November 2018 · English Only

Remuneration policies in the bank sector: the new (stricter) rules on golden parachutes are confirmed by the Bank of Italy

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REMUNERATION POLICIES IN THE BANK SECTOR: THE NEW (STRICTER) RULES ON GOLDEN PARACHUTES ARE CONFIRMED BY THE BANK OF ITALY

After completion of the public consultation opened in March this year1, the Bank of Italy finally issued on October 23, 2018 an updated version of Regulation No. 285/2013 (“Regulation 285”) on remuneration policies in the banking sector.

Banks and investment firms (società di intermediazione mobiliare) are now required to align with Regulation 285 by adopting compliant remuneration policies by the time the financial statements for fiscal year 2018 are approved2.

Among a number of significant changes, Regulation 285 introduces additional and more ed provisions in the sensitive area of golden parachutes.

First of all, banks are required to identify the minimum performance requirements which must be met in order for a risk taker to receive a golden parachute. In addition, the criteria and limits (in terms of number of annual salaries) for the determination of golden parachutes must be first approved by the shareholders’ meeting.  

In addition, golden parachutes must be considered for all purposes as variable remuneration and therefore:

(a)      included in the fixed/variable ratio; and

(b)    subject to all the limitations and conditions applicable to variable remuneration, including in terms of deferral and partial pay out in instruments.

To more clearly reflect the above, the notion of variable remuneration as revised by Regulation 285 now expressly includes, among others, the severance amounts paid by the bank at the time of termination to settle a potential or actual labour dispute (including therefore golden parachutes).

The Bank of Italy thus confirms an approach that partially departs from the EBA Guidelines of December 2015, according to which severance payments (including golden parachutes) should not be taken into account for the purpose of both the calculation of the fixed/variable ratio and the application of deferral and pay out in instruments, when they are agreed “on a settlement in case of a potential or actual labour dispute, to avoid a decision on a settlement by the courts” and where “the institution has demonstrated to the competent authority the reasons and appropriateness of the amount of the severance payment”.  

The Bank of Italy takes a much more prudential position and prefers to consider the amounts paid within the framework of a settlement agreement as variable remuneration for all purposes.

As a consequence, any amount given as severance at the time of termination, also when forcedly paid to avoid a lawsuit, is to be included in the fixed/variable ratio, is subject to deferral and must be partially paid out in instruments3.

As a partial exception to the above rule, the amounts paid on the occasion of a settlement agreement are excluded from the fixed/variable ratio (but still subject to deferral and partial pay out in instruments) if calculated on the basis of a pre-defined arithmetic formula to be reflected in the bank’s remuneration policy.

The same exclusion from the fixed/variable ratio applies also to the consideration paid for post-employment non-compete covenant which does not exceed, for each year of validity of the covenant, the last annual fixed remuneration4.

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1 The public consultation focused on the proposed amendments to Regulation No. 285, introduced mainly with a view to aligning its contents to the EBA Guidelines of December 2015 and complying with Articles 74(3) and 75(2) of Directive 2013/36/EU (so-called CRD IV). We examined the main changes proposed by the Bank of Italy in our April newsletter that you can find at http://www.legance.it/newsletter/remuneration-policies-in-the-bank-sector-new-rules-on-golden-parachutes.

2 Banks also have to align by April 1, 2019 the individual agreements for the members of strategic supervision, management and control bodies and by June 30, 2019 the individual agreements for the remaining personnel. National collective agreements should also be updated at the earliest occasion.

3 The prudent approach adopted by the Bank of Italy may in principle produce the effect of encouraging managers to start lawsuits related to their termination rather than settling the dispute out of Court; as a matter of fact, any indemnification for unfair termination that banks may be sentenced to pay, according to the national collective agreement, after a lawsuit or an arbitration, would not be subject to any fixed/variable ratio or deferral mechanism and would be payable fully in cash.

According to the new Regulation 285 the consideration paid for a post-employment non-compete covenant is not considered variable remuneration at all when its overall amount does not exceed the last annual fixed remuneration.


DISCLAIMER

The only purpose of this Newsletter is to provide general information. It is not a legal opinion nor should it be relied upon as a substitute for legal advice.