Private Equity managers and other asset managers who thought they might avoid a European clampdown on compensation are now facing tighter restrictions on how and when bonuses are paid and disclosure, reports Reuters.
A new consultation paper on the Alternative Investment Fund Managers Directive (AIFMD) proposes extending the reach of regulators and Europe’s Capital Requirements Directive, according to a spokesperson from consultancy PwC.
Previous rules targeted bank pay, primarily. While asset managers such as private equity executives were among the most leniently treated, in tier 4, with minimum use of deferral and equity.
Now, under the new measures proposed in the AIFMD, firms may be required to pay at least half of their bonuses in stock and defer between 40 to 60 percent of variable pay for up to five years. This is intended to restrict the amount of cash bonuses to align compensation more closely with risk. Firms will also have to disclose total pay for a financial year, and provide a breakdown of compensation for senior managers and other key staff members.
You can well imagine the sensitivity of disclosing total pay for top executives at a firm. The new rules could put EU-regulated firms at a disadvantage for the recruitment and retention of employees. It also affects both firms based in Europe and those that are marketed in Europe. So it could potentially lead some private equity firms or private equity executives outside the EU to rethink doing business there.
“The rules will mean sweeping changes to the pay policies and practices of many asset management firms. Many thought they’d escaped the brunt of banking pay regulations, but they’re coming back to bite,” said Tim Wright, reward director at PwC. “It is something of a surprise that it looks like carried interest will be included. Carried interest is directly linked to realisations made in the fund managed and there are likely to be conceptual difficulties in calculating the annual amount,” says Wright.
Private equity firms have until September, 2011, to respond to the new directive, which could be implemented in the summer of 2013.
Will the new AIFMD directive affect your firm or your career plans? Do you think similar regulatory moves are on the horizon in North America? Add your comments below.
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