The Alternative Investment Fund Managers Directive (AIFMD) requires that managers (AIFMs) have remuneration policies which are consistent with sound and effective risk management. The AIFM must determine its remuneration policies and practices for staff whose professional activities have a material impact on the risk profiles of the AIFM or the alternative investment funds (AIFs) they manage.

The relevant principles are set out in Annex II to AIFMD and include the following:

  • subject to the legal structure and the rules or constitutive documents of the AIF, a "substantial portion" (which is generally at least 50%) of any variable remuneration shall consist of units of the AIF or related instruments;
  • such units or instruments must be subject to an appropriate retention policy to align the interests of the AIFM with the AIF and the AIF's investors;
  • depending on the level of variable remuneration, at least 40-60% of such remuneration must be deferred over a period which is appropriate in view of the life cycle, redemption policy and risk profile of the AIF. This period should be at least three to five years unless the life cycle of the AIF is shorter;
  • the variable remuneration is paid or vests only if it is sustainable according to the financial situation of the AIFM as a whole, and justified according to the performance of the business unit, the AIF and the individual concerned. Variable remuneration may be reduced by a number of methods, including clawback.

The European Securities and Markets Authority (ESMA) issued detailed guidelines on the Annex II principles (Guidelines) on 11 February. The key elements of the Guidelines include:

AIFM's internal governance

  • the AIFM has to ensure that sound and prudent remuneration policies exist and are not circumvented;
  • AIFMs should select the type of staff for which a remuneration policy is put in place and be able to demonstrate according to which criteria this selection occurred.

Categories of staff covered

The Guidelines apply to staff whose professional activities might have a material impact on the AIF's risk profile. This includes:

  • senior management, risk takers, control functions; and
  • any employee receiving a total remuneration that takes them into the same remuneration bracket as the aforementioned categories of staff.

Types of remuneration covered

  • Remuneration consists of all forms of payments or benefits paid by the AIFM, of any amount paid by the AIF itself, including carried interest, and of any transfer of units or shares of the AIF, in exchange for professional services rendered by the identified staff;
  • All remuneration should be divided into either fixed remuneration or variable remuneration.

Application of guidelines to delegates

AIFMs should ensure that:

  • the entities to which portfolio management or risk management activities have been delegated, whether located inside or outside the EU, are subject to regulatory requirements on remuneration that are equally as effective as those applicable under the Guidelines; or
  • appropriate contractual arrangements are put in place with such entities in order to ensure that there is no circumvention of the remuneration rules set out in the Guidelines.

Application of proportionality principle

  • Proportionality may lead, on an exceptional basis and taking into account specific facts, to the disapplication of the following requirements if this is reconcilable with the risk profile, risk appetite and the strategy of the AIFM and the AIFs it manages and within the limits set by the Guidelines:
    • variable remuneration in instruments;
    • retention;
    • deferral;
    • ex post incorporation of risk for variable remuneration (e.g., clawbacks);
    • the establishment of a remuneration committee.

Next steps

The Guidelines will apply from 22 July 2013, subject to the transitional provisions of AIFMD. The guidelines can be found at We are analysing the detail of the Guidelines and will issue further bulletins on the practical application of the Guidelines in due course.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.