No pun was intended in the writing of the above title, however the new rules governing remuneration introduced by the Central Bank of Bahrain are nothing short of revolutionary. Revolutionary because I do not think any other regulator in the region has established rules that are at once extremely progressive while at the same time taking into consideration older best practice publications on remuneration issued by BCBS and other bodies.
The word revolutionary is not used lightly in this article, as some Bankers I believe have not yet fully understood the significance of the changes that will be wrought once these rules are implemented. (The rules will be effective from 1 July 2014 onwards).
As a Central Bank, the CBB needs to be lauded for having the courage to introduce such rules. In most jurisdication the introduction of such rules would and could lead to mighty uproar by the industry and business media. The reaction in Bahrain so far however appears to be muted, which is a good sign. Or it could indicate that not everyone is aware of the revolutionary changes that are due.
I should probably start by making it clear that the rules apply only to ‘approved persons’ (AP) and ‘material risk takers’ (MRT) with a combined annual salary of BD1,00,000 or more- including all benefits and allowance. This means a monthly consolidated salary of around BD8,333 or USD22,100.
An interpretation of the CBB’s objectives in enacting such rules leads one to believe that the CBB intends to protect shareholders and other stakeholders from the following:-
- Employees will not be able to introduce deals, products or projects that are profitable in the short run (or appear profitable in the future) while ultimately leading to losses – the rules require that when remuneration (or bonus) is awarded based on a new projects or deals, it should be linked to the outcome of a deal or project i.e. essentially aligned with risk. Accordingly deferral is actively encouraged and legislated.
- The rules even allow for cancellation or ‘clawback’ of agreed remuneration or bonus – which is unprecedented in this part of the world. To quote from the rulebook: “Accrual and deferral of variable remuneration does not oblige the bank to pay the variable remuneration, particularly when the anticipated outcome has not materialised or the bank’s financial position does not support such payments”. The clawback rule is highlighted below later in this article.
- Short term risk taking or short sighted strategies are avoided. By implementation of these rules, it is assumed that remuneration of material risk takers will be intimately linked to short and long term performance of the Bank, the assessment of which will be deferred. One could even assume that Banks will be turned into lean mean performance oriented machines- with a conscience. To quote from the rulebook again (which applies to MRT and AP):
- “(a) A substantial proportion of remuneration must be variable and paid on the basis of ….. measures that adequately measure performance; and
- (b) The variable proportion of remuneration must increase significantly along with the level of seniority and/or responsibility.
- (a) At least 40% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years; and
- (b) For the CEO, his deputies and the other 5 most highly paid business line employees, at least 60% of the variable remuneration must be deferred for at least 3 years.”
- The CBB has even been smart enough to ensure that even the deferred remuneration is not all paid out in cash. To quote again from the rulebook:
- “As a minimum, 50% of variable remuneration (including both the deferred and undeferred portions of the variable remuneration) must be awarded in shares or share-linked instruments or where appropriate, other non-cash instruments.
- The remaining portion …. of the deferred remuneration can be paid as cash remuneration vested over a minimum 3-year period.
- Awards in shares or share-linked instruments must be subject to a minimum share retention policy of 3 years from the time the shares are awarded.”
- Approved persons or people in controller positions will be prevented from earning remuneration that is heavily linked to outcome or performance of the Bank. One would assume that the CBB’s intention with this rule is that, it would prevent approved persons’ from being lax or ‘going easy’ on reporting or questioning serious issues, or performing their duties in such a way that would allow persons in power from usurping authority or carrying out questionable transactions. Essentially the days of the ‘star’ bonuses for the Internal auditor or CFO are over. Their remuneration should be linked to achievement of goals and objectives of their departments/roles and should be skewed in favour of fixed and not variable remuneration as is the case for material risk takers.
- Banks will not have to pay out contractually obligated bonus or remuneration simply because it was agreed in the past, if the performance of the Bank, or as interpreted by me, even of a division is negative or has resulted in losses, Bonus need not be paid out. To quote from the rulebook again:
- “Existing contractual payments related to a termination of employment must be re-examined, and kept in place only if there is a clear basis for concluding that they are aligned with long-term value creation and prudent risk-taking.
- Remuneration systems must link the size of the bonus pool to the overall performance of the bank.
- Subdued or negative financial performance of the bank should generally lead to a considerable contraction of the bank’s total variable remuneration, taking into account both current remuneration and reductions in payouts of amounts previously earned, including through malus and clawback arrangements.
- Recognition of staff who have achieved their targets or better, may take place by way of deferred compensation, which may be paid once the bank’s performance improves.”
The modifications to the rulebook require various activities such as approval of remuneration schemes by Board Remuneration Committee, shareholders, External auditor certification of compliance with schemes etc. However I have not sought to highlight these requirements of the modifications to the rulebook in this article.
If you as a reader are an employee with a Bank, this probably means its time to review your employment contract and assess how it will change and how your remuneration may also change.
For a Bank I believe this maybe the time to ignite and ensure conversation on the changes that will have to come through by July 2014. Most Banks I assume would have already appointed consultants to revisit and update their remuneration framework, others have set up internal committees to discuss the issues and ensure policies and procedures and contracts are updated in house.
The times of leaning back and enjoying a bonus (as in the armchairs shown above) is changing …. One waits to see the effect of implementation of these rules on the Banking sector in Bahrain. Doomsday soothsayers would predict that it could lead to choking of the sector in Bahrain, others would predict that it would lead to exit of ‘shortsighted high-risk-taker Bankers’ from Bahrain – which is good for the sector..
I remain hopeful.