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
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
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
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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