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: Jim Hamilton's World of Securities Regulation

By Jim Hamilton

Swiss Regulator Proposes Remuneration Regime Delinked from Excessive Risk Taking

The Swiss Financial Markets Supervisory Authority proposes to regulate the remuneration of all financial institutions, not just systemically relevant ones, in a way that delinks excessive risk from bonuses and other variable compensation. The regulation of compensation would extend beyond requiring disclosure of the remuneration received by senior management to mandate summary disclosure of the remuneration structure for all employees. The FINMA requirements are broadly in line with the executive compensation principles laid down by the Financial Stability Board, which were recently endorsed by the G-20.

FINMA wants to ensure that remuneration systems do not provide incentives to employees to take inappropriate risks that could threaten the stability of financial institutions. Bonuses and other forms of variable compensation would have to be structured on a sustainable and long-term basis in line with economic profit while taking into account the costs related to all risks entered into. Further, corporate boards would be responsible for the remuneration policy of the entire company and would be required to disclose the company?s policy in a remuneration report.

The FINMA proposal would mandate that the criteria used to award bonuses and other variable remuneration cannot be based on the short-term performance of individual company units and employees. This is to prevent employees from pursuing targets that have little to do with the long-term success of the company or that do not take into account the risks entered into. Deferred remuneration components must be subject to fluctuations in value during the holding period so as to further increase risk awareness and the incentive for sustainable business. If the company performs negatively, deferred remuneration should make up the majority of the variable remuneration, as it is linked to the company?s success and only increases in value once the economic situation of the company has improved

More broadly, FINMA believes that remuneration systems should increase employees? risk awareness. FINMA views variable remuneration as the employees' stake in the success of the company and requires that all variable remuneration paid out must actually have been earned by the company over the long term. By contrast, variable remuneration is not paid if a company does not perform well. FINMA defines success based on economic profit. As a result, a company only creates added value if an excess remains after deducting the full risk-adjusted cost of capital. The more sustainable a company?s positive performance, the more employees can benefit from variable remuneration

Full post as published by Jim Hamilton's World of Securities Regulation on June 05, 2009 (boomark / email).