Guidelines on Remuneration Practices Introduction to key - PowerPoint PPT Presentation

www.pwc.com Overview of SBP’s Guidelines on Remuneration Practices

Introduction to key requirements

Globally, organisations are experiencing a paradigm The global picture shift in remuneration practices Rules based requirements (CRD IV or equivalent) Principles based guidelines (FSB, BCBS, OECD Principles or equivalent) No formal regulation Certain examples of countries with Insufficient data similar guidelines Argentina R Italy R Australia P Japan P Brazil R Korea P Europe Bahrain P Mexico R North America Canada P Qatar P China P Saudi R Arabia France R South-East Switzerland R Germany R Asia South Asia United R Hong Kong P Kingdom Africa South India R United P America Indonesia P States Australia 3

These guidelines will have pervasive entity-wide impacts on strategic, business, HR, risk and operating models Industry dynamics are likely to significantly alter due to: Underlying complexity around design and implementation; and • • Eventual culmination of strategic, HR and risk management sophistication Applicability • Minimum applicability on: a) All MRTs and MRCs of the local operations (including the CEO and other members of senior management), whose actions may have the potential for significant impacts/ risks to the institutions b) All Country Heads of overseas operations (as MRTs) c) All CEOs/ COOs of fully owned local and foreign subsidiaries (as MRTs) – e.g. MFBs, AMCs, insurance companies, capital market entities etc. d) For b) and c) above, regulations not applicable if the foreign branch/ subsidiary subject to similar regulations in the host country • Banks with branch mode in Pakistan to confirm that parent fully complies with similar regulations in home jurisdictions 4

Implementation will require use of emerging performance measurement methodologies Risk adjusted balanced scorecard • Risk adjusted balanced scorecards for all MRTs and MRCs across the entity • Remuneration framework to clearly address all major types of risks and their treatment for determination of risk adjusted compensation • Remuneration practices to be aligned with short and long term business objectives • MRC compensation not to be determined or influenced by the profitability of functions or areas which they review Pay structure MRTs: • Remuneration to compose of variable and fixed components with mix of cash, equity and other forms to be consistent with risk alignment • Mix may vary depending on the employee’s position and role, scorecard/matrices to explain the rationale for the mix recommended for each position MRCs: Fixed > Variable (except in exceptional circumstances approved by BRC) 5

Deferrals are meant to encourage long-termism vs. short- termism and discourage excessive risk taking Deferred component • An appropriate proportion of variable pay of MRTs to be withheld / deferred • Remuneration policy to provide for the basis of calculation of deferred pay and deferment period Deferral period • Min 3 yrs for MRTs (proportionate payments subject to malus) • Compensation payout schedules to be sensitive to time horizon of risks • Remuneration framework to recommend different ranges of variable compensation and time periods of deferred payments for different risk takers Management of deferred benefits • Management of deferred pool within the entity; and/or • New fund with along a management function and governance mechanism 6

Board’s ownership and supervision of the remuneration programme is key to delivering success BRC composition BoD performance Pay gap assessment • Non-exec. preferably In accordance with BPRD Remuneration policy to cover independent directors in Circular No. 11 of 2016 pay gap provisions : majority. In case, dated August 22, 2016 which • Reasonable pay gaps independent directors not in requires assessment of: between highest and lowest majority, then • Overall Board paid employees across chairmanship shall be various levels as well as • Board Committees with an Independent across the organisation • Individual Members Director. • Discourage benefit • BRC members to be suitably concentration qualified and experienced with sufficient understanding of MRTs and MRCs, and risks emanating from their activities 7

Major stages in remuneration design and implementation

Certain major enterprise-wide initiatives to be undertaken concurrently by December 2017 Review existing remuneration BRC ToRs and monitoring mechanism governance structure for implementation • Amendments in BRC composition • Updating BRC ToRs • Enhancements of BoD ToRs • MIS packs, reporting structures, type of • Capacity building through orientations and information and how it will flow together other means with the decision structure Identification of MRTs and MRCs • Engaging all significant stakeholders • Role criticality assessment through including HR, Risk, Finance, Operations, reviews of structures, JDs, delegations, Strategy, BUs etc. authority limits, significance of client segments, portfolios and products • Reasonable and concrete inclusion criteria managed, transaction remits, committee • Assessment of risks embedded in the membership and authorities (group of risk activities of all potential in-scope takers/ collective risk takers) etc. employees; such as credit, market, • Reviews of existing performance appraisal operational, interest rate, liquidity, fraud, processes IT, strategic/ reputational etc.) • Designating select employees as either MRTs or MRCs 9

Risk adjusted balanced scorecards will converge with many strategic, operational, HR, IT and risk initiatives Improvements in existing environment and system acquisitions / alignments • Current state assessment of strategic • Streamlined data, process and IT framework, KPIs/ scorecards, processes, environment to enable transparent database, systems, MIS and risk capabilities application of scorecards • Conceiving transition solutions to ensure best • Implementation plan to target optimum possible implementation state state, with responsibilities and timelines Remuneration policy and risk adjusted balanced scorecards with supporting KPIs • Employee compensation structures • Targets at BU and employee levels separately for MRTs and MRCs aligned with entity’s strategic objectives • Corporate/ CEO scorecard articulating • Balancing the customer experience, HR the strategic targets and operations aspects with business objectives • Strategic framework to support best practice scorecard development/continuous update • Pay structure and deferrals for various levels of MRTs • Risk adjusted balanced scorecards for all MRTs and MRCs 10

Implementation by December 2018 will require carefully designed models and persistent change management Other design initiatives • Mechanism for deferred pool management • Quarterly progress reports to BRC and final submission to SBP. First report will be as of March 2017, to be submitted to SBP by April 2017 • Change management: Across the board discussions and acceptance, involving relevant stakeholders from Board and all tiers of management, regarding the detailed requirements, their salient features and foreseeable benefits/ impacts with the objective to foster a risk responsible culture Implementation initiatives (by December 2018) • Implementation of risk adjusted remuneration models across the converged business areas/MRTs and MRCs, as designed in Phase ‐ 1 • Improvements in overall business, HR, risk management environment and risk adjusted balanced scorecards 11

Actions and challenges in compliance journey

Firms will have to develop concrete and reasonable MRT and MRC inclusion criteria Broad guidelines for inclusion 1. President/ CEO/ COO 2. Direct reportee to the President/ CEO/ COO 3. Country Heads of overseas operations 4. President/ CEO/ COO of fully owned local and foreign subsidiaries 5. Direct reportees to the members of senior management managing those critical functions, as determined by BRC 6. All other Material Business Unit heads managing assets greater than or equal to a specific threshold, as decided by BRC 7. With regard to credit risk transactions, employee: • is responsible for proposing credit proposals, or structuring credit products; or • has authority to take or approve a decision on such credit risk exposures; or • is a member of a committee which has authority to take the decisions; of transaction greater than or equal to specific threshold, as determined by BRC 13

7. In relation to treasury portfolio, head of a treasury desk, including money market, equities, FX, derivatives, sales etc. or a direct reportee to such head. 8. The employee has the authority to take decisions regarding new products or is a member of a committee having such authority BRC may identify additional employees as MRTs or MRCs based on their risk profiles Globally, banks have sizeable number of MRTs and MRCs to govern, under their risk aligned remuneration framework Jurisdiction Bank Employees MRTs & MRCs UK Barclays 45,700 1,523 UK RBS 21,421 707 UK ING Bank 15,209 711 Europe Dankse Bank 19,000 895 Europe Deutsche Bank 98,138 2,903 Europe Commerzbank 48,360 1,225 Europe Piraeus Bank 14,299 346 14