2. Governance of Remuneration
1. Banks shall comply with all corporate governance requirements with regards to remuneration as specified by SAMA or any regulatory authority, as applicable.
2.1 Board of Directors Responsibilities
2. The Board of Directors (the Board) of a bank shall be responsible for the overall design and oversight of the remuneration system that promote prudent risk-taking behaviors and business practices and accordingly shall not delegate this responsibility to senior management.
3. The Board shall be ultimately responsible for promoting effective governance, sound remuneration practices, ethical behavior and compliance with laws, regulations, and internal conduct standards, and for ensuring accountability for misconduct; in addition to the following:
a. Overseeing and holding senior management accountable for implementing and participating in the design of the remuneration system that effectively delineates how remuneration tools address misconduct risk or other imprudent risk taking behavior.
b. Engaging actively with senior management, including challenging senior management’s remuneration assessments and recommendations if warranted when serious or recurring misconduct occurs and ensure that root cause analysis is performed, lessons learned are promulgated bank-wide and new policies are adopted, as necessary, to prevent it from happening again.
4. The Board shall ensure that senior management puts in place policies and procedures that ensure effective control and adherence to these rules, and any relevant Laws, Regulations, Principles and Standards.
5. The Board shall review and, if satisfied, approve the remunerations of the senior management based on the recommendations of the Nomination and Remuneration Committee.
6. The Board shall ensure that an annual review of the remuneration (internally through Internal Audit or externally commissioned by a recognized firm) is carried out independently without the intervention of senior management. The review must assess the compliance with these rules and any relevant Laws, Regulations, Principles and Standards, as well as the bank’s internal policies that are prepared according to these rules. The Board shall takes into account the results of such a review when making decisions related to remuneration, and could briefly disclose those results in the Board of Directors Annual Report.
2.2 Formation and Responsibilities of the Nomination and Remuneration Committee
7. Banks shall have a Nomination and Remuneration Committee comprising of at least three members. The composition and responsibilities of the committee shall be consistent with SAMA’s Key Principles of Governance in Financial Institutions and any other requirements set by any regulatory authority, as applicable.
8. The General Assembly, upon the proposal of the Board, shall lay down the terms of reference of the Nomination and Remuneration Committee, which should include its work controls, responsibilities, procedures for appointing committee members, their membership duration and remuneration. A copy of the terms of reference of the Nomination and Remuneration Committee shall be submitted to SAMA along-with the Compliance Report for every cycle.
9. The Nomination and Remuneration Committee should work closely with the bank’s Risk Management Committee and/or the Chief Risk Officer in the evaluation of the incentives created by the remuneration system.
10. The Nomination and Remuneration Committee shall review the implementation of the Remuneration Policy at-least on a half-yearly basis to ensure achievement of its stated objectives.
11. The Nomination and Remuneration Committee shall closely review and monitor the remuneration for highest paid staff to verify compliance with the Remuneration Policy, and to avoid misuse.
2.3 Senior Management Responsibilities
12. Senior management should implement the remuneration system that promotes effective governance, sound remuneration practices, ethical behavior and comply with laws, regulations, and internal conduct standards.
13. Senior Management shall be responsible for the following:
a. Promote, develop and communicate conduct expectations and clearly link remuneration and conduct standards, including as part of the performance assessment process and ensure that the potential consequences of misconduct on remuneration are clearly explained to all employees.
b. Follow-up on the publication of the desired aspirations of every department in the bank regarding ethical behavior and work practices that are in compliance with the laws, regulations and internal standards of behavior, and the application and achievement of these aspirations.
c. Identify, monitor and report on relevant indicators of misconduct risk in every department in the bank, as well as monitor the role of each department in the bank in escalating and remediating identified deficiencies or other important matters in an appropriate and timely fashion, in such a way as to allow inclusion of relevant feedback and changes in the performance assessment process if needed.
14. Senior management shall submit a report to the Nomination and Remuneration Committee on a semi-annual basis at least on measures taken and steps to be taken within the framework of applying the Banks Remuneration Rules issued by SAMA and any relevant Laws, Regulations, Principles and Standards.
2.4 Misconduct
15. Banks should have an internal definition of misconduct based on their characteristics, values and business, which promotes adherence to legal, professional, internal conduct and ethical standards.
16. The bank’s risk appetite statements should reflect clear and well-understood values and conduct standards that are tailored and cascaded to individual business units and taken into account when assessing performance and promotion potential. Individuals should be held accountable for ensuring that their own conduct is consistent with these standards.
2.5 Remuneration Policy
17. Banks shall have a written Remuneration Policy for Senior Management approved by General Assembly, and a Remuneration Policy for all other employees approved by the Board of Directors. The Remuneration Policy shall ensures the achievement of prudent management of the risks associated with remuneration.
18. The Remuneration Policy should be designed to attract and retain quality staff with sufficient knowledge, skills and expertise to effectively conduct the business of the bank.
19. The Remuneration Policy should, inter-alia, cover the following areas:
a. The objectives of the Remuneration system (with focus on promoting effective risk management and achieving financial soundness and stability of the bank).
b. Scope of policy should cover all levels and categories of employees whether regular or contractual as well as outsourcing arrangements with third-party service providers.
c. Broad structure of the Remuneration system (including but not limited to linking remuneration with performance and alignment of remuneration with risk taking).
d. Determinants of the mix of remuneration components (including but not limited to fixed and variable components; cash, equity and other non-cash benefits).
e. Description and details of major perquisites to be made part of the remuneration.
f. Authority matrix clarifying management’s approval limits for remunerations and any constraints that require approval from Nomination and Remuneration Committee.
g. A clear description of the responsibilities of the control functions, as well as human resources, related to participating in designing appropriate remuneration policies, developing performance indicators related to risk and behavior, and identifying, monitoring and reporting misconduct.
h. Criteria to be used for determining the value for allocation of the shares in relation to remuneration.
20. The Remuneration Policy should not be solely based on industry practices but should also take into account the business model, financial condition, operating performance and business prospects of the bank.
21. The review of Remuneration Policy to assess its adequacy and effectiveness should be made an integral part of the bank’s risk management framework.