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Dubai's DFSA amends rulebook: executive remuneration (bonuses)
There has been much in the press recently about concerns in the US and Europe over "bankers' bonuses" and the control and management of remuneration versus performance. However, these concerns are global and in response to this, the Dubai Financial Services Authority (DFSA) recently amended its Rulebook regarding corporate governance requirements and remuneration. We understand that the DFSA are likely to introduce further changes during the course of 2013. Rebecca Ford and Antonio Michaelides provide further details of the regulations introduced by the DFSA in respect of remuneration practices.
From an employment law perspective, the issue of executive remuneration and in particular, the regulation of bonuses, presents an interesting challenge to the dynamic of the employer-employee relationship. This is particularly the case in the financial sector, where the remuneration structure of some employees has historically comprised a relatively low basic wage supplemented by very high annual performance-related bonuses.
The so-called 'problem' of executive reward, in particular the discretionary bonus element, has several dimensions which have emerged largely as a result of changes that have taken place over the last two decades. However, many will agree the three key aspects are perceived to be:
Very much against this backdrop and in line with the global developments on the topic of executive remuneration, the DFSA has turned its focus to the regulation of remuneration practices (including bonuses), namely:
In line with the approach in Europe, the amendments to the Rulebook seek to place greater emphasis on the accountability of employees, the general health and performance of a business (both in the short and longer term) and the individual's own performance and impact on the health of that business. Remuneration structures and the strategies of regulated firms going forward should:
What this essentially means is that firms will need to consider whether employees are likely to expose the firm to unacceptable financial, reputational and other risks when putting in place remuneration structures. It is easy to see the rationale behind this but, on the flip-side, it doesn't fully align with the fact that "risk" was often a cardinal feature of certain financial markets in the past and something that fostered the required growth of businesses. Thus, the fact that banks, insurers and dealers will now be expected to have more stringent measures to address the risks that once led to unprecedented economies of scale presents a challenge to the very make-up of such institutions and, consequentially, the employer-employee relationship.
In accordance with the new guidance from the DFSA on remuneration practices, remuneration structures should include performance-based remuneration and consideration should be given to various elements; of particular interest is the suggestion that the use of guaranteed bonuses should generally be avoided. This is sensible in uncertain economic times but it does signal a move away from what has become an expectation in certain markets and there are concerns about the effect of this on incentivisation given the general perception (in Europe at least) of discretionary bonuses, especially in less certain economic times.
Under the DFSA guidance, where remuneration structures are to include performance-based remuneration, best practice further requires that consideration be given to factors such as:
These elements, as has been prominent in the most recent debates in Europe, are not alien to the financial markets and certainly not to bankers, brokers or commodities traders but there is a general acceptance that the emphasis has shifted. Arguably, we are seeing a move away from contractual (guaranteed) bonuses but, at the same time, the obligations owed by employees to both its employer and, in particular, the latter's business in the long-term are heightened.
The introduction of revised remuneration structures and increased monitoring inevitably requires a concurrent thought process so as to avoid a feeling of dejection and actually foster productivity, not least in times of economic uncertainty. Further, even if this is alleviated to some extent by the "promise" of a discretionary bonus payment (whether during employment or on termination), best practice would require this to be:
Going forward, a more interesting aspect will be whether we start to see substantial changes in actual remuneration practices in the Middle East, including how performance is linked to reward and how this is explained (i.e. the mechanics). Long term incentive plans and other employee incentive schemes, which have to date not been a significant feature in remuneration packages in the Middle East, may now become more prevalent. The time and current climate seem increasingly right for companies to consider change yet some may be reluctant to be first movers and may need to overcome the perceived barriers and risks outlined above first.
The fact that the world's financial centres continue to make this a priority, however, does at least act as a push for companies in, what most now perceive to be, the right direction. In particular, it will be interesting to see how the world's financial centres react to the European cap on bonuses which continues to be the subject of intense debate amongst member states. The proposal is to introduce a cap on variable pay of 100% of salary with the possibility of (a) increasing the cap to 200% of salary with shareholder approval; and (b) applying the cap more flexibly where variable pay is deferred for more than five years. The cap will apply to EU headquartered banks (including their non-EU operations); the EU operations of non-EU headquartered banks; and certain investment firms operating within the EU.
Only time will tell whether this will have the desired effect (both in the short and long term) on the European markets but given the global nature of the financial markets in the 21st century it is important to consider how this will impact the world's other financial centres as many of the institutions caught by the proposals also operate outside of the EU. There has been an increasing focus in recent years in multinational corporates on achieving consistency in approach across reporting lines, despite jurisdictional differences, and it is therefore possible at least that wide scale regulatory changes in Europe will influence the conduct of a company or financial institution in, for example, the Middle East. But if the changes in Europe do not have this effect, then there may well be some truth in the perceived danger that many bankers, at least, will move to the US, Asia or the Middle East permanently, thus creating another challenge for the markets of these jurisdictions.
If you would like further information on any issue raised in this update please contact Rebecca Ford.