Hong Kong Monetary Authority (HKMA) has issued the Guideline on a Sound Remuneration System following the results of the industry consultation conducted in the final quarter of last year. The Guideline reflects the recommendations by the Financial Stability Board endorsed by the G20 as international standards on sound remuneration practices. It applies to all Authorised Institutions (AIs) in Hong Kong and in the case of overseas incorporated AIs, the remuneration systems applicable to officers and employees engaged in the conduct of their business and operations in Hong Kong.
The Guideline, released on 19 March 2010, focuses on the governance and control arrangements for, and operation of, AIs' remuneration systems in the context of the incentives for risk-taking they may create. It requires:
- The establishment of a Board Remuneration Committee which should entirely, or at least in a majority, consist of independent non-executive directors. Regular review of the remuneration system must be conducted by the Committee at least on an annual basis.
- The proportionate balance of fixed and variable remuneration. Generally, the proportion of variable remuneration to total remuneration would be expected to increase in line with the seniority and responsibility of an employee; such that a substantial proportion of the remuneration of the senior management and key personnel should be paid in the form of variable remuneration. A substantial portion (may be more than 50 per cent) of such variable remuneration may be paid in the form of shares or share-linked instruments. Guaranteed bonuses will not normally be permitted other than exceptionally for new hires in the first year of employment.
- The award of variable remuneration to depend on the fulfilment of certain pre-determined and assessable performance criteria. These criteria include both financial and non-financial factors such as adherence to risk management policies and compliance with legal, regulatory and ethical standards.
- The alignment of remuneration payouts to the time horizon of risks. Deferral of the payment of a portion of variable remuneration (between 40-60 per cent) would be expected to increase in line with the seniority and responsibility of the employee. The deferred remuneration should generally vest gradually over a period of years and no faster than on a pro rata basis. Termination of employment should not trigger early payout of unvested deferred sums which should be forfeited.
HKMA's supervisory powers
The HKMA will adopt a "risk-based" approach in the supervision of an AIs' remuneration systems including:
- all information relating to an AIs' remuneration system must be made available to the HKMA upon request
- for locally incorporated AIs, HKMA may require additional capital to be held to cover remuneration risks that are not adequately covered
- HKMA may set a quantitative limit on the total variable remuneration payable by an AI (such as limiting total variable remuneration to a percentage of total net revenues)
Where an AI in Hong Kong is part of a banking group (either a subsidiary of a banking group or a branch of an overseas incorporated bank), it may adopt the remuneration policy at the group level if it can demonstrate to the HKMA's satisfaction that the relevant group remuneration policy is broadly consistent with the Guideline. The HKMA may obtain relevant information and opinions regarding the remuneration system from the home supervisor of the AI's parent bank or head office, or raise any inconsistency with them.
AIs are required to disclose information on their remuneration systems and payments to senior management and key personnel to the public. In addition, AIs must disclose new sign-on and severance payments awarded to senior management and key personnel each financial year.
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