The European Union (EU) has had its sights set on regulating executive pay for many years. Following the 2007–2008 global financial crisis, the Financial Stability Board (FSB) published 'Principles for Sound Compensation Practices' in April 2009 and 'Principles for Sound Compensation Practices – Implementation Standards' in September 2009. The EU, as a member of the FSB, quickly asserted that incentive arrangements were a significant factor motivating the excessive risk taking that allegedly led to the crisis, and introduced significant regulatory controls over pay in the financial services sector.

EU-wide regulation, as opposed to regulation on a national level, is intended to ensure a consistent approach throughout all Member States. The EU believes this is crucial due to competitive pressures in the financial services sector and the fact that many firms have cross-border operations. The initial focus of this regulation was on banks and investment firms. However, the EU has since expanded regulation to other subsectors, including asset managers and insurers.

Key developments regulating pay in the financial services sector include the:

a Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR) (Section II);

b Alternative Investment Fund Managers Directive (AIFMD) (Section III);

c Undertakings for Collective Investment in Transferable Securities Directive (UCITS V) (Section III);

d Solvency II Regulation (Section IV); and

e Markets in Financial Instruments Directive (MiFID II) (Section V).

The EU has also published other requirements that impact on executive pay. These include share dealing rules under the Market Abuse Regulation (MAR) and corporate governance developments under the Shareholder Rights Directive (SRD) (Section VI).

EU requirements are highly detailed. This chapter is not intended to be comprehensive, but will instead alert you to relevant issues and trends that you should be aware of.

EU requirements that impact on executive pay are amended and updated from time to time. Potential updates of particular note are CRD V and CRR II (which are currently under negotiation – please see Section II for more details), which contain proposals aimed at tackling unequal pay in the financial services sector by mandating a gender neutral remuneration policy. Financial services firms may well find themselves subject to EU gender pay regulations in the future, in addition to the voluntary codes that currently exist (such as the Women in Finance Charter, which applies in the United Kingdom) and any individual Member State legislative requirements that may apply.


In 2010, the EU adopted CRD III.2 This Directive3 created the bulk of the rules that regulate remuneration of executives and material risk-takers in credit institutions and certain investment firms. The rules were based on the FSB principles and significantly changed how those firms pay their staff.

Further rules were added in CRD IV.4 One significant addition was a cap on the variable pay of material risk-takers to 100 per cent or, with shareholder approval, 200 per cent of fixed remuneration, known as the 'bonus cap'. When CRD IV was introduced, the EU also adopted CRR to harmonise remuneration disclosure by CRD-regulated firms.5

CRD and CRR rules must be read in conjunction with the 'Guidelines on Sound Remuneration Policies' published by the European Banking Authority (EBA) in June 2016. These guidelines clarify expectations under CRD and CRR and also impose additional rules. The guidance was mandated by CRD IV and applied from 1 January 2017.

i Scope

CRD and CRR apply to credit institutions and certain investment firms at group, parent company and subsidiary level, including those outside the EU. This means that the rules cover non-EU subsidiaries and branches of regulated EU firms, as well as EU subsidiaries of non-EU institutions.

CRD and CRR also apply to employees 'whose professional activities have a material impact on their employer's risk profile' ('identified staff' or 'material risk-takers'), that is, senior management, other risk-takers, employees in control functions and employees in the same remuneration bracket as senior management and risk-takers. In 2014, the EU published regulatory technical standards to clarify the identification of 'material risk-takers' under CRD and CRR. The technical standards use qualitative and quantitative criteria to identify staff.6

A key concept of CRD is the 'proportionality principle'. It is recognised that firms may apply the rules differently according to their size, internal organisation and the nature, scope and complexity of their activities. There is currently a lack of clarity on the application of the proportionality principle. Some Member States interpret the proportionality principle as enabling the disapplication of certain principles. However, the EBA disagrees with this application under the current drafting.

The EU Commission has published proposed revisions to the CRR and CRD IV in the form of CRR II and CRD V. CRR II and CRD V are currently subject to discussions within the EU legislative bodies and should be finalised by the end of 2018 in order to come into force in early 2019 (subject to a transition period to mid 2020). It is anticipated that the CRR II and CRD V will restrict the application of the proportionality principle.

The EU Commission also published legislative proposals in December 2017 for the Investment Firms Regulation7 (IFR) and the Investment Firms Directive8 (IFD) introducing a revised EU prudential framework for investment firms. The proposed IFR and IFD would together make changes to CRR, CRD IV and MiFID II with the aim that the changes would dovetail with CRR II and CRD V. The proposed IFR and IFD divide investment firms authorised under MiFID II into three categories, referred to as Class 1, 2 and 3 firms (Class 1 being systemically important investment firms, Class 2 being non-systemically important investment firms and Class 3 being small and non-interconnected investment firms). The proposal is that the remuneration requirements of Class 1 firms will be subject to CRD V and CRR II in full, with Class 2 and Class 3 firms being subject to somewhat less restrictive remuneration requirements.

ii Rules

CRD seeks to encourage effective risk management and avoid short-term gain at the expense of long-term results. CRD includes requirements that:

a there is an appropriate ratio between fixed and variable remuneration. This includes the 'bonus cap', which limits material risk-taker variable pay to 100 per cent or, with shareholder approval, 200 per cent of fixed remuneration. The approval requires acceptance by at least 66 per cent of shareholders who own 50 per cent of shares, or 75 per cent of votes if 50 per cent of shares are not represented, and the resolution must be subject to a range of notification formalities. When calculating the bonus cap, a discount can be applied up to 25 per cent of total variable remuneration, enabling more remuneration to be awarded, provided it is paid in instruments with deferral of at least five years;

b variable remuneration must be subject to risk adjustment and be fully flexible. This means that firms must be able to reduce variable remuneration if negative performance occurs;

c under no circumstances may the total variable remuneration limit the ability of a firm to strengthen its capital base;

d performance assessment must be set in a multi-year framework, ensuring that short-term performance will not have a considerable impact on the amount to be paid out;

e between 40 and 60 per cent of variable remuneration must be deferred. The appropriate deferral period depends on the impact that a relevant staff member may have on the firm's risk profile as well as the total variable remuneration. The higher the total variable remuneration, the higher the minimum deferred percentage must be. In any case, deferral must be for at least three to five years and must be in line with the nature of the business, its risks and the activities of the relevant member of staff;

f at least 50 per cent of all variable remuneration must be delivered in the shares or share-linked instruments, equivalent non-cash instruments in the case of a non-listed firm or, if appropriate, in any other instruments reflecting the credit quality of the firm.9 The 50 per cent minimum threshold must apply equally to each of the non-deferred and the deferred parts;

g institutions must establish a retention policy for their up front and deferred instruments that aligns the employee's incentives with the institution's long-term interests;

h variable remuneration should only be paid or vested if it is sustainable according to the financial situation of the firm. Firms must set up adjustment mechanisms, including malus (arrangements that permit the institution to reduce unvested or deferred remuneration) and clawback (arrangements that require repayment of vested variable remuneration) where certain triggers occur;10

i guaranteed bonuses must be limited to the first year of employment and in the context of hiring new staff;

j severance payments must reflect performance achieved over time and not be designed to reward failure;

k staff must not use personal hedging or insurance to undermine the risk alignment effects of the rules; and

l if an employee leaves before retirement, discretionary pension benefits should be held by the firm for five years in instruments linked to long-term performance, such as shares and share-linked instruments. For retiring employees, discretionary pension benefits should be paid in those instruments and also be subject to five-year retention.

The rules also cover general remuneration governance. These include requirements concerning remuneration policy, such that it must be consistent with and promote sound and effective risk management and not encourage risk taking exceeding the firm's tolerated risk level, and the policy and its implementation must be subject to annual independent review. There are also rules concerning the remuneration of control functions, and a requirement for certain firms to have an independent remuneration committee.

The EBA guidance also provides for additional requirements, including a prohibition on the payment of interest or dividends on instruments that have been awarded as variable remuneration under deferral arrangements to identified staff. This includes a prohibition on paying such interest or dividends when the deferral period ends. The payment should instead be treated as received and owned by the firm. This is understood to have implications for the valuation of awards when considering the value of variable remuneration for the purposes of the bonus cap.

iii Disclosure

Substantive remuneration disclosure requirements are found in CRR. Relevant firms must publicly disclose remuneration information at least annually. The disclosure may be a stand-alone report or be included in the firm's annual report. The disclosures are qualitative and quantitative.

Qualitative disclosures include information about the decision-making process for determining remuneration policy, information about the link between pay and performance, and the most important remuneration design characteristics, including information on criteria used for performance measurement and risk adjustment, as well as deferral policy and vesting criteria.

Quantitative information is broken down by business area and identified staff category and includes:

a amounts of fixed and variable remuneration;

b amounts and forms of variable remuneration, split into cash, shares, share-linked instruments and other types;

c amounts of deferred remuneration awarded during the financial year; and

d amounts of sign-on and severance payments awarded.

Firms must disclose numbers of individuals remunerated €1 million or more per financial year, separated into bands of €500,000, and for remuneration of €5 million and above, separated into bands of €1 million. Firms must also submit data regarding high earners and remuneration benchmarking11 to national authorities, who then forward the data to the EBA. Firms that maintain a website must explain on it how they comply with the CRD rules.

The EBA guidance clarifies the disclosure requirements but there is also additional guidance available.12



Firms authorised to conduct regulated activities under AIFMD13 will be subject to the applicable remuneration rules implemented in 2013. AIFMD has to be read in conjunction with the 'Guidelines on sound remuneration policies' published by the European Securities and Markets Authority (ESMA) in February 2013. A minor amendment to the Guidelines regarding the application of the rules where the manager forms part of group was published in March 2016.

The remuneration rules apply to all alternative investment fund managers (AIFMs) authorised under AIFMD, that is, to all EU AIFMs that manage or market alternative investment funds (AIFs) regardless of whether they are EU or non-EU AIFs. This includes managers of hedge, private equity, venture capital, commodity, infrastructure and real estate funds. Like CRD, AIFMD applies to the remuneration of those categories of staff whose professional activities have a material impact on the risk profiles of the AIFMs or of the AIFs they manage, including senior management, risk-takers, control functions and employees in the same remuneration bracket as senior management or risk-takers.

As with CRD, AIFMD rules are based on the FSB principles and are broadly the same, and so align with the CRD III/IV requirements. There are, however, key exceptions. For example, for AIFMD firms:

a there is no bonus cap;

b the minimum non-cash instrument requirement must be paid in units or shares of the AIF concerned, equivalent ownership interests, or share-linked instruments or equivalent non-cash instruments; and

c the deferral period for deferred remuneration must be linked to the life cycle of the underlying AIF.

Also, as with CRD, certain AIFMs must establish a remuneration committee. In terms of disclosure, any AIFM seeking to obtain authorisation under AIFMD must disclose details of its remuneration policies and practices to its national regulator, and must also annually disclose specific remuneration information for each EU AIF it manages and each AIF it markets in the EU.


Remuneration requirements under UCITS V14 mirror corresponding requirements under AIFMD. The UCITS rules were implemented by March 2016. UCITS V bridges the regulatory disparity between AIFs and undertakings for the collective investment in transferable securities (UCITS) in Europe. ESMA published their latest guidelines on 'sound remuneration policies' under the UCITS Directive in October 2016.

The UCITS Directive applies to undertakings for collective investment in transferable securities. Like CRD IV and AIFMD, the UCITS Directive applies to remuneration of those categories of staff whose professional activities have a material impact on the risk profiles of the UCITS management company or of the UCITS that they manage, including senior management, risk-takers, control functions and employees in the same remuneration bracket as senior management or risk-takers.

Like CRD IV and AIFMD, the UCITS Directive remuneration rules are based on the FSB principles and contain substantially the same principles as CRD IV, with the exception that, for UCITS firms:

a there is no bonus cap;

b the minimum non-cash instrument requirement must be paid in units of the UCITS concerned, equivalent ownership interests, or share-linked instruments or equivalent non-cash instruments; and

c the deferral period is at least three years (as opposed to three to five years).

As with CRD IV and AIFMD, certain UCITS management companies must establish a remuneration committee. The UCITS Directive also requires certain disclosures: (1) a UCITS prospectus detailing remuneration policy, methods of remuneration calculation and information about those responsible for remuneration; (2) an annual report containing information about total remuneration for the financial year and material changes to remuneration policy; and (3) key investor information.


Remuneration rules for insurance and reinsurance businesses are found in the Solvency II Regulation,15 supplementing the Solvency II Directive.16 The relevant European supervisory authority for the insurance sector, the European Insurance and Occupational Pensions Authority has provided guidance on corporate governance under Solvency II, including on the scope of remuneration policy and composition of remuneration committees.

Under the Solvency II Regulation, an insurance or reinsurance undertaking must adopt a written remuneration policy. When establishing and applying that policy, the undertaking must ensure the policy promotes sound and effective risk management and not encourage risk taking that exceeds the risk tolerance limits of the undertaking. The policy must apply to the undertaking as a whole and contain specific arrangements that take into account the tasks and performance of the administrative, management and supervisory body, persons who effectively run the undertaking or have other key functions, and other categories of staff whose professional activities have a material impact on the undertaking's risk profile.

The remuneration provisions are not as stringent as under other regulations. However, there are wide-ranging requirements, including, but not limited to, creation of an independent remuneration committee, the requirement for an appropriate balance of fixed and variable remuneration, the measurement of performance-related variable remuneration based on the performance of the individual, the relevant business unit and the overall results of the undertaking, and a minimum deferral period of three years.

The Insurance Distribution Directive17 (IDD) came into force in February 2016 with the requirement that Member States transpose the IDD into local law to take effect from 1 October 2018. From October 2018, insurance distributors must not be remunerated, or remunerate or assess the performance of their employees, in a way that conflicts with their customers' best interests. In particular, remuneration arrangements or sales targets must not provide an incentive to recommend a particular insurance contract where a different insurance contract is available that could better meet a customer's needs.


A recent focus of EU regulation is sales incentives. In December 2016, the EBA published guidelines on remuneration related to the sale and provision of retail banking products and services. Shortly after, in 2017, the EU published a regulation18 supplementing MiFID II.19 The regulation provides remuneration rules in relation to all persons who could impact service provision or firm corporate behaviour within firms providing investment services, including front-office, sales or other staff indirectly involved in providing investment or ancillary services. The MiFID II provisions and EBA guidance cover similar trends.

When providing sales incentives, firms should ensure that they:

a do not remunerate or assess performance in a way that conflicts duties to act in the clients' best interests;

b do not use remuneration structures or sales targets, etc., that could provide incentives to recommend a particular financial instrument to a retail client when the firm could offer a different financial instrument that would better meet the clients' needs;

c design and implement remuneration policies that have appropriate criteria to be used to assess performance, including qualitative criteria encouraging acting in clients' best interests;

d define and implement remuneration policies and practices under internal procedures that take account of the interests of all clients of the firm, ensuring clients are treated fairly and their interests are not impaired by remuneration practices adopted in the short, medium or long term;

e do not create remuneration policies that create conflict of interests or incentives that may lead relevant persons to favour their own interests or the firm's interests to the potential detriment of any client; and

f ensure that remuneration and similar incentives are not solely or predominantly based on quantitative commercial criteria, and instead take into account appropriate qualitative criteria reflecting compliance with applicable regulations, fair treatment of clients, and quality of services provided to clients.

The MiFID II rules also require that the management body approves the firm's remuneration policy, and that senior management takes responsibility for day-to-day policy implementation and for monitoring compliance risks.



MAR20 expands and develops the EU market abuse regime. The rules came into effect on 3 July 2016. Much of MAR focuses on general market abuse provisions, such as insider dealing or market manipulation. However, the rules also impact the operation of incentive plans. MAR includes notification and disclosure requirements for 'persons discharging managerial responsibilities' (PDMRs) working within issuers linked to EU regulated markets, and for 'persons closely associated' (PCAs) with a PDMR.

The rules include requirements for PDMRs and PCAs to notify the issuer and relevant competent authority within three days of every transaction conducted on their own account relating to shares or debt instruments, or linked derivatives, of that issuer. The issuer must notify the market within the same time period. The rules also provide for 'closed periods' during which PDMRs cannot deal in securities of the issuer, subject to limited exemptions.

ii Corporate governance

The EU also has a strong focus on corporate governance. In 2007, the EU published the Shareholder Rights Directive (SRD).21 The SRD aims to improve corporate governance in EU companies traded on regulated markets by enabling shareholders to better exercise voting rights across borders. The rules cover a wide range of formalities for general meetings, including minimum notice periods, information requirements and voting rules.

The SDR was amended in June 2017,22 requiring Member States to transpose the amendment into national law by 10 June 2019 (SDR II). SRD II establishes a range of corporate governance rules, including an obligation for companies to publish a directors' remuneration policy subject to a shareholders' vote. Member States may determine whether this vote is binding or advisory, but a vote must be held whenever the policy is amended and at least every four years. Companies must also publish a 'clear and understandable' directors' remuneration report annually that is subject to an advisory shareholders' vote.

iii Pay equality

The EU remains interested in equal pay and gender equality. A report commissioned by the EU published in April 201723 shows initiatives taken by Member States to promote pay equality. Many Member States have started to introduce gender pay gap reporting, which (broadly speaking) places a requirement on firms caught by the reporting regulations to periodically publish data relating to the differences in the levels of pay between male and female employees. These Member States include Belgium, Demark, France, Germany, Iceland, Sweden and the United Kingdom.


The EU General Data Protection Regulation24 (GDPR) came into force on 25 May 2018. The GDPR gives individuals greater rights in relation to the processing of their 'personal data', and has widespread application wherever personal data processing takes place. Executive remuneration structures, particularly where trusts and nominee arrangement exist, or the structures are managed on behalf of employers by professional share plan administration companies, will be caught by the GDPR. Companies based in the EEA, or with employees in the EEA, should review their remuneration structures to ensure all personal data processing is compliant with the GDPR.


EU regulation of executive remuneration and corporate governance is evolving rapidly. Even though financial services has been the primary target, executive remuneration in all sectors is a sensitive and politically charged issue, as evidenced by the expansion of the rules and the proposed corporate governance requirements.

Good governance and robust pay structures can improve accountability, transparency and encourage more dialogue with shareholders. However, there can be unintended consequences, certainly as regards prescriptive regulation on financial services pay. Less regulated sectors, such as technology firms, have flexibility around how they pay their staff, enabling them to attract the most talented staff. To compete with these sectors, many banks have significantly increased fixed pay to continue to offer competitive remuneration packages. In addition, some firms have supplemented salaries and bonuses with new forms of remuneration, including 'role-based' or 'fixed-pay' allowances, which the EU has acted to regulate.

The EU has probably the most prescriptive financial services remuneration rules in the world. Time will tell whether this has the EU's intended impact of reducing risk in the sector, or whether it, along with other regulations affecting the sector, has the impact of significantly reducing jobs in the EU in this sector as they are redeployed elsewhere.

2018 and 2019 will see the introduction of CRD V, CRR II, IFR and IFD, which will have an effect on executive remuneration in the financial services sector. The final details of these pieces of legislation will soon become apparent.


1 Janet Cooper is a partner and Matthew Hunter and Stephen Penfold are associates at Tapestry Compliance LLP.

2 Directive 2010/76/EU, amending Directives 2006/48/EC and 2006/49/EC.

3 Directives 'direct' Member States to implement national law to give effect to objectives set out in the Directive within a set time frame. National implementation can give rise to inconsistent implementation around the EU.

4 Directive 2013/36/EU, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.

5 Regulation (EU) No. 575/2013. Regulations directly apply to Member States and do not require transposition into the laws of each Member State.

6 Commission Delegated Regulation (EU) No. 604/2014.

7 COM(2017) 790 final.

8 COM(2017) 791 final.

9 The European Commission has confirmed in a recent report (COM(2016) 510) that it deems it appropriate for listed institutions to use share-linked instruments instead of shares, and legislative proposals have been made for CRD V to make this permissible.

10 Minimum triggers include where the staff member (1) participated in or was responsible for conduct that resulted in significant losses to the firm, or (2) failed to meet appropriate standards of fitness and propriety.

11 Guidelines on high earners cover all EEA-based institutions (non-EEA branches or subsidiaries are exempt), but guidelines on remuneration benchmarking only apply to selected significant institutions chosen by national regulators.

12 Guidelines on remuneration benchmarking (EBA/GL/2014/08) and Guidelines on the data collection exercise regarding high earners (EBA/GL/2014/07).

13 Alternative Investment Fund Managers Directive 2011/61/EU.

14 Undertakings for the Collective Investment in Transferable Securities Directive 2009/65/EC, as amended, in particular by Directive 2014/91/EU (UCITS V). UCITS V is a revision to UCITS regime and it aims to enhance investor protection within the UCITS framework.

15 Commission Delegated Regulation (EU) 2015/35.

16 Directive 2009/138/EC.

17 Directive (EU) 2016/97.

18 Commission Delegated Regulation (EU) 2017/565.

19 Directive (2014/65/EU).

20 Regulation 596/2014.

21 Directive 2007/36/EC.

22 Directive 2017/828.

23 'Pay Transparency in the EU: A legal analysis of the situation in Member States, Iceland, Liechtenstein and Norway', Albertine Veldman, April 2017.

24 (EU) 2016/679.