The Finnish Financial Supervisory Authority’s (FFSA) recommendation on remuneration principles in the financial sector is mainly based on the European Commission’s recommendation on remuneration policies in the financial services sector of 30 April 2009. It intends to ensure, inter alia, that remuneration mechanisms within entities supervised by the FFSA do not include features that increase risk taking or diminish the stability of such entities or even the whole financial markets.
It is suggested that financial institutions establish and maintain remuneration policies that cover the whole personnel of the financial institution in question. The recommendation should, nevertheless, be applied in particular when remunerating the Managing Director and such other persons whose actions have a material impact on the risk exposure of the financial institution. Remuneration policies should be consistent with sound and effective risk management and should not induce excessive risk taking. Further, they should be in line with the business strategy, objectives, values and long term interests of the financial institution, and be consistent with the principles relating to the protection of clients and investors.
The recommendation includes guidelines as to striking an appropriate balance between the fixed and variable elements of pay. Further, it is recommended, inter alia, that the payment of the major part of any substantial bonuses or other variable components of remuneration should be deferred by at least three years and that the financial institution should have the ability to withdraw bonuses that are paid after the realization of a relevant risk factor. As to performance measurement, performance related remuneration should be based on an overall assessment reflecting individual performance as well as the performance of both the relevant business unit and the entire financial institution with due consideration of all the risks. Also, performance should be assessed against a multi-year framework and the payment of bonuses should recognize the relevant business cycle of the financial institution. It is further recommended, inter alia, that significant financial institutions would set up their own remuneration committees, independent control over the effectiveness and implementation of remuneration policies would be established and that relevant details of remuneration policies would be disclosed in a transparent manner.