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ESMA consultation on remuneration guidelines for alternative investment fund managers


On 28 June 2012, the European Securities and Markets Authority (ESMA) published a consultation paper on proposed guidelines on the remuneration of alternative investment fund managers (AIFMs), which include managers of hedge funds, private equity funds and real estate funds.

The proposed guidelines set out how AIFMs will be required to implement remuneration policies to comply with the EU Alternative Investment Fund Managers Directive (AIFMD), which has to be implemented into the national law of EU states by 22 July 2013.

Overall, the proposed guidelines are likely to present a marked change for many AIFMs, even once the principle of proportionality is applied. Accordingly, starting to think about the implications of these requirements, both for the UK and other EU states, is recommended.

The detailed implications of the AIFMD are subject to the FSA (and other EU regulatory bodies), producing their own rules consistent with the final ESMA guidelines, which will apply to the AIFMs regulated by those bodies. The FSA is expected to publish its own consultation document later this year.


The AIFMD remuneration requirements apply to all AIFMs which are within the scope of the AIFMD.  These are normally: 

  • EU AIFMs which manage one or more alternative investment funds (AIFs) irrespective of whether such AIFs are EU AIFs or non-EU AIFs;
  • Non-EU AIFMs which manage one or more EU AIFs; and
  • Non-EU AIFMs which market one or more AIFs in the EU irrespective of whether such AIFs are EU AIFs or non-EU AIFs.

This will include AIFMs who are subsidiaries of other credit institutions such as banks and insurance companies.

For affected AIFMs, there will be two categories of requirements - ‘general’ (in respect of all staff) and ‘specific’ (applying only to individual remuneration packages of ‘Identified Staff’).

As expected, proportionality can be applied to both types of requirements.  Practically, this means the AIFM may have some scope for tailoring the way in which it implements remuneration policies and practices.

Proposed guidelines

The aim of the guidelines is to ensure that AIFs have “sound and prudent remuneration policies and structures with the aim of increasing investor protection and avoiding conflicts of interest that may lead to excessive risk taking”.

We have provided below a high level summary of the key requirements and our comments on these.

Remuneration policy and general principles

Remuneration policy - the AIFM will need to implement a remuneration policy which ensures the AIFMs interests’ are aligned with those of the AIFs it manages.

Risk alignment - remuneration must be fully risk-aligned.  Remuneration includes carry and the transfer of shares or units in the AIF, but does not include co-investment where the co-investment has been fully paid up by the individual prior to co-investment returns being paid.

Deloitte's view: The fact carry and some co-invest is to be considered ‘remuneration’, for the purposes of the proposed guidelines, is positive as it may help meet the deferral requirements on variable pay (see below). That said, work is likely to be required to ensure carry is appropriately risk aligned with the introduction, for example, of retention periods, malus (pre-vesting) and clawback (post-vesting) provisions. Funds that perform well quickly may find they have to hold back amounts they would otherwise have paid out. There is also insufficient detail in the paper to understand precisely how carry could meet the requirements (e.g. valuing the carry for the purposes of assessing the deferred proportion of variable pay).


General - These are applicable to all employees and will potentially affect severance payments and discretionary pension benefits. AIFMs should be able to explain to competent authorities the criteria they use to determine the amount of severance pay, ensuring no reward for failure.

Specific - The AIFM will need to determine ‘Identified Staff’ (broadly individuals who have or could have an impact on the AIFM’s risk profile) whose remuneration will be subject to specific requirements including:

  • At least 40% to 60% of their variable remuneration should be deferred with a minimum deferral period of 3 to 5 years.
  • Further retention periods should apply.
  • At least 50% of the variable remuneration should be paid in instruments.  This applies equally to both the non-deferred and the deferred parts of the variable remuneration.
  • Variable remuneration should be performance-based and risk adjusted.
  • Performance related remuneration should include parameters linked to the risks and performance of the AIF concerned, the business unit of the AIFM and the individual’s activities.
  • The risk alignment process should use a mix of qualitative and quantitative approaches for assessing individual performance.
  • The AIFM should be able to reduce the variable remuneration by malus (pre-vesting) or clawback (post-vesting).
  • Carry could, subject to the terms and structure of it, satisfy the above requirements.

Deloitte's view: Policies will need to be reviewed and changes made as appropriate to meet the general requirements. Significant change may also be required in the way AIFMs remunerate Identified Staff, e.g. with increasing emphasis on deferral into appropriate instruments and the introduction of retention periods. Consideration will need to be given both to meeting these requirements and managing the commercial impact for AIFs and individuals as well as the tax position. There are challenges from a tax perspective, for example, for partnerships seeking to defer remuneration and detailed consideration will be required as to how it can be achieved depending on the exact structure of the AIFM. Greater links to personal as well as business performance may also put tension on the tax position of carry and co-invest in some non-UK jurisdictions.


A principle of proportionality is incorporated into the guidelines with the aim of matching the remuneration policies and practices appropriately to the risk profile of the AFIM and the AIFs it manages. Practically, this means the remuneration requirements do not need to be applied to the same extent by all AIFMs.

There are two levels of proportionality:

  • Size, internal organisation and nature, scope and complexity of the activities: There will be an opportunity to tailor the requirements depending on these factors.
  • Categorising ‘Identified Staff’: Broadly, ‘Identified Staff’ will be individuals who have/could have an impact on the AIFM’s risk profile.

Deloitte's view: It is primarily the responsibility of the AIFM to assess its own characteristics. However, competent authorities are required to review the ways AIFMs actually implement the proportionality principle and AIFMs will need to be able to demonstrate to competent authorities how they have selected Identified Staff. Accordingly, proper documented, and objective processes will need to be considered and put in place.


A ‘Supervisory Function’ will be required with a remit to review remuneration policy at least annually. The body of individuals performing this function will depend on proportionality.

In smaller and less complex AIFMs, the person or persons in charge of the AIFM’s ‘management body’ may undertake the ‘supervisory function’ role where there is no separate supervisory function. (The ‘management body’ of the AIFM effectively refers to board of directors or equivalent).

AIFMs should also establish a remuneration committee, with non-executive members, if they are significant in terms of their size or the AIFs they manage, internal organisation and nature, or scope and complexity of activities.  There is an explicit exclusion for AIFMs where the value of their assets under management is less than €250 million.

Deloitte's view: Although familiar to most listed companies, these governance and remuneration committee requirements are likely to be new territory for many AIFMs.


AIFs must disclose details about remuneration including the total remuneration, including carry, split into fixed and variable paid by the AIFMs to its staff.

Deloitte's view: These disclosure requirements may present a significant step up for some AIFMs in both detail and visibility of remuneration disclosed.

Timing of consultation

The consultation runs until 27 September 2012, and ESMA aims to publish a final report before the end of the year.  Following the release of the final ESMA guidelines, the FSA will produce their own rules consistent with the final ESMA guidelines which will apply to AIFs regulated by the FSA.

Further detail

For a more detailed note, download our report. (PDF, 210 KB)

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