What remuneration rules apply to an AIFM's staff?

Pay policies and practices must be consistent with sound and effective risk management, promote it, and never encourage risk-taking at odds with the funds' risk profiles, rules or constitutional documents. The rules reach the staff categories whose professional work can materially affect the risk profile of the AIFM or its funds: senior management, risk takers, control functions and anyone earning in the same bracket as senior managers and risk takers. They cover pay from the AIFM, amounts paid directly by the fund, carried interest included, and transfers of fund units or shares.

The policy fits the business strategy, objectives, values and interests of the AIFM, its funds and their investors, and contains measures against conflicts of interest. The management body, in its supervisory function, adopts its general principles, reviews them periodically and answers for their implementation, which undergoes a central and independent internal review at least once a year. Control-function staff are rewarded against the objectives of their own function, independently of the business they control, and the remuneration committee directly oversees the pay of senior risk and compliance officers. All of this applies in proportion to how large the AIFM is, how it is organised and how complex its business is.

Performance pay blends an assessment of the individual, of the business unit or fund and of the AIFM as a whole, on financial and non-financial criteria, within a multi-year framework matched to the funds' life cycle so that longer-term results count. Fixed pay must be a big enough share of the total that variable pay can be fully flexible, down to nothing. Guaranteed variable pay is exceptional: new recruits only, first year only. Severance reflects performance over time without rewarding failure, and variable pay is adjusted for current and future risks.

At least half of any variable pay, deferred or not, is paid in units of the fund concerned, equivalent ownership interests, share-linked instruments or equivalent non-cash instruments, subject to a retention policy, unless AIF management is less than half of the AIFM's total portfolio. The exam material presents 50% as a ceiling ("up to 50%"); since 2013 the law has made it a floor. At least 40% of variable pay is deferred over a period suited to the fund's life cycle and redemption policy, and for no less than three to five years unless the life cycle is shorter; deferred pay vests no faster than pro rata, and at least 60% is deferred where the amount is particularly high.

Variable pay, deferred parts included, is paid or vests only if the AIFM's overall finances can sustain it and the performance of the unit, the fund and the person justifies it, and it can be cut or clawed back. Staff may not hedge personally, or insure their pay or liability, in ways that defeat the risk alignment of their pay, and pay may not be channelled through vehicles designed to escape the rules.

An AIFM that is significant, judged by its own size or that of its funds, how it is organised internally, and how wide-ranging and complex its activities are, sets up a remuneration committee able to judge pay policies, and the risk incentives they create, competently and independently. The exam material says large firms; since 2013 the legal test has been significance. The committee prepares pay decisions, including those with consequences for the risks of the AIFM or its funds and how they are managed, and the management body takes them in its supervisory function. Its chair and members are management body members with no executive role. The committee only prepares; the management body adopts and reviews the policy.