They cover control functions, comprising staff other than senior management responsible for risk management, compliance, internal audit and similar functions, including for example the chief financial officer in relation to their responsibility for preparing financial statements.
Staff members responsible for heading the portfolio management, administration, marketing and human resources should have remuneration requirements specific to their category. The guidelines also apply to other risk-takers such as staff members whose professional activities, either individually or as a group, can exert material influence on the manager’s risk profile or on a fund that it manages, including anyone capable of entering into contracts or positions and taking decisions that materially affect the risk positions of the manager or a fund, such as staff, individual traders and specific trading desks. They may also include other high-earning staff that do not fall into any of these categories.
To assess the materiality of influence on the risk profile of a manager of fund, the management firm must define what constitutes materiality within their particular context.
According to Esma, remuneration consists of all types of payment or benefit paid by the manager, any payments by the fund itself, such as carried interest, and any receipt of participation in the fund through shares or units in exchange for services provided by the manager’s staff.
The guidelines distinguish between fixed remuneration, which does not take into account any performance criteria, and variable remuneration that depends upon fund performance or possibly other contractual criteria.
The types of remuneration can include direct monetary payments and benefits. The latter may include cash, shares, options, cancellation of loans to staff members upon the end of their employment, pension contributions, remuneration by funds, and non-monetary benefits such as discounts, fringe benefits or special allowances toward the cost of items such as cars or mobile phones.
Esma says that ancillary payments or benefits that are part of a general, non-discretionary policy throughout the management firm and do not represent any kind of incentive for employees to take on risks can be excluded from the definition of remuneration for the purposes of the AIFM Directive requirements.
In addition, the requirements do not cover any payments made directly by the fund for the benefit of the selected staff that consists of a pro-rata return on any investment they have made into the fund.
Esma argues that retention bonuses should be considered as a form of variable remuneration and only be allowed as long as risk alignment requirements are properly applied. However, fees and commissions paid to intermediaries and external providers of outsourced functions are not covered by the guidelines.
The guidelines include detailed rules on the establishment, structure and functioning of the remuneration committees that managers that are significant in size or that manage funds that are significant are required to create (and that for others may be considered good practice).
They also cover the principle of alignment of risks, which may for instance entail the retention by the manager of discretionary pension benefits accruing to employees for five years after they have left the firm.
The consultation runs until September 27. Esma is inviting feedback from industry participants and other interested parties, indicating the specific aspects of the guidelines on which they are commenting, a clear rationale clearly stating the costs and benefits, and any alternatives the authority should consider. Esma says it aims to publish a final report before the end of the year, ensuring that the guidelines are in place in advance of the directive’s transposition deadline in July next year.
Olivier Sciales is a partner at the Luxembourg law firm Chevalier & Sciales.