The European Insurance and Occupational Pensions Authority (EIOPA) has published an opinion to promote consistent approaches to the supervision of remuneration. While the Solvency II Delegated Regulation provides requirements on remuneration, these are sufficiently high level and allow room for discretion. This opinion provides guidance to EU national supervisory authorities on how to apply the requirements. The opinion focuses on staff considered to be higher profile risk-takers.
The opinion begins by acknowledging that remuneration policies and practices can provide incentives to act in ways that undermine effective risk management. The Solvency II Delegated Regulation ((EU) 2015/35) requires all insurance and reinsurance firms to have remuneration policies. EIOPA has found that practices in respect of remuneration policies have diverged across the EU. The opinion states that supervisory authorities may choose to apply the guidance to staff that fall outside scope. EIOPA also reminds firms that for members of the administrative, management and supervisory body of the firm and the most highly paid employees of global systemically important insurers (G-SIIs) the Financial Stability Board’s Principles and Standards for Sounds Compensation Practice should also be taken into account.
Who does the Opinion apply to?
The opinion applies to the remuneration of staff in set categories whose variable remuneration exceeds EUR 50,000 and represents more than one third of their total remuneration. The categories include board members, other executive directors, key function holders and material risk takers.
What does the Opinion cover?
- The need for fixed and variable components of remuneration to be balanced so that employees do not become overly dependent upon the variable component. If a firm exceeds the threshold of a 1:1 ratio regarding any board members, other executive directors, key function holders, material risk takers and the supervisory authority should engage with the firm to investigate whether the remuneration policy is balanced with regard to the proportion of variable remuneration. Supervisory authorities should pay attention to very low fixed remuneration.
- A substantial portion of variable remuneration should be deferred. Deferral periods will vary depending on the business and risk profile. Deferral periods of 40 per cent are considered to be substantial. For deferral periods under 40 per cent, EIOPA recommends that supervisory authorities engage with the business to better understand why this is the case. EIOPA recommends that a deferral rate should be higher than 40 per cent where there is a high amount of variable remuneration, for example, where the ration is higher than 1:1.
- Both financial and non-financial criteria must be taken into account when performance is assessed. Where remuneration is performance related it should be assessed on the basis of the individual’s performance, the performance of the relevant business unit and the performance of the firm (or group to which it belongs). The criteria used in any assessment should be linked to the decisions made by the staff member and should ensure that the remuneration award process has an appropriate impact on the individual’s behaviour. Qualitative criteria should contribute value to the firm – such as compliance with law or regulation, achievement of strategic goals, Environmental, Social and Governance (ESG) criteria, customer satisfaction, ethical behaviour, staff turnover and corporate values. Non-financial criteria must be a proportionate element of the assessment.
- Performance measurement must include downwards adjustment for exposure to risks. Downwards adjustments should be considered by supervisors including malus clawback and in-year adjustments. Variable remuneration should not only be adjusted downwards when staff members do not meet their personal objectives, but also when their business units and/or the undertaking as a whole fail to do so.
- Termination payments must be related to performance and be designed in a way that does not reward failure. Remuneration policies should cover termination payments and should contain guidance on maximum payments or criteria for determining such payments. The opinion sets out what types of payment will fall within the principles.
EIOPA has said that it will begin monitoring adherence to this opinion two years after publication (i.e. after 7 April 2022).