's long-term objectives. The system is controlled by the French Commission Bancaire in accordance with regulation 97-02.


The professional rules concerning compensation also apply to company executives, but may be adapted, under the control of the French Commission Bancaire, by the deliberating body in relation to its role in the risk-taking process and taking into account the legislation, regulations and other measures which also apply to it, notably the AFEP - MEDEF (3) code on corporate governance and the regulatory provisions adopted in response to the financial crisis applicable until the 31st of December 2010.

1. Governance rules: for increased transparency and control

  • The governance rules define the roles of the Board of Directors or Supervisory Board, and their compensation committee. The latter consists primarily of independent members (2), qualified to analyse the policies and practices in terms of compensation, including the company's risk policy. It expresses its opinion on the proposals of the General Management and undertakes an annual review of the compensation policy.
  • The General Management consults the risk control department and the compliance department for the definition and implementation of the compensation policy for market professionals.
  • Each year, companies send the French Commission Bancaire a report on compensation policy and practices. In addition, each year and prior to the Annual General Meeting, companies publish information relating to compensation. This covers the main features of the compensation policy, compensation amounts split into basic salary and variable compensation, the criteria used to measure performance, the amounts of outstanding deferred compensation, etc.

2. Variable compensation: methods that do not encourage excessive risk-taking, with a significant portion of variable compensation deferred and the introduction of a bonus-malus system

The variable component of the compensation is calculated based on the achievement of financial and non-financial objectives defined individually and collectively. The basis of assessment reflects the net profit of operations after taking into account all the costs (essentially the cost of risk, liquidity and capital remuneration).

The main provisions cover :


  • Guaranteed variable compensation prohibited : Guaranteed variable compensation is prohibited, except in the context of recruitment. In this case, the guarantee is strictly limited to 1 year.
  • A significant portion of variable compensation is deferred. Deferred variable compensation represents at least 50% of the variable compensation allocated to the professionals concerned.

- This figure must represent at least 60% for the highest compensation levels.

- Payment is deferred over at least three financial years subsequent to the year in which the variable compensation is allocated and it is conditional (cf bonus-malus system).

  • Securities or equivalent instruments represent at least 50% of the variable compensation allocated to the professionals concerned. These instruments are valued at the date of allocation of the variable compensation and are subject to a minimum acquisition or holding period that cannot be less than two years on average.
  • Application of the bonus-malus system: Actual payment of the deferred component, irrespective of the form (cash or security), is subject to conditions that are based on criteria related to the results of the company, the business line's activity and, if necessary, individual criteria. Accordingly, deferred variable compensation may be substantially reduced or not be paid at all.


(1) In accordance with conditions to be specified by the competent professional bodies, the rules are intended to apply also to financial market professionals in investment companies, asset management companies, insurance companies, private equity companies.

(2) According to the criteria of the AFEP-MEDEF corporate governance code for listed companies dated December 2008.

(3) AFEP - French Association of Private Companies; MEDEF - French Employers' Federation



APPENDICES: Professional rules concerning the governance variable compensation of financial market professionals.

CONTACT

Colette Cova
email : ccova@fbf.fr
Tel : 01 48 00 50 07

Kenza Benqeddi
email : kbenqeddi@fbf.fr
Tel : 01 48 00 50 08

 
 
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