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Overview of SBP’s Guidelines on Remuneration Practices

Introduction to key requirements

The global picture

Rules based requirements (CRD IV or equivalent)

Principles based guidelines (FSB, BCBS, OECD Principles or equivalent)

No formal regulation

Insufficient data

North America

South America

Africa

Europe

South-East Asia

Australia

South Asia

Globally, organisations are experiencing a paradigm shift in remuneration practices

Argentina R

Australia P

Brazil R

Bahrain P

Canada P

China P

France R

Germany R

Hong Kong P

India R

Indonesia P

Italy R

Japan P

Korea P

Mexico R

Qatar P

Saudi Arabia

R

Switzerland R

United Kingdom

R

United States

P

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Certain examples of countries with similar guidelines

These guidelines will have pervasive entity-wide impacts on strategic, business, HR, risk and operating models

Applicability

• Minimum applicability on:

a) All MRTs and MRCs of the local operations (including the CEO and other

members of senior management), whose actions may have the potential for

significant impacts/ risks to the institutions

b) All Country Heads of overseas operations (as MRTs)

c) All CEOs/ COOs of fully owned local and foreign subsidiaries (as MRTs) –

e.g. MFBs, AMCs, insurance companies, capital market entities etc.

d) For b) and c) above, regulations not applicable if the foreign branch/ subsidiary

subject to similar regulations in the host country

• Banks with branch mode in Pakistan to confirm that parent fully complies with similar

regulations in home jurisdictions

Industry dynamics are likely to significantly alter due to:

• Underlying complexity around design and implementation; and

• Eventual culmination of strategic, HR and risk management sophistication

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Implementation will require use of emerging performance measurement methodologies

Risk adjusted balanced scorecard

• Risk adjusted balanced scorecards for all MRTs and MRCs across the entity

• Remuneration framework to clearly address all major types of risks and their

treatment for determination of risk adjusted compensation

• Remuneration practices to be aligned with short and long term business

objectives

• MRC compensation not to be determined or influenced by the profitability of functions

or areas which they review

Pay structure

MRTs:

• Remuneration to compose of variable and fixed components with mix of cash, equity

and other forms to be consistent with risk alignment

• Mix may vary depending on the employee’s position and role, scorecard/matrices to

explain the rationale for the mix recommended for each position

MRCs: Fixed > Variable (except in exceptional circumstances approved by BRC)5

Deferred component

• An appropriate proportion of variable pay of MRTs to be withheld / deferred

• Remuneration policy to provide for the basis of calculation of deferred pay and

deferment period

Deferral period

• Min 3 yrs for MRTs (proportionate payments subject to malus)

• Compensation payout schedules to be sensitive to time horizon of risks

• Remuneration framework to recommend different ranges of variable compensation

and time periods of deferred payments for different risk takers

Management of deferred benefits

• Management of deferred pool within the entity; and/or

• New fund with along a management function and governance mechanism

Deferrals are meant to encourage long-termism vs. short-termism and discourage excessive risk taking

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Board’s ownership and supervision of the remuneration programme is key to delivering success

7

BRC composition BoD performance

assessment

Pay gap

• Non-exec. preferably

independent directors in

majority. In case,

independent directors not in

majority, then

chairmanship shall be

with an Independent

Director.

• BRC members to be suitably

qualified and experienced

with sufficient

understanding of MRTs

and MRCs, and risks

emanating from their

activities

In accordance with BPRD

Circular No. 11 of 2016

dated August 22, 2016 which

requires assessment of:

• Overall Board

• Board Committees

• Individual Members

Remuneration policy to cover

pay gap provisions:

• Reasonable pay gaps

between highest and lowest

paid employees across

various levels as well as

across the organisation

• Discourage benefit

concentration

Major stages in remuneration design and implementation

Certain major enterprise-wide initiatives to be undertaken concurrently by December 2017

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Review existing remuneration governance structure

• Amendments in BRC composition

• Enhancements of BoD ToRs

• Capacity building through orientations and other means

BRC ToRs and monitoring mechanism for implementation

• Updating BRC ToRs

• MIS packs, reporting structures, type of

information and how it will flow together

with the decision structure

Identification of MRTs and MRCs

• Engaging all significant stakeholders

including HR, Risk, Finance, Operations,

Strategy, BUs etc.

• Reasonable and concrete inclusion criteria

• Assessment of risks embedded in the

activities of all potential in-scope

employees; such as credit, market,

operational, interest rate, liquidity, fraud,

IT, strategic/ reputational etc.)

• Role criticality assessment through

reviews of structures, JDs, delegations,

authority limits, significance of client

segments, portfolios and products

managed, transaction remits, committee

membership and authorities (group of risk

takers/ collective risk takers) etc.

• Reviews of existing performance appraisal

processes

• Designating select employees as either

MRTs or MRCs

Risk adjusted balanced scorecards will converge with many strategic, operational, HR, IT and risk initiatives

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Improvements in existing environment and system acquisitions / alignments

• Current state assessment of strategic

framework, KPIs/ scorecards, processes,

database, systems, MIS and risk capabilities

• Conceiving transition solutions to ensure best

possible implementation state

• Streamlined data, process and IT

environment to enable transparent

application of scorecards

• Implementation plan to target optimum

state, with responsibilities and timelines

Remuneration policy and risk adjusted balanced scorecards with supporting KPIs

• Employee compensation structures

separately for MRTs and MRCs

• Corporate/ CEO scorecard articulating

the strategic targets

• Strategic framework to support best practice

scorecard development/continuous update

• Risk adjusted balanced scorecards for

all MRTs and MRCs

• Targets at BU and employee levels

aligned with entity’s strategic objectives

• Balancing the customer experience, HR

and operations aspects with business

objectives

• Pay structure and deferrals for

various levels of MRTs

Implementation by December 2018 will require carefully designed models and persistent change management

Other design initiatives

• Mechanism for deferred pool management

• Quarterly progress reports to BRC and final submission to SBP. First report will be as of

March 2017, to be submitted to SBP by April 2017

• Change management: Across the board discussions and acceptance, involving relevant

stakeholders from Board and all tiers of management, regarding the detailed requirements,

their salient features and foreseeable benefits/ impacts with the objective to foster a risk

responsible culture

Implementation initiatives (by December 2018)

• Implementation of risk adjusted remuneration models across the converged business

areas/MRTs and MRCs, as designed in Phase‐1

• Improvements in overall business, HR, risk management environment and risk adjusted

balanced scorecards

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Actions and challenges in compliance journey

Broad guidelines for inclusion

1. President/ CEO/ COO

2. Direct reportee to the President/ CEO/ COO

3. Country Heads of overseas operations

4. President/ CEO/ COO of fully owned local and foreign subsidiaries

5. Direct reportees to the members of senior management managing those critical

functions, as determined by BRC

6. All other Material Business Unit heads managing assets greater than or equal to a

specific threshold, as decided by BRC

7. With regard to credit risk transactions, employee:

• is responsible for proposing credit proposals, or structuring credit products; or

• has authority to take or approve a decision on such credit risk exposures; or

• is a member of a committee which has authority to take the decisions;

of transaction greater than or equal to specific threshold, as determined by BRC

Firms will have to develop concrete and reasonable MRT and MRC inclusion criteria

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7. In relation to treasury portfolio, head of a treasury desk, including money market,

equities, FX, derivatives, sales etc. or a direct reportee to such head.

8. The employee has the authority to take decisions regarding new products or is a

member of a committee having such authority

BRC may identify additional employees as MRTs or MRCs based on their risk profiles

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Globally, banks have sizeable number of MRTs and MRCs to govern, under their risk aligned remuneration framework

Jurisdiction Bank Employees MRTs & MRCs

UK Barclays 45,700 1,523

UK RBS 21,421 707

UK ING Bank 15,209 711

Europe Dankse Bank 19,000 895

Europe Deutsche Bank 98,138 2,903

Europe Commerzbank 48,360 1,225

Europe Piraeus Bank 14,299 346

Review of strategic, HR, IT and risk environment will provide an opportunity to better align with entity’s vision

• Analyse the As-Is business, operational, HR, IT and risk environment through

workshop/ focus groups, reviews of organograms, JDs and other documentation

• Review the relevant documentation/ information:

o Strategic framework (strategy, KPIs, targets, budgets etc.) and performance

measurement techniques (e.g. KPIs/ simplistic scorecards)

o Board and management committees’ ToRs and reporting packs

o Relevant policies and SOPs such as for credit, investments, 0perations, HR etc.

o Full set of existing initiatives, to be translated into the employees’

performance management tools

• Review existing scorecards in terms of coverage from business, risk, finance,

compliance, operations and other key domains, regulatory and best practice aspects

such as extent of financial and non-financial factors, risk factors, incorporation of

objectives/ goals, KPIs, targets/ thresholds and initiatives etc.

• Review cascading of corporate scorecards to BU scorecards and further to employee

levels

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Data, process, technology and analytical capabilities are pivotal for transparent risk aligned remuneration models

• Review sources and processes that make the relevant data and MIS available for

adequate review of remuneration and performance (systems, databases, manual and

automated reports, JDs etc.) for translation into KPIs and KRIs (e.g. the following):

• Assessment of processes, system, data structure, MIS, warehousing and analytics

with due regard to the following:

o Emerging best practices

o Transition arrangements and workarounds between near future and ideal best

practice states

BU Wise

Product Wise

Customer Wise

Employee Wise

Profitability

Risk indicators

Profitability

Risk indicators

Profitability

Risk indicators

Profitability

Risk indicators

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Required sophistication may involve a quantum leap

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KPIs and simplistic scorecards

Balanced scorecards

Risk adjusted balanced scorecards

Mainly business/ financial targets,

such as revenue, profitability,

advances, investments, deposits,

costs, growth etc.

Business process

Customer Learning & growth

• Compliance with service

level TATs

• Reworks/ discrepancies

• Internal audit ratings

• Internal control ratings,

etc.

• Customer retention and penetration

• Customer profitability

• Customer satisfaction score

• Request processing within standard TATs,

• Conduct and consumer protection, etc.

• Staff trainings

• Staff occupancy/

utilisation

• Succession planning,

etc.

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With representative weights, target/ tolerance and score thresholds for various factors

KPIs and simplistic scorecards

Balanced scorecards

Risk Adjusted Balanced Scorecards

• RWA

• Stressed RWA

• NPL

• Stressed NPL

• Customer internal credit rating

• Product/ industry risk rating

• Product/ industry concentration

• Customer complaints

• Regulatory penalties

• Operational losses etc.

• RAROC/ RORAC

Required sophistication may involve a quantum leap

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Consideration of all major risk types:

• Credit Risk

• Market Risk

• Operational Risk

• Liquidity Risk

• Interest Rate Risk

• Reputational/ Strategic Risk etc.

Goal congruence through convergence of all interrelated initiatives/ programmes

• MRTs and MRCs across the entity

• Risk adjusted balanced scorecards

• MIS structures/ reports

• Scheme for deferred pool management

• Remuneration framework

• Remediation plans identifying near team as

well as medium-long term initiatives

• Enhanced strategic plans

• Streamlined JDs

• Enriched KPIs/ KRIs

• Enhancements in technology and database

structures to automate scorecard generation

• Process enhancements to enable data

production/ information generation

• Change management

Business, HR and operations

• Branch model transformation

• Geographic expansion

• New products, services and channels

• NPL optimisation

• Customer loyalty and cross-sell

• Consumer, SME and agri growth

• Digital footprint

• Process efficiencies

• HR productivity and capacity planning

• Internal cost allocation methodologies

Systems and automation

• CBA enhancements

• LOS/ BPM/ CRM

• Data warehouses/ data marts

• Risk engines

• HRM automation 19

Remuneration programme outcomes Existing/ planned initiatives

Remuneration framework will be an eventual culmination of a number of complex preparatory stages

Remuneration framework to prescribe:

• Process for risk adjusted balanced scorecard update, monitoring and use

• Remuneration setting mechanism and pay-out structure for all MRTs and MRCs

• Monitoring the implementation and its impacts

• Disclosure of critical elements as required under the Guidelines and as good practice

for ensuring transparency

o Principles for MRT and MRC remuneration determination

o Communication and divulgence mechanism for remuneration related aspects

o Principles for exclusions of certain salary components from the purview of risk

based remuneration

o Principles for settlement of deferred compensation to exiting and former

employees

• Differentiation concept of fixed and variable pay (i.e. classification of components

within fixed and variable pay)

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Applicable from 2018 annual report and financial statements, subsequent to

implementation of the Guidelines on all the MRTs and MRCs

• Information on remuneration policy, its key features and objectives and remuneration

related governance framework

• Features of total compensation - Fixed and variable remuneration

• Factors considered for differentiating the variable pays across employees or group of

employees

• Description of MRTs

• Alignment of remuneration measures with risks and performance – includes CEO, MRTs

and Key Executives

• Discussion on how the institution ensures that MRCs are remunerated independently of

the functions they oversee

• Explanation of entity’s policy on vesting and deferral of variable remuneration, rationale

of the fraction of remuneration being deferred

• Quantitative details of MRT and MRC remuneration

Much widened scope of additional principle based and quantitative disclosures around MRTs & MRCs and their remuneration

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The journey will require Board and management ownership to address significant challenges

• Entity-wide initiative with cross-departmental dependencies and design/

implementation support from HR, Risk, Strategy, Finance, Operations, BUs and other

functions

• Concurrent undertaking of multiple correlated phases/ activities in strict

timeframes will require major institutional capacity building

• Need for internal capabilities to be significantly up-scaled in terms of HR,

strategy, risk, IT, operations and data to achieve transition to sophisticated

performance measurement systems

• Need for integrated customer/ employee view of risk and profitability

• Thoughtful interpretations and exercise of judgment to prevent unintended negative

consequences

• Constraints in conceiving near term solutions involving practical work arounds and

clear path of future alignment

• Managing independence and change for a programme of wide-spread impacts

• Cascading effects of risk aligned remuneration, potentially on staff reportable to MRTs

& MRCs and further down in the hierarchy

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Our views on staged timelines to follow for compliance

Description2017

Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Review of existing governance structure

Board Remuneration Committee

Monitoring mechanism (MIS)

MRT and MRC identification

Identification of areas for improvement

Remediation plans

Risk adjusted balanced scorecards

Variable compensation payout structure

Deferred pool management

Accounting, financial reporting, legal and tax implications

Bank wide remuneration Framework

Budget finalisation

Change management (ongoing)

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