- Question ID
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2016_2806
- Legal act
- Directive 2013/36/EU (CRD)
- Topic
- Remuneration
- Article
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94
- Paragraph
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1
- Subparagraph
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letter (g); sub-letter (ii)
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- EBA/GL/2021/04 - Guidelines on sound remuneration policies under CRD (repealing EBA/GL/2015/22)
- Article/Paragraph
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Paragraphs 8.2 (n. 124 f), 13.2. 14.2, 15.1
- Type of submitter
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Competent authority
- Subject matter
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Calculation of the ratio variable to fixed remuneration
- Question
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Is it possible to value Long Term Instruments, included in the variable component, according to the IFRS 2 as accounting standard?
In particular, IFRS 2 requires fair value accounting including consideration of the optional character of the Long Term instruments. Is this allowed by CRD IV and EBA GLs on sound remuneration?
The question refers specifically to the calculation of the amount of variable remuneration for the purpose of the compliance-check with regard to the 200% bonus cap as transposed in the national law. In particular it refers to the value to be used for instruments, Long Term Instruments, included in the variable component. Is it possible to value them, according to the IFRS 2 as accounting standard? In particular, IFRS 2 requires fair value accounting including consideration of the optional character of the Long Term instrument, i.e. taking into account probability criteria, e.g. by means of Monte Carlo simulation with regard to optional elements of the Long Term instrument (e.g. future performance of shares)?
- Background on the question
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The EBA RTS 527/2014 art.1, 2), e) and Recital 6 - related to classes of instruments that are appropriate to be used for the purpose of variable remuneration - state that the valuation of instruments used for variable remuneration should be based on the value at the time the instrument is awarded in accordance with the applicable accounting standard.
- Submission date
- Final publishing date
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- Final answer
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In summary, for the purpose of calculating the bonus cap, the EBA Guidelines on Sound Remuneration Policies permit, in the absence of a market price, that instruments are valued at their fair value in accordance with IFRS 2 at the date of the award of variable remuneration without taking into account the probability whether instruments will be granted or not or if their future value changes.
Article 94 of Directive 2013/36/EU sets out requirements for variable elements of remuneration. Article 94 (1)(g)(i) establishes that "the variable component shall not exceed 100% of the fixed component…", Article 94(1)(l) establishes that "a substantial portion, and in any case 50% of any variable remuneration shall consist of a balance of" non-cash instruments.
The remuneration of staff consists of a variable and a fixed component and the ratio between them is calculated – taking into account, where implemented, Article 94(1)(g)(iii) that allows that a "maximum of 25% of total variable remuneration" is discounted. Paragraph 4 of the EBA Guidelines on the applicable notional discount rate for variable remuneration specifies that : "For the purpose of these guidelines the discount rate is the value by which a nominal amount of awarded variable remuneration which vests in the future is multiplied in order to obtain its discounted value. The discounted value is then used for the calculation of the ratio between the fixed and the variable components of total remuneration for identified staff".
According to the Guidelines on sound remuneration policies (section 14, par 227) the institution determines the awards of variable remuneration based on assessed performance and risks and applies ex ante risk adjustments. Only afterwards the variable remuneration is paid (section 15, 233) partly in cash, partly in non-cash instruments.
The calculation of the ratio has to be made based on the nominal amount of remuneration awarded, only afterwards the number of instruments that staff should receive as part of their variable remuneration should be established based on their value.
To this end the instruments referred to in Article 94(1)(l) have to be valued. The instruments referred to are the share, equivalent ownership interest, share linked or equivalent non-cash instruments or other instruments as defined within the Commission Delegated Regulation (EU) No 527/2014 of 12 March 2014 supplementing Directive (EU) No 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the classes of instruments that adequately reflect the credit quality of an institution as a going concern and are appropriate to be used for the purposes of variable remuneration (RTS on instruments).
Where available, institutions should use the market price; where this is not available the fair value. Using the fair value instead of the market price, where available, would be considered as a circumvention of the remuneration requirements. (see also par 164 f of the Guidelines on sound remuneration policies).
In particular par 252 of the Guidelines on sound remuneration policies specifies that: "Share-linked or other equivalent non-cash instruments (e.g. stock appreciation rights, types of synthetic shares) are those instruments or contractual obligations, including instruments based on cash, whose value is based on the market price or, where a market price is not available, the fair value of the stock or equivalent ownership right and track the market price or fair value. All such instruments should have the same effect in terms of loss absorbency as shares or equivalent ownership interests." "Instruments should be priced at the market price or their fair value on the date of the award of these instruments" (par 256 of the Guidelines. This means that the valuation should establish the market value (where available) or the fair value of the instrument, in the meaning of Article 94(1)(l), at the date of the award.
Paragraph 12 of IFRS 2 states “the entity shall measure the fair value of the employee services received by reference to the fair value of the equity instruments granted.” Paragraphs 16 and 17 define how this fair value should be calculated and state that “an entity shall measure the fair value of equity instruments granted at the measurement date (defined in IFRS 2 as ‘the date at which the fair value of the equity instruments granted is measured for the purposes of this IFRS. For transactions with employees and others providing similar services the measurement date is the grant date), based on market prices if available” and that “if market prices are not available, the entity shall estimate the fair value of the equity instruments granted.” Hence, these paragraphs of IFRS 2 match with the valuation methodology included in paragraphs 252 and 256 of the EBA Guidelines. Both sets of rules are not contradictory but rather suggest the same use of measurement techniques and therefore the accounting valuation as prescribed in IFRS 2 is acceptable under the CRD IV and EBA Guidelines on sound remuneration policies.
Par 188 of the Guidelines on sound remuneration policies specifies that ‘the ratio between variable and fixed remuneration components should be set independent of any potential future ex post risk adjustment or fluctuation in the price of instruments. The valuation of the instrument must not take into account that eventually the variable remuneration awarded in such instruments is subject to malus or clawback or that such deferred variable remuneration might be reduced in case staff leaves. Such aspects are not relevant for the value of the instrument as such.
Par 125 of the Guidelines on sound remuneration policies only applies to variable remuneration that is based on future performance and establishes that the valuation of a fixed number of instruments awarded should exceptionally be valued for the purpose of calculating the ratio between the variable and fixed component of total remuneration at the market price or fair value when the prospective remuneration plan was granted. The feedback table to the Guidelines explains (regarding par 120 of the consultation paper) that this valuation was implemented to "ensure that institutions can determine ex ante" – at grant, before the actual award is made – "the maximum ratio between the variable and the fixed remuneration for identified staff." Also here the general rule applies that listed institutions use the market price and non-listed institutions the fair value of the instrument.
- Status
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Final Q&A
- Answer prepared by
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Answer prepared by the EBA.
- Note to Q&A
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Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Directive 2013/36/EU (CRD) and continues to be relevant.
Disclaimer
The Q&A refers to the provisions in force on the day of their publication. The EBA does not systematically review published Q&As following the amendment of legislative acts. Users of the Q&A tool should therefore check the date of publication of the Q&A and whether the provisions referred to in the answer remain the same.