New Rules Governing Compensation within French Financial Institutions

H. Rodgin Cohen is a partner and chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication by François Barrière and Richard Vilanova.

On December 17, 2010, the French Journal Officiel published an arrêté [1], (i) supplementing the rules adopted by the arrêté dated November 3, 2009 governing the variable compensation of “financial market professionals” employed by credit institutions and investment firms (see our publication of December 4, 2009), and (ii) giving the French Prudential Control Authority additional powers to monitor compensation levels within such institutions. These provisions implement provisions of the E.U. directive N° 2010/76/UE dated November 24, 2010 (referred to as the CRD III Directive) under French law. To a large extent, this arrêté (i) confirms and embodies in regulation the rules of conduct issued by the French Banking Federation dated November 5, 2009, and (ii) is consistent with the Committee of European Banking Supervisors’ Guidelines on Remuneration Policies and Practices, dated December 10, 2010.

New Rules Governing Compensation

The new rules amend French banking regulation N° 97-02 on internal control of credit institutions and investment firms and are therefore applicable to the financial institutions falling within the scope of such regulation. [2]

These new compensation rules cover “financial markets professionals whose activities are likely to have a significant impact on the risk exposure of the relevant entity”. In addition to provisions regarding the composition of the compensation committees of financial institutions, the new rules provide that:

  • (i) Guaranteed variable compensation is prohibited, except in the context of a recruitment where the guarantee cannot exceed one year.
  • (ii) The deferred portion of variable compensation must represent at least 40% (or at least 60% for the “highest paid individuals”, such term not being defined) of the variable compensation allocated to the professional concerned. Payment of such portion must be subject to a condition of performance and deferred over at least three fiscal years following the year of award. Such deferred amounts cannot be paid in installments greater than those resulting from a pro rata temporis calculation. The deferral period must take into account the economic cycle, the nature of activities, the related risks and the employees’ activity.
  • (iii) Shares or share-linked instruments must represent at least 50% of the variable compensation allocated to the covered professionals and be subject to a minimum vesting or holding period. Such principle applies to the totality of a covered professional’s variable compensation, including non-deferred components.
  • (iv) Discretionary payments linked to the termination of an employment contract must be subordinated to performance conditions regarding the beneficiary, assessed by reference to the performance of the company, subject to mandatory labor law provisions.
  • (v) Pensions policy must be consistent with the risk management objectives of the company. If the employee leaves the financial institution before retirement, discretionary pensions must take the form of shares or share-linked instruments (cf. “iii” above) and their remittance must be deferred until the end of a five-year period. In the case where the employee reaches retirement age, discretionary pensions are to be paid in the same form, subject to a holding period of five years.

New Powers of the Autorite de controle prudentiel Relating to Compensation

The new rules provide for additional powers of the French Prudential Control Authority or Autorité de contrôle prudentiel (“ACP”) relating to the supervision of the compensation practices of institutions subject to its control.

The ACP may require that such institutions restructure their compensation policy in accordance with ”sound risk management” and a “long-term growth objective”.

With respect to institutions benefiting from exceptional government intervention, the ACP ensures that (i) variable compensation distributed by such institutions is limited when not consistent with such institutions’ ability to meet their capital requirements, and (ii) compensation of the members of the executive body of such institutions is justified.

In addition, the arrêté requires additional information to be included in the report on compensation practice to be sent to the ACP annually by each relevant institution. Such additional information must include, among other things, the names of any consultancy firm retained to advise on the relevant institution’s compensation policy.

Entry into Force of the New Provisions

These new rules take effect as from January 1, 2011.


[1] Arrêté du 13 décembre 2010 modifiant diverses dispositions réglementaires relatives au contrôle des rémunération des personnels exerçant des activités susceptibles d’avoir une incidence sur le profil de risque des établissements de crédit des entreprises d’investissement ainsi que diverses dispositions de nature prudentielle.
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[2] These institutions are (i) credit institutions or investment firms incorporated in France and supervised by the Autorité de contrôle prudentiel, (ii) subject to local tax and labor law rules, branches and consolidated subsidiaries located outside France of credit institutions and investment firms incorporated in France, and (iii) branches in France of credit institutions and investment firms not incorporated in a member state of the EEA. Branches in France of credit institutions and investment firms incorporated in a member state of the EEA are not subject to these French regulations; they should be governed by equivalent regulations of their home member state.
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