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Remuneration practices in the financial sector

February 2010 - Finance. Legal Developments by Norrbom Vinding Law Firm, member of ius laboris.

More articles by this firm.

On 27 January 2010, the Danish Government presented its – long awaited – proposal to regulate remuneration and bonus structures in the financial sector.

For some time now, pay and bonus structures in the financial sector have been much debated both in Denmark and abroad - a debate prompted, among other things, by the European Commission's recommendation on remuneration policies in the financial services sector. The debate has not so much centred on whether to regulate remuneration practices in the financial sector, but rather on the scope of such regulation - in order to ensure a sound banking system in the long term. With the proposal, the Danish Government believes, an appropriate balance has been struck between regulating risk-taking and safeguarding competition for the best talent.  

There are five main features in the proposal:  

Recommendations from the Danish Corporate Governance Committee
First of all, the Government proposes to encourage all financial enterprises - also unlisted ones - to comply with the recommendations on remuneration policies for executive boards and boards of directors soon to be issued by the Danish Corporate Governance Committee. The recommendations are expected in April 2010 and to recommend, among other things, that financial enterprises should have in place a clear and transparent remuneration policy adopted by the general meeting.  

Binding remuneration code of practice
The next feature of the proposal is directed at executives and others who take significant risks on behalf of the enterprise. Those individuals, it is proposed, should be subject to a binding remuneration code of practice - a code intended to ensure that remuneration practices promote sound and effective risk management and do not encourage excessive risk-taking. The code would be drawn up by five organisations in the sector - the Danish Bankers Association, the Danish Insurance Association, the Association of Danish Mortgage Banks, the Danish Mortgage Banks' Federation and the Danish Employers' Association for the Financial Sector.  

Supervision of remuneration policies
Remuneration policies in the financial sector, it is proposed, should be supervised by the Danish FSA. The purpose is to ensure an appropriate balance between variable and fixed remuneration components so that individual employees' personal finances will not be entirely dependent on whether a bonus is paid. The purpose is also to ensure that when a significant bonus is awarded, the risks associated with the performance underlying the bonus will be taken into account. In addition, the Danish FSA would ensure that significant bonuses will be based on long-term performance periods and that at least 60% of major bonus payouts will be deferred over at least three years. The deferred element of the bonus would not be paid out if the data on which the bonus is calculated turn out to be misstated or unsustainable in the long term.  

Duty to disclose variable remuneration components
In order to ensure greater transparency of remuneration policies, the Danish Government proposes requiring financial enterprises to disclose in their annual financial statements the percentage of their payroll bill which is variable.  

Disclosure of variable remuneration of employees with customer contact
Finally, financial enterprises would be required to inform customers if employees with customer contact receive variable remuneration based on sales performance.  

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On 27 January 2010, the proposal was presented to the political parties behind the credit package and the proposal is therefore only intended as a basis for discussion. And given the political parties' disagreement about what regulatory measures to introduce to regulate remuneration practices in the financial sector, the proposal will most likely be amended.