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30 March 2010
On January 1 2010 the Financial Supervisory Authority introduced new regulations and guidelines on variable compensation. The new regulations and guidelines apply, in principle, to all financial firms that fall under the authority's supervision. With regard to employees whose actions can have a material impact on the firm's risk exposure, companies must apply the regulations and the guidelines to all decisions regarding remuneration for the period before January 1 2010.
According to the regulations and guidelines, firms must have a remuneration policy that is consistent with good risk management and does not encourage short-term profit and excessive risk-taking. The remuneration policy shall encompass all employees. The new regulation and guidelines provides guidance on how performance should be measured and how risks should be managed when applying variable compensation. The remuneration policy should be subject to regular reviews to ensure that it develops in conjunction with changes to the firm's situation. The firm should base a decision on the design of the remuneration policy on an analysis of how the policy affects the risks to which the firm is exposed how these risks are managed.
When the firm determines if remuneration shall consist of cash or shares, share-linked instruments or other financial instruments, or a combination of these, the firm should endeavour to encourage long-term value creation and apply a sound risk horizon. In addition, guaranteed variable remuneration should constitute an exception and only be allowed in conjunction with new employment, and then limited to the first year.
The regulations and guidelines clarify the board of directors' responsibility for the firm's remuneration policy and stipulate which information regarding remuneration should be disclosed in conjunction with the annual report.
For employees whose actions can have a material impact on the risk exposure of the firm, at least 60% of the variable remuneration should be deferred for at least three years. In certain circumstances, such as if the firm's position has been significantly weakened, companies may decide to cancel deferred payment, either in part or in whole.
The regulation and guidelines are based on the European Commission's Recommendation K(2009) 3159 governing remuneration policy in the financial services sector. With these regulations and guidelines, the authority has also implemented the global principles for sound remuneration systems which were adopted at the G20 meeting in September 2009.
For further information on this topic please contact Niclas Rockborn or Nils Unckel at Gernandt & Danielsson Advokatbyrå by telephone (+46 8 670 66 00), fax (+46 8 662 61 01) or email (firstname.lastname@example.org or email@example.com).
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