4. Determining Remuneration
4.1 Alignment of Remuneration with Risk
28. Banks shall ensure that the incentives provided by their remuneration system take into consideration risk, capital, liquidity and the likelihood and timeliness of earnings.
29. An employee’s remuneration should take into account all existing and potential risks including difficult-to-measure risks such as liquidity, cost of capital, reputation, regulatory and misconduct risks. Furthermore, the size of the variable remuneration pool and its allocation within the bank should take into account the full range of risks.
30. The processes for managing misconduct risks through remuneration system should include, at a minimum, ex ante processes that embed non-financial assessment criteria such as the quality of risk management, degree of compliance with laws and regulations and broader conduct objectives of the bank, including fair treatment of customers, into individual performance management and remuneration at all levels of the bank and as part of the broader governance and risk management framework. Such processes should be supported by ongoing programs including formal training courses that reinforce appropriate standards of behavior.
31. Control functions and Human Resources function should be adequately involved in remuneration design and decision-making to ensure effective remuneration incentives in addressing misconduct risk.
32. Remuneration payments should be sensitive to the time horizon of risks and, if needed, the variable component of remuneration should be deferred where risks are realized over long periods.
33. Banks shall employ an appropriate technique/criteria to adjust their accounting profits for the full range of identifiable risks keeping in view the size and complexity of its operations.
34. Adequate amounts of variable remuneration should be placed at risk of reduction, to help alignment of remuneration outcomes with adverse outcomes and/or risks that may manifest only with time.
4.2 Remuneration Structure
35. The remuneration structures for various levels of employees should be designed to promote effective risk management and achieve remuneration objectives.
36. The mix of forms of remuneration should vary depending on the employee’s position and role, it should take into account the full range of financial and non-financial incentives in an employment relationship, and may include cash, equity and other forms of remuneration.
37. The proportion of fixed and variable components of remuneration for different business lines should be determined taking into account the nature and level of responsibilities of an employee, business area in which they work, and the Remuneration Policy of the bank. Banks should, however, ensure that total variable remuneration does not limit their ability to strengthen their capital base.
38. The remuneration structure of employees working in control functions should be designed to ensure objectivity and independence of these functions. In this regard, it should be ensured that performance measurement and determination of remuneration of such employees are not dealt with by any person working in/associated with the business areas monitored by the control functions.
39. The determination of bonus pool should take into account the overall performance of the bank whereas its distribution to individual employees should be based on performance of the employee as well as that of the business unit or division in which they work. There should, however, be no guaranteed minimum bonuses and similar other payments, other than an employee’s salary, that are not based on performance.
40. Current and potential risks should be taken into account when determining the size and distribution of the variable remuneration. The variable remuneration of senior management as well as other employees whose actions have a material impact on the risk exposure of the bank should, therefore, be determined in line with the following:
a. A substantial proportion of remuneration should be variable and paid on the basis of individual, business-unit and bank-wide measures that adequately measure performance.
b. A substantial proportion of variable remuneration, of at least 40 percent, should be awarded in shares or share-linked instruments (or, where appropriate, other non-cash instruments) and should be subject to an appropriate share retention policy.
c. A substantial portion of variable remuneration, of at least 40 percent, should be payable under deferral arrangements over a period of years.
d. These proportions should increase significantly along with the level of seniority and/or responsibility. For the most senior managers and the most highly paid employees, the percentage of variable remuneration that is deferred should be substantially higher of at least above 60 percent.
41. The deferral period for remuneration should not be less than three years based on the nature of the business, its risks and the activities of the concerned employee.
42. The remaining portion of the deferred remuneration can be paid as cash remuneration vesting gradually. In the event of negative contributions of the bank and/or the relevant line of business in any year during the vesting period, any unvested portions are to be clawed back, subject to the realized performance of the bank and the business line.
4.3 Remuneration Adjustment
43. Remuneration system should provide for mechanisms to adjust variable remuneration, including, for instance, through in-year adjustment, and malus or clawback arrangements, which can reduce the variable remuneration after it is awarded or paid. Such mechanisms must be documented in the Bank’s policies and procedures.
44. The bank's poor financial performance during any period is expected to lead to a decrease in the total variable remuneration, taking into account both current remuneration and reductions in payment previously earned during that period. Banks should submit clear justifications of such decrease to SAMA as support documents along with the compliance report.
45. Remuneration adjustment should allow banks to adjust remuneration to account for risks that have subsequently occurred, including instances of employee misconduct or material error, material downturn in performance or a material failure of risk management.
46. Effective policies and procedures must be in place to set indicative criteria and cases that could trigger the use of remuneration adjustment and may result in reductions to variable remuneration regardless of the individual’s performance.
47. At a minimum, adjustment should occur in the following cases:
a. In cases of misconduct that have led to significant loss to the bank, its customers or any party or;
b. Where there is fraud, gross negligence or material failure of risk management controls, including violation of internal policies or any related rules or regulation.
48. Remuneration adjustment policies should take into account, as a minimum, those under review when determining accountability for adverse risk events; the liability or proximity to the misconduct, rank and role, individual’s motivation (e.g. personal gain, malice, fraud, ignorance, lack of training), negligence in exercise of individual’s duties, level of participation in and responsibility for the events under review, history of misconduct, actions that were taken or could have been taken to prevent such events from occurring, including any failures within the bank to internally supervise and oversee staff, and the root cause of the events triggering review.
49. When deciding the amounts of remuneration to be adjusted, performance and remuneration adjustment policies should take into account all relevant indicators of the severity of impact, which may include the cost of fines and regulatory actions, direct and indirect financial losses and/or the impact on profitability attributable to the relevant failure, any reputational damage, the impact of such events on customers, and costs to redress the events under review.
50. Where remuneration adjustments are made before the full impact of the risk management failures or misconduct is known, appropriate subsequent adjustments should be made to ensure that the final adjustment fully reflects the impact of the incident or misconduct.
51. Remuneration adjustment policies should provide that the granting and vesting of all awards made to individuals undergoing internal or external investigation may be frozen until the investigation has concluded and a decision has been made and communicated to the relevant employee(s).
52. The use of remuneration adjustment should not be limited to those most directly involved and responsible for misconduct, but it should extends beyond them. Specifically, adjustment should be considered for the heads of control functions and for employees in control or direct line of business functions who by virtue of their role could be considered responsible or accountable for the failure or for the weakness in the control framework relevant in the employee misconduct, if such failure or weakness was attributed to lack of due diligence or misuse. Also it should be considered for senior management or members of the Board or relevant committees who, while not directly responsible were either aware, or could have been reasonably expected to be aware due to their seniority or role in the bank, of the failure or misconduct at the time, but failed to take adequate steps to promptly address it.
53. Remuneration adjustment should be governed by clear procedures that:
a. Indicate the authority to approve remuneration adjustment and processes of escalating to human resources, control functions, and senior management and deciding cases that may trigger the use of remuneration adjustment for misconduct.
b. Ensure that control functions and human resources, are appropriately involved in the processes of remuneration adjustment, except for those persons who may also fall within the scope of the investigation.
c. Make clear the role of discretion in such processes, who is authorized to use such discretion and how such discretion would be appropriately bound by supporting governance and risk management processes.
d. Require adequate documentation and rationale of final decisions.
e. Ensure transparency by clearly communicating in writing to all affected individuals the value of remuneration adjustments made to variable remuneration and the reasons for such adjustments. That includes noticing the Board or Nomination and Remuneration Committee.