European banks’ executive remuneration under the new European Union regulation

Abstract

We review how the new European regulation of bank executive compensation could affect the future of banking in Europe. Although there is no conclusive empirical evidence on the relation between bank executive remuneration and the financial crisis, authorities have intensively regulated the compensation of bank managers to eliminate risk-taking incentives in the financial industry. However, the new regulation could have unintended consequences of creating an adverse selection problem at European banks, reducing the number of best-performing managers available for European banks, and motivating an excessive increase in fixed remuneration over total remuneration, altering the way incentive systems work.

Keywords:

• Corporate governance
• Single Supervisory Mechanism (SSM)
• banks
• remuneration systems
• identified staff
• board of directors

JEL Classification:

• G21
• G28
• M14

Acknowledgements

The authors are grateful to David G. Mayes, Rosaria Cerrone and to the seminar participants at the 2017 meeting on Reforming Banking Union that took place at University of Luxembourg. Any errors are the responsibility of the authors.

Notes

1. High earners (hereafter H.E.) are staff members who earn €1 m or more per financial year (regardless of whether or not they are “Identified Staff”).

2. CRDIV (art. 94(1)(g)).

3. The Identified Staff, as defined by the EBA (2015a), is the “staff whose professional activities have a material impact on the institution’s risk profile”. The EU issued the technical standards included in the Commission Delegated Regulation (EU) No 604/2014, supplementing CRD IV where the quantitative and qualitative criteria are set forth in order to identify categories of staff whose professional activities have a material impact on a bank risk profile.

4. (para. 75 et seq.) encoded in the CRDIV (art. 92(2)).

5. (para. 115 et seq.), in accordance with the CRD IV (art. 92(2)(g)).

6. Directive 2013/36/EU, Art. 94(1)(m).

7. CRD IV (Art. 94.(1)(l)).

8. Article 94(1)(n) of CRD IV.

9. In the EU there is still no unified approach to deposit insurance. European Commission efforts to introduce the European Deposit Insurance Scheme (EDIS) have not been successful thus far.

10. The RAF will be a key element in the evaluation of risk management at each bank (Jackson, 2015). An effective RAF provides a common means to understand, evaluate, and communicate the assumed risks (Delgado 2015). The elaboration of the RAF is no easy task since risk measurement, and the assignment of risk appetite to each division, department or subsidiary, or to each employee, are complex and difficult to accomplish ex ante.

11. Employing the data of the EBA (2014a, 2014b, 2015c, 2016 and 2017) from the H.E. of the top 10 European countries by number of H.E. as of 2015.