New Regulations on bonus payments to bank employees

Date 19 jul. 2010

On 7 July 2010 the EU Parlament enacted proposal for a directive of the European Parliament and of the Council amending Directive 2006/48/EC, regarding capital requirements applicable to the transaction supply and resecuritisation and  supervision with compensation policies.

 

The content of the proposal is motivated by an idea that, among other things, unpro-portional compensation policies have caused unsecure risk taking in the bank sector, which contributed to the financial crisis.

 

The purpose of the proposal is to prevent excessive risk taking, which an unproportional bonus payment can contribute to.

The consequences of the new proposal are as follows:

  • Beginning 1 January 2011, cash bonuses may not exceed 30% of the total bonus and 20% if it is a special bonus.
  • Between 40% and 60% of every bonus must be withheld for a minimum of three years. If the financial institution investments do not develop as expected, the institution may revoke the bonus.
  • A minimum of 50% of the bonus must be paid in conditional capital or shares. Condition capital means that in the event the financial institution experiences difficulties, it may revoke the bonus.

The new EU regulations also require financial institutions to implement proportional limitations on bonuses. The purpose is to prevent payment of bonuses of unproportional sizes. The rules are meant as a preventive measure to avert the risk a future financial cirisis by limiting bank employees’ incentives to conduct excessively risky short-term investments. 

 

Bonuslike Pension Payments
In order to promote the purpose of the regulations, all types of compensation are subject to the financial institutions’ new compensation policies, including bonuslike pensions. Consequently, extraordinary pension payments are subject to the new withholding requirements, for example as conditional capital that can be revoked if the financial institution encounters difficulties.

 

The purpose of this is to prevent bank employees from receiving pension that in reality are bonuses that have been paid in contravention of the bank’s best interests. The regulation is therefore aimed at preventing that the bonus payment rules are circumvented.

 

Special Regulations Applicable to Financial Institutions Who Have Received Fi-nancial Aid

The proposal also includes special rules applicable to financial institutions who have received financial aid. These institutions are not allowed to pay bonuses, unless such payment is based on specific reasons. 

 

The EU Parlament’s decision will be presented to the EU Counsel in mid-July 2010, the latter of which must ultimately approve the agreement. 

 

The new regulations will become effective 1 January 2011.

 

If you have questions regarding the above or require additional information on bonus payments to employees in financial institutions, please contact attorney Claus Molbech Bendtsen (cmb@mwblaw.dk) or junior associate Pinar Gökcen (pgo@mwblaw.dk).
 
The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.