Remuneration As A Governance Tool: Lessons From Solvency II

Introduction

Remuneration has traditionally been viewed as a compensation matter: namely how much, in cash and bonuses, should directors be compensated for their services. Increasingly, however, remuneration is being recognised as a governance tool. The focus has shifted from the amount of remuneration awarded to the behaviours that remuneration structures incentivise. Well-designed remuneration structures may encourage prudent risk-taking, long-term value creation and customer protection. Conversely, poorly designed remuneration structures may encourage excessive risk-taking and short-termism.

As a result, remuneration has become a central governance tool for boards, regulators, shareholders and other stakeholders alike. This trend is particularly evident under Commission Delegated Regulation (EU) 2015/35¹ (“CDR”) within the Solvency II framework, Directive (EU) 2016/97² on Insurance Distribution (“IDD”), and, more broadly, in current governance disputes, such as the litigation