AIFMD: Remuneration Policies

Maria Chetcuti-Cauchi | 07 Nov 2013

Ccmalta Default

 

Malta AIFM remuneration

An AIFM license holder is required to have sound remuneration policies  in place in order to comply with the AIFMD. AIFs which are not internally managed and have appointed an external AIFM are not subject to the remuneration principles established in the AIFMD. An AIFM License holder is required to have remuneration policies for those categories of staff, including senior management, risk takers, control functions and any employee receiving total remuneration that puts them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the risk profiles of the License holder or of the AIFs it manages. When setting up remuneration polices, the license holder should carefully outline and define its long term objectives. These objectives should be present within the business plan so that remuneration will be in line with the risk appetite and general strategies of the license holder.  Such remuneration policies are applied to and inclusive of salaries and discretionary pension benefits. 

All remuneration can be divided into two categories;

  • Fixed remuneration : Example, payments or benefits without taking into consideration any performance criteria; or
  • Variable remuneration: additional payments or benefits which depends on performance or other contractual criteria

Both of these categories may include monetary payments in the form of cash, shares, pension contributions etc., or non (directly) monetary payments such as discounts, fringe benefits, or special allowances for car and mobile services amongst others.  AIFMs must comply with the principles set out in the AIFMD when applying remuneration, and in such a way that is proportionate and appropriate to their size, internal organization, and the nature, scope and complexity of their organization and activities.

A remuneration policy must cover all aspects of remuneration including fixed and variable components and specific benefits such as pension terms and severance pay. When a staff member leaves the license holder, the pensions shall not be paid out for five years and will be connected to an assessment on performance. No longer will it be allowed for members of staff that are leaving the license holder to receive large payouts without a performance and risk adjustment being considered. The underlying principle is that failure is not to be rewarded. Variable remuneration policies should be fully flexible thus allowing remuneration to not only decrease as a result of negative performance, but also that it can decrease to zero.

The License holder shall always ensure that it maintains a balance between a sound financial situation and the pay out of variable remuneration. The license holder must be responsible to ensure that its financial situation won’t be negatively affected by the amount of variable remuneration that will be awarded that year, nor the amount of variable remuneration that will be approved or paid in that year. The management body, in its supervisory function, must review, at least annually, the remuneration policies. Depending on the size, internal organization and the nature, scope and complexity of the activities of the license holders, the supervisory body may be internal (by management) or separate. However if an internal supervisory body is in place , the remuneration policies should not be primarily controlled by executive members of the supervisory function, but shall cooperate with the remuneration committee and control functions.

The Principles

a) the remuneration policy is consistent with and promotes sound and effective risk management and does not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the AIFs they manage;

(b) the remuneration policy is in line with the business strategy, objectives, values and interests of the AIFM and the AIFs it manages or the investors of such AIFs, and includes measures to avoid conflicts of interest;

(c) the management body of the AIFM, in its supervisory function, adopts and periodically reviews the general principles of the remuneration policy and is responsible for its implementation;

(d) the implementation of the remuneration policy is, at least annually, subject to central and independent internal  review for compliance with policies and procedures for remuneration adopted by the management body in its supervisory function;

(e) staff engaged in control functions are compensated in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control;

(f) the remuneration of the senior officers in the risk management and compliance functions is directly overseen by the remuneration committee;

(g) where remuneration is performance related, the total amount of remuneration is based on a combination of the assessment of the performance of the individual and of the business unit or AIF concerned and of the overall results of the AIFM, and when assessing individual performance, financial as well as non-financial criteria are taken into account;

(h) the assessment of performance is set in a multi-year framework appropriate to the life-cycle of the AIFs managed by the AIFM in order to ensure that the assessment process is based on longer term performance and that the actual payment of performance-based components of remuneration is spread over a period which takes account of the redemption policy of the AIFs it manages and their investment risks;

(i) guaranteed variable remuneration is exceptional, occurs only in the context of hiring new staff and is limited to the first year;

(j) fixed and variable components of total remuneration are appropriately balanced and the fixed component  represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy, on variable remuneration components, including the possibility to pay no variable remuneration component;

(k) payments related to the early termination of a contract reflect performance achieved over time and are designed in a way that does not reward failure;

(l) the measurement of performance used to calculate variable remuneration components or pools of variable remuneration components includes a comprehensive adjustment mechanism to integrate all relevant types of current and future risks;

(m) subject to the legal structure of the AIF and its rules or instruments of incorporation, a substantial portion, and in any event at least 50 % of any variable remuneration consists of units or shares of the AIF concerned, or equivalent ownership interests, or share-linked instruments or equivalent non-cash instruments, unless the management of AIFs accounts for less than 50 % of the total portfolio managed by the AIFM, in which case the minimum of 50 % does not apply.

The instruments referred to in this point shall be subject to an appropriate retention policy designed to align incentives with the interests of the AIFM and the AIFs it manages and the investors of such AIFs. Member States or their competent authorities may place restrictions on the types and designs of those instruments or ban certain instruments as appropriate. This point shall be applied to both the portion of the variable remuneration component deferred in line with point (n) and the portion of the variable remuneration component not deferred;

n) a substantial portion, and in any event at least 40 %, of the variable remuneration component, is deferred over a period which is appropriate in view of the life cycle and redemption policy of the AIF concerned and is correctly aligned with the nature of the risks of the AIF in question.

The period referred to in this point shall be at least three to 5 years unless the life cycle of the AIF concerned is shorter; remuneration payable under deferral arrangements vests no faster than on a pro-rata basis; in the case of a variable remuneration component of a particularly high amount, at least 60 % of the amount is deferred;

(o) the variable remuneration, including the deferred portion, is paid or vests only if it is sustainable according to the financial situation of the AIFM as a whole, and justified according to the performance of the business unit, the AIF and the individual concerned.

The total variable remuneration shall generally be considerably contracted where subdued or negative financial performance of the AIFM or of the AIF concerned occurs, taking into account both current compensation and reductions in payouts of amounts previously earned, including through malus or clawback arrangements;

(p) the pension policy is in line with the business strategy, objectives, values and long-term interests of the AIFM and the AIFs it manages.

If the employee leaves the AIFM before retirement, discretionary pension benefits shall be held by the AIFM for a period of 5 years in the form of instruments defined in point (m). In the case of an employee reaching retirement, discretionary pension benefits shall be paid to the employee in the form of instruments defined in point (m), subject to a 5 year retention period;

(q) staff are required to undertake not to use personal hedging strategies or remuneration- and liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements;

(r) Variable remuneration is not paid through vehicles or methods that facilitate the avoidance of the requirements of this directive.

These principles apply to any type of remuneration paid by the AIFM, to any amount paid directly by the AIF itself, including carried interest, and to any transfer of units and/or shares of the AIF made to the those categories of staff.

Proportionality

The License holder must ensure that remuneration policies are appropriate to its size, internal organization and the nature, scope and complexity of its activities. Not all license holders will have to give substance to the remuneration requirements in the same way. Although the remuneration principles listed above are applicable to all license holders, proportionality may lead, on an exceptional basis and taking specific facts into account, to the disapplication of some of the requirements if this is suitable with the risk profile and strategies of the license holder and the AIF it manages. If the license holder feels as though some requirements may be dis applied, it must explain each point and rationale to the MFSA. The MFSA will review the way in which the license holder actually implements proportionality.

Different risk profiles among different license holders justify a proportionate implementation of the remuneration policies. Proportionality shall also apply to different categories of staff. Those categories of staff whose professional activities have a material impact on their risk profile should comply with specific requirements. These specific requirements aim to manage the risk that their activities entail.  The same criteria of size, internal organization and the nature, scope and complexity of these activities should apply.  When appropriate, considering the size of the license holder and its nature, scope and complexity, the management body should not determine its own remuneration.  The supervisory function should determine and oversee the remuneration of the management body members. In cases where a license holder has a separate supervisory function, in order to combat possible conflicts of interests, a fixed remuneration policy should be considered for members of the supervisory function. In those cases where the supervisory function is internal, fixed remuneration should only be given to those non-executive members of the management body that perform the tasks of the supervisory function. Depending on the license holders’ characteristics, approval of the remuneration of the management body may be assigned to the shareholders.

The Remuneration Committee

The remuneration Committee will be established for those license holders that are significant in terms of its size or the size of the AIFs they manage.  The committee shall be set up in a way that allows it to judge remuneration policies competently and independently. The committee’s chairperson shall be a member of the management body who does not perform any executive responsibilities in the license holder. The rest of the committee members shall be members of the management body who do not perform any executive functions.  A number of committee members should have sufficient expertise concerning risk management and control activities. The CEO of the license holder should not be involved in meetings which discuss his/her remuneration.  The committee will be able to advice and support the supervisory function on remuneration policies and also review the possible appointment of external remuneration consultants. Formal reviews must be made by the committee in order to test how the remuneration system will react to future external and internal events. The committee should have full access to all data regarding the decision making process of the supervisory function on the remuneration systems, and provide information to the supervisory function, and where appropriate, to the shareholders meetings about the activities performed.

Control Functions

Control functions should be in place to have an active role in the design and ongoing review of the remuneration policies and also for other business areas. These control functions should work alongside the management body, the committee and the supervisory function to assist in determining remuneration strategies and help to maintain effective risk management. The remuneration level of staff in the control functions should allow the license holder to employ experienced and qualified employees in the functions such as compliance officers, risk managers and internal auditors. If the control function staff are to receive variable remuneration, it should be based on function specific objectives and should not compromise their independence or create conflicts of interest in their role as advisors to the committee. The remuneration of those members of staff that head the control functions, should not be left solely to the supervisory function but also overseen by the remuneration committee.  Members of staff within the control function should not be in a position to receive an increase or a decrease in their variable remuneration if they approve a transaction or give specific advice on financial and risk matters.

A remuneration policy must cover all aspects of remuneration including fixed and variable components and specific benefits such as pension terms and severance pay. When a staff member leaves the license holder, the pensions shall not be paid out for five years and will be connected to an assessment on performance. No longer will it be allowed for members of staff that are leaving the license holder to receive large payouts without a performance and risk adjustment being considered. Such payments shall not reward failure. Variable remuneration policies should be fully flexible thus allowing remuneration to not only decrease as a result of negative performance, but also that it can decrease to zero.

Disclosure

A license holder should disclose its remuneration policies that are in place; however this should not have any adverse effects on confidentiality agreements and data protection legislation. 


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