2016-09-26 | 40/SEOJK.03/2016Added · Updated
This circular implements POJK No. 45/POJK.03/2015 by mandating conventional commercial banks to establish written remuneration policies for the Board of Directors, Board of Commissioners, and employees, distinguishing between fixed and variable components. Banks are required to identify Material Risk Takers (MRTs) using qualitative or quantitative approaches and must defer a percentage of their variable remuneration based on job level. The document further regulates the application of Malus and Clawback mechanisms for deferred or paid variable remuneration and specifies detailed disclosure requirements in annual governance reports, including specific tables for remuneration packages.
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To:
The Board of Directors of Conventional Commercial Banks at their place.
COPY
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 40/SEOJK.03/2016
CONCERNING
THE IMPLEMENTATION OF GOVERNANCE IN THE PROVISION OF REMUNERATION FOR COMMERCIAL BANKS
In connection with the Financial Services Authority Regulation Number 45/POJK.03/2015 concerning the Implementation of Governance in the Provision of Remuneration for Commercial Banks (State Gazette of the Republic of Indonesia Year 2015 Number 371, Additional State Gazette of the Republic of Indonesia Number 5811), hereinafter referred to as the Remuneration POJK, it is necessary to regulate the implementation provisions for the application of governance in the provision of remuneration for commercial banks in a Circular Letter of the Financial Services Authority as follows:
I. GENERAL PROVISIONS
In order to improve governance in the provision of remuneration,
according to Article 3 of the Remuneration POJK, Banks are required to have a written Remuneration Policy for the Board of Directors, Board of Commissioners, and Employees while still considering the interests of employees, the Bank, and stakeholders.
The improvement of governance in the provision of Remuneration aims
to maintain the health of the Bank individually through the prevention of excessive risk-taking by decision-makers.
Fixed Remuneration is Remuneration that is not linked to performance and risk. Examples of Fixed Remuneration include basic salary, facilities, housing allowances,
health allowances, education allowances, holiday allowances, and pensions.
Variable Remuneration is Remuneration that is linked to
performance and risk. Examples of Variable Remuneration include bonuses or other forms equivalent to bonuses.
According to Article 22 of the Remuneration POJK, Banks are required to designate parties
who become Material Risk Takers. Subsequently, according to Article 23 of the Remuneration POJK, the payment of Variable Remuneration to parties who become Material Risk Takers, hereinafter referred to as MRT, must be deferred by the Bank by a certain percentage.
Banks may postpone the payment of deferred Variable Remuneration (Malus) or reclaim Variable Remuneration that has already been paid (Clawback) to parties
who become Material Risk Takers under certain conditions.
II. REMUNERATION POLICY
Banks are required to have a written policy for Remuneration for the Board of Directors, Board of Commissioners, and Employees, both for Fixed Remuneration and for Variable Remuneration.
A. Fixed Remuneration
Fixed Remuneration is generally given in
cash form which may also be accompanied by non-cash provisions.
In establishing policies for the provision of Fixed Remuneration,
according to Article 12 of the Remuneration POJK, Banks are required to at least consider business scale, business complexity, peer group, inflation rate, financial conditions and capabilities, and must not conflict with applicable legislation.
Banks must consider the (gap) in Remuneration among
different job levels so as to reduce the potential for internal conflicts and operational risks such as fraud or other operational risks in establishing policies for the provision of Fixed Remuneration.
B. Variable Remuneration
Variable Remuneration can be given in
cash and/or shares or share-based instruments issued by the Bank.
In establishing policies for the provision of
Variable Remuneration, according to Article 13 of the Remuneration POJK, Banks are required to consider business scale, business complexity, peer group, inflation rate, financial conditions and capabilities, and must not conflict with applicable legislation. The establishment of policies for the provision of Variable Remuneration must encourage prudent risk-taking.
In establishing risks linked to Variable
Remuneration, Banks consider the risk that has the most influence in business activities as the primary risk referring to Financial Services Authority regulations regarding the application of risk management for commercial banks. Generally, there are 8 (eight) risks in Bank business activities, namely credit risk, market risk, liquidity risk, operational risk, legal risk, reputational risk, strategic risk, and compliance risk. For example, for Banks that do not focus on derivative activities but focus on credit disbursement, then credit risk becomes the most influential risk to be linked to Variable Remuneration. For Banks whose business focuses on credit disbursement and derivative transactions, then credit risk and market risk become the most influential risks to be linked to Variable Remuneration.
According to Article 17 of the Remuneration POJK, Banks with public company status (go public) are required to provide part of
Variable Remuneration in the form of shares or share-based instruments issued by the respective Bank, considering at least the following:
a. the provision of Variable Remuneration in the form of shares or share-based instruments issued by the respective Bank for go-public Banks applies for at least for the entire Board of Directors, members of the Board of Commissioners, and MRT; and b. the percentage of provision of Remuneration in the form of shares or share-based instruments issued by the Bank can be given differently at each job level by considering among others the role and responsibility of the respective position in Bank management. Example: for MRTs given at 5% (five percent), non-MRT Board of Directors members given at 4% (four percent), and for non-MRT Board of Commissioners members given at 3% (three percent) of the Variable Remuneration received by each. The provision in the form of shares or share-based instruments issued by the respective Bank is expected to increase the sense of belonging to the Bank.
According to Article 19 of the Remuneration POJK, in the event the Bank incurs
losses, the Bank may not distribute or distribute Variable Remuneration with a relatively small value.
The term "relatively small value" as referred to in item 5 is the provision of Variable
Remuneration whose value is smaller than in the last period the Bank obtained profit or set smaller according to the proportion of the Bank's profit decline.
The provision of Variable Remuneration as referred to in item 6 is a form of appreciation for
some individuals who have performance or achievements worthy of receiving Variable Remuneration even though the Bank incurs losses.
C. Remuneration Committee
Provisions regarding governance in the provision of Remuneration this
are essentially part of the implementation of governance for commercial banks. Thus, provisions regarding remuneration complement existing governance regulations.
In connection with item 1 above, the existence
of the Remuneration Committee is one of the committees formed to assist in the implementation of duties and responsibilities of the Board of Commissioners, particularly in applying governance in the provision of Remuneration.
The Remuneration Committee can be formed separately from the
Nomination Committee or merged into one with the Nomination Committee as the Remuneration and Nomination Committee.
The membership of the Remuneration and Nomination Committee is
as regulated in provisions regarding the application of governance for commercial banks. As for duties and responsibilities related to Remuneration policies as established in the Remuneration POJK, while regarding Nomination policies as regulated in provisions governing the application of governance for commercial banks.
III. MATERIAL RISK TAKERS
A. Designation of Material Risk Takers by Banks
According to Article 22 of the Remuneration POJK, Banks are required to designate parties
who become MRTs.
The designation of MRTs can be done through 2 (two) approaches,
namely:
a. Qualitative Approach
Through the qualitative approach, the Board of Directors and/or Employees who, due to their duties and responsibilities, take decisions that have a significant impact on the Bank's risk profile are designated as MRTs.
B. Deferral of Variable Remuneration for Material Risk Takers
According to Article 23 of the Remuneration POJK, Banks are required to defer the payment of Variable Remuneration for MRTs by a certain percentage. The deferral of Variable Remuneration for MRTs is done considering the following:
The size of the deferral percentage is adjusted
to the job level, namely the higher the job level, the larger the percentage of Variable Remuneration that is deferred.
Regarding Variable Remuneration that is deferred:
a. in cash form, no additional or reduction in monetary value is given, including those caused by changes in the time value of money; and/or b. in the form of shares or share-based instruments issued by the Bank, no additional or reduction in the number of shares or share-based instruments issued by the Bank is given, including those caused by changes in the value of shares or share-based instruments issued by the Bank.
In the event Variable Remuneration is given in
cash form and in the form of shares or share-based instruments issued by the Bank, then deferral cannot be done only for one form of Variable Remuneration but must be done for all forms of Variable Remuneration.
Methods that can be used by Banks in establishing the size of
deferral of Variable Remuneration for MRTs include:
a. Comparing the amount of Variable Remuneration of MRTs with the amount of the highest Variable Remuneration from non-MRTs at the same job level. Example: Mr. X is an Executive Official who is designated as an MRT, receiving Variable Remuneration 30% (thirty percent) larger compared to the highest amount of Variable Remuneration from non-MRT Executive Officials. In this case, the Bank can defer the excess of 30% (thirty percent) of the Variable Remuneration for Mr. X. In the event that Variable Remuneration received by non-MRT Employees is higher than that of MRT Employees, among others caused by the performance of non-MRT Employees being better, then this method cannot be used by the Bank as a method in establishing the size of deferral of Variable Remuneration for MRTs. b. Comparing Variable Remuneration with total Fixed Remuneration over 1 (one) year for the respective MRT. Example: total Fixed Remuneration received by Mr. Y as an MRT in 1 (one) year is Rp1.2 billion, while the Variable Remuneration received for his performance in the same year is Rp1.5 billion. In this case, the Bank can defer the excess of Variable Remuneration over Fixed Remuneration for Mr. Y by Rp300 million.
c. Based on the percentage of profit increase of the Bank
compared to the Bank's profit 1 (one) year prior.
Example: The Bank obtains a profit increase compared to the previous year of 20% (twenty percent). In this case, the Bank can defer 20% (twenty percent) of the Variable Remuneration for MRTs. In the event the Bank does not experience a profit increase compared to the profit of the previous year or the Bank experiences a decline in profit compared to the profit of the previous year, then this method cannot be used by the Bank as a method in establishing the size of deferral of Variable Remuneration for MRTs.
Banks can use the methods as referred to in item 4 or can use other methods adjusted to
the Bank's conditions at the time of providing Variable Remuneration provided the method in question remains aligned with the application of prudent risk-taking.
Banks must establish the size of the percentage of Variable Remuneration
that will be deferred in an amount that can cause a significant impact to encourage MRTs to apply prudent risk-taking.
C. Postponement of Payment of Deferred Variable Remuneration
(Malus) or Reclamation of Paid Variable Remuneration (Clawback)
According to Article 26 of the Remuneration POJK, under certain conditions established by the Bank, the Bank may postpone the payment of deferred Variable Remuneration (Malus) or reclaim Variable Remuneration that has already been paid (Clawback) to parties designated as MRTs. In the application of Malus and/or Clawback so that its implementation can be done well with minimal risk, the Bank needs to consider at least the following:
Banks can use Malus, Clawback, or
combinations of Malus and Clawback arrangements against Variable Remuneration that is deferred for MRTs. These arrangements are contained in the Bank's written Remuneration policy.
The selection of Malus and/or Clawback arrangement forms
is done carefully by considering constraints that the Bank may face in implementing the policy in question, including legal and tax aspects.
Malus or Clawback arrangements are used by the Bank under certain
conditions, including the Bank incurring losses, the occurrence of risks that have a negative impact on the Bank's finances, the occurrence of fraud committed by parties who are MRTs that harm the Bank, or other conditions established by the Bank.
To mitigate legal and/or other risks that may
arise in the application of Malus and/or Clawback, the Bank needs to establish clear and detailed criteria.
The application of Malus and Clawback is done as follows:
a. Malus is applied to Variable Remuneration that is still deferred; and b. Clawback is applied to Variable Remuneration that has already been paid, for members of the Board of Directors, members of the Board of Commissioners, or Employees who are designated as MRTs, both those still working and those who no longer work at the Bank.
Regarding the portion of Variable Remuneration subject
to Malus, it can be paid partially or fully later or not paid at all. Therefore, the Bank needs to establish criteria for Variable Remuneration subject to Malus that can be paid or cannot be paid.
In the application of Clawback, the Bank needs to establish methods
for the return of Variable Remuneration by MRTs subject to Clawback, both for MRTs still holding office or who no longer hold office at the Bank. Some methods for the return of Variable Remuneration subject to Clawback by the Bank include:
a. MRTs return the Variable Remuneration subject to Clawback; and/or b. deductions are made against rights to be received such as salary and/or bonuses.
IV. DISCLOSURE
According to Article 28 of the Remuneration POJK, Banks are required to disclose
information on Remuneration policies in the annual report on governance implementation as regulated in provisions governing the application of governance for commercial banks.
Information regarding Remuneration policies as referred to
in item 1 must at least cover:
a. The Remuneration Committee including:
| Type of Remuneration and Facilities | Amount Received in 1 (One) Year | |||
|---|---|---|---|---|
| Board of Directors | Board of Commissioners | |||
| Persons (Million Rp) | Persons (Million Rp) | |||
| Salary, bonuses, routine allowances, tantiems, and other facilities in non-natura form | ........... | ............. | ........... | ............. |
| Other facilities in natura form (housing, health insurance, etc.) that: | ||||
| a. can be owned; b. cannot be owned. | ........... | ............. | ........... | ............. |
| Total | ........... | ............. | ........... | ............. |
j. Remuneration packages grouped by income level received by the Board of Directors and members of the Board of Commissioners in 1 (one) year, as in the table below:
| Amount ... |
Total Remuneration per Person in 1 (One) Year *) Total Board of Directors Total Board of Commissioners
Above Rp2 billion ............... ...............
Above Rp1 billion to Rp2 billion
............... ...............
Above Rp500 million to Rp1 billion
............... ...............
Below Rp500 million ............... ...............
Note: *) received in cash k. Variable Remuneration, including:
has been decided in the General Meeting of Shareholders and/or the Bank's Articles of Association. Disclosure regarding shares options must at least cover:
employees and their families for work and/or services that have been performed. Salaries compared in the salary ratio are the compensation received by the Board of Directors, members of the Board of Commissioners, and employees per month. What is meant by "employee" in this case is permanent Bank employees up to the level of operational employees; p. the number of recipients and the total amount of Variable Remuneration that is unconditionally guaranteed to be given by the Bank to prospective Board of Directors, prospective Board of Commissioners, and/or prospective Employees during the first 1 (one) year of employment; q. the number of Employees subject to termination of employment and the total nominal amount of severance pay paid as in the table below:
Total Nominal Severance Pay
Paid per Person in 1 (One)
Year
Number of Employees
Above Rp1 billion ...............
Above Rp500 million to Rp1 billion ...............
Below Rp500 million ...............
r. the total amount of Variable Remuneration that is deferred, consisting of cash and/or shares or instruments based on shares issued by the Bank; s. the total amount of Variable Remuneration that is deferred and paid during 1 (one) year; t. the details of the amount of Remuneration given in 1 (one) year including:
Cash
(in million rupiah)
……….. ……….. ……….
Shares/ Instruments
based on shares issued by the Bank
(in shares and nominal million rupiah that are conversion from shares) ……….. ……….. ……….. ………. ……….. ……….. ……….. ………. Note: *) Only for MRTs
Presentation of ...
The presentation of the above information is submitted in the form of a table or graph, and/or comparison with the previous 1 (one) year reporting period. In the event that the Bank presents information in the form of a table, the presentation must at least refer to the tables as referred to in item 2 above.
V. CLOSING
With the implementation of this Financial Services Authority Circular, Chapter IX. Transparency of GCG Implementation, letters D, E, and F in Bank Indonesia Circular Number 15/15/DPNP dated April 29, 2013 regarding the Implementation of Good Corporate Governance for Commercial Banks is declared not applicable to:
a. Foreign Banks, BUKU 3 Banks, and BUKU 4 Banks since the implementation of this Financial Services Authority Circular; and b. BUKU 1 and BUKU 2 Banks that are not Foreign Banks starting from January 1, 2017.
The provisions in this Financial Services Authority Circular shall take effect on the date of determination.
Determined in Jakarta on September 26, 2016
EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed
NELSON TAMPUBOLON
Copy matches the original
Legal Director 1
Legal Department signed
Yuliana
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Source: Otoritas Jasa Keuangan (Financial Services Authority) — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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