This presentation is provided only as a training and educational resource to assist in
the dissemination and awareness of AIFMD’s remuneration rules. It is a supplement to
your firm’s internal compliance reference materials and sources. Each individual
organization must determine how a specific requirement applies to its particular
To assist firms in their research, this presentation provides references. Hyperlinks are
provided for convenience only, and we do not guarantee their accuracy or
This presentation reflects requirements as of January 2014. Be sure to monitor for
This presentation assumes a general familiarity with AIFMD, the Alternative
Investment Fund Managers Directive.
For an introduction to AIFMD, see our presentation:
AIFMD 101: An Introduction for U.S. Managers
Alternative investment fund
Alternative investment fund manager
Alternative Investment Fund Managers Directive
European Securities and Markets Authority
• Article 13 and Annex II of the AIFMD establish general rules regarding
remuneration (compensation) paid by AIFMs to their employees.
• ESMA has issued specific guidelines on compliance with these rules.
– The remuneration rules are effective July 22, 2013.
– For a summary of the Guidelines, see our presentation:
AIFMD Remuneration: Reference guide
Reference: ESMA Guidelines, Paragraph 4
Objectives of the Rules
• “Curb excessive risk taking by alternative fund managers.”
– “Avoid conflicts of interests that lead to excessive risk taking.”
– Enhance investor protection as a result.
• Align pay rules with those in other financial sectors.
– Make AIFMD rules consistent with rules under the Capital Requirements Directive.
Reference: ESMA Press Release, 11 February 2013
• The remuneration rules apply to all AIFMs:
– Except that non-EU AIFMs not using the passport and relying on national private
placement regimes are subject only to the disclosure guidelines, as long as these
national regimes will continue to be in force.
• When portfolio management or risk management is delegated:
– The delegates must be subject to regulatory requirements that are “equally as effective
as those applicable under the guidelines” or
– Contractual arrangements must be in place “to ensure that there is no circumvention of
the remuneration rules.”
– For delegates in countries outside the EU with regulations that are “equally as effective”
as those under the AIFMD guidelines, compliance with local regulations may constitute
compliance with AIFMD requirements.
Reference: ESMA Guidelines, Paragraphs 1, 18
• Remuneration is broadly defined as all payments or benefits from the
AIFM or the AIF (including any transfer of units or shares of the AIF) in
exchange for professional services rendered by identified staff.
• Remuneration therefore includes:
Transfers of shares or units of the AIF
Discretionary pension benefits
Reference: ESMA Guidelines, Paragraphs 10-14, 82, 83
• Remuneration excludes:
– Payments or benefits that are part of a general, non-discretionary, AIFM-wide policy and
pose no incentive effects in terms of risk assumption.
– Pro-rata returns of investment into the AIF that arise from a cash investment (rather
than a loan).
– “[D]istributions that partners receive as owners of an AIFM.”
• Remuneration is either fixed or variable.
• AIFMs cannot use indirect structures to circumvent the rules.
Reference: ESMA Guidelines, Paragraphs 11, 12, 15-17
• The remuneration rules apply to identified staff.
• Unless “it is demonstrated that they have no material impact” on risk
profile, the following are identified staff:
– Executive and non-executive members of the governing body of the AIFM,
– Senior management,
– Control functions (compliance, internal audit and the like),
– Staff responsible for heading portfolio
management, administration, marketing, human resources, and
– Other risk takers, including portfolio managers and traders, who have a material
influence on risk profile either individually or as a group.
Reference: ESMA Guidelines, Paragraphs 3, 20, and part II on definitions
Identified Staff (cont.)
• Identified staff also includes other employees in the same remuneration
bracket if they have a material impact on the risk profile.
• Identified staff at delegates may be limited to those identified staff that
have a material impact on the risk profile of the AIF.
• AIFMs must designate identified staff.
– AIFMs must conduct analysis at an appropriate level of depth.
– Proportionality* can operate within the AIFM with regard to classification of staff.
* See Slides 22-23 for a discussion of proportionality.
Reference: ESMA Guidelines, Paragraphs 19, 21, 22, 31
• Remuneration policy should be consistent with business strategy.
• Remuneration policy should avoid conflicts of interests:
– Any variable remuneration for oversight functions should be based on function-specific
objectives and not solely on AIFM performance.
– The independence of control functions (such as compliance and risk management)
should not be compromised.
– There should be a separation of functions if possible (e.g., the management body should
not determine its own compensation).
• The supervisory function should review implementation at least annually.
Reference: ESMA Guidelines, Paragraphs 37, 41-48, 50, 51, 61, 71-76, 78, 132, 169
• AIFMs are encouraged to establish a remuneration committee.
– AIFMs of “significant size” must have a committee.
– Proportionality* applies to the establishment of a committee.
– The committee should have an independent chair and sufficient expertise.
• Control functions such as compliance and risk management should be
involved in the remuneration process.
* See Slides 22-23 for a discussion of proportionality. Paragraphs 53 – 55 of the Guidelines list
specific factors to consider with regard to proportionality on remuneration committees.
Reference: ESMA Guidelines, Paragraphs 40, 49, 52-69
• Remuneration policy should be connected to risk management.
It should consider all risks and prevent “excessive risk-taking.”
It should use the same risk measurements that are applied in management of the AIFs.
Proportionality* applies to risk management calculations.
AIFMs should consider using qualitative measures as well as quantitative
measures, especially for risk and control considerations (such as compliance breaches.)
• Performance numbers should be adjusted for risk at the time that the
initial award is made.
– This is called an “ex ante” adjustment.
* See Slides 22-23 for a discussion of proportionality.
Reference: ESMA Guidelines, Paragraphs 77-81, 107-109, 118-120, 122-124
Risk Adjustment (cont.)
• AIFMs may adjust remuneration after the initial award is made.
– This is called an “ex post” adjustment, and it is possible only if a portion of the initial
award is deferred.
– An ex-post adjustment can only be downward.
– Ex-post adjustments are made through maluses and clawbacks.*
– A retention period** or a decline in value of a deferred award is not a sufficient ex-post
* A malus prevents vesting of deferred remuneration, while a clawback returns ownership to the
** The period during which remuneration paid in instruments (units in the AIF or their
equivalent) can’t be sold.
Reference: ESMA Guidelines, Paragraphs 125, 148-159, and part II on definitions
Design and Structure
• AIFMs have full flexibility in determining the split between fixed and
– Since variable remuneration may be zero, fixed remuneration should be sufficiently high
to compensate for skills.
• Variable remuneration should be “performance-based and risk-adjusted.”
– Criteria to determine variable remuneration should match business objectives.
– Criteria should incorporate qualitative as well as quantitative elements.
– Accrual period should match business needs; it must be at least 1 year and should
generally be multi-year.
– Variable remuneration should be tied as closely as possible to the decision level of the
Reference: ESMA Guidelines, Paragraphs 78, 94-96, 99-104, 110-116
Design and Structure (cont.)
• A portion of variable remuneration should be deferred.
– Portion to be deferred should be 40-60%.*
– Minimum deferral period is 3 -5 years unless the life cycle of the AIF concerned is
shorter. Minimum deferral is 12 months.
• A portion of variable remuneration should be paid in instruments.
– Instruments are shares or units in the AIF or their equivalent.
– Portion to be paid in instruments is 50%.*
– Payment in instruments may be subject to a retention period before they may be sold.
* Proportionality applies. See Slides 22-23 for a discussion of proportionality. Paragraphs 142 and
147 of the Guidelines list specific factors to consider with regard to proportionality on variable
Reference: ESMA Guidelines, Paragraphs 97, 98, 105, 106, 117, 125-131, 133-147
Design and Structure (cont.)
• AIFMs should have a documented process for converting performance into
• The remuneration policy should address potential loopholes:
– Variable remuneration may be reduced when the AIFM is in financial trouble.*
– Discretionary pension benefits should be subject to retention periods, etc., so that
retirement is not a way to sidestep the remuneration rules.
– Severance payments cannot reward failure.
– Staff members cannot engage in personal hedging against reductions in remuneration.
* Proportionality applies. See Slides 22-23 for a discussion of proportionality.
Reference: ESMA Guidelines, Paragraphs 35, 36, 83-92, 121
• AIFMs must disclose their remuneration policies and practices annually.
– Proportionality applies.*
– See the Reference Guide (Slides 40-43) for specific information that should be disclosed.
• AIFMs need not disclose the remuneration paid to any individual.
* Proportionality applies. See Slide 22-23 for a discussion of proportionality.
Reference: ESMA Guidelines, Paragraphs 161-163
• “AIFMs should comply in a way and to the extent that is appropriate to
their size, internal organization and the nature scope and complexity of
• Not all AIFMS should have to give substance to the remuneration
requirements in the same way and to the same extent. Proportionality:
– “[S]hould operate both ways: some AIFMs will need to apply more sophisticated policies
– “May lead, on an exceptional basis and taking into account specific facts, to the
disapplication of some requirements.”
Reference: ESMA Guidelines, Paragraphs 23-26
• Only certain requirements may be disapplied.
– Numerical requirements may only be disapplied in their entirety. For example, the
percentage to be paid in instruments cannot be reduced from 50% to 35%. However, the
50% could be reduced to 0% if payment in instruments would be disproportionate.
• “It is primarily the responsibility of the AIFM to assess its own
characteristics and to develop and implement remunerations policies and
practices which appropriately align the risks faced and provide adequate
and effective incentives to its staff.”
See the Reference Guide (Slides 44-48) for detail on factors that should be considered when
assessing proportionality in general and for particular guidelines.
Reference: ESMA Guidelines, Paragraph 28
• AIFMs should document in writing:
The remuneration policy.
Procedures for appraisals and awards determination.
The basis for decisions made during the process of determining remuneration.
The rationale behind any application of proportionality.
The basis for concluding that a delegate has policies that are “equally as effective,” if the
AIFM does not rely on contractual provisions.
See the Reference Guide (Slides 49-50) for specific items that should be documented.
Reference: ESMA Guidelines, Paragraphs 39, 117, 170
• The ESMA guidelines define good policy and practice with regard to
remuneration at AIFMs and their delegates.
– AIFMs and their delegates have flexibility with regard to implementation of policy and
– When AIFMs and their delegates depart from ESMA-recommended policy and practice,
they must be able to explain how their approach is consistent with the objectives of the
– AIFMs should thoroughly document their remuneration policies and procedures,
rationale for the application of proportionality (if relevant) and support for
– Delegates should carefully categorize their identified staff in relation to each AIF.