AFME - Association for Financial Markets in Europe
Method of determining 25% – Question 1
We are strongly of the view that CRD Article 94(1)(g)(iii) clearly does not specify whether the maximum of 25% of variable remuneration that can be discounted should be calculated before or after having applied the discount. That is, both the following interpretations are possible: the 25% is calculated based on nominal values for long-term deferred awards, or on the discounted value of such awards. Neither “variable remuneration” nor “total variable remuneration” is a defined term and both interpretations can variously be implied through context when the terms are used throughout the CRD.
We believe that the 25% should be applied to the discounted value of awards. Crucially, this approach is mathematically correct as it applies an ‘apples with apples’ calculation in values of the same time period. This approach is also consistent with textual references in the CRD to variable remuneration being ‘payments’. Payments of variable remuneration are made on a performance-related basis, so a determination today of the level of future payments should take into account the likelihood of the payments being made. This logic supports the inclusion of other factors in setting the discount rate (as outlined in previous sections above) and the use of the discounted amount to calculate the 25%. Furthermore, we believe that it is also consistent to calculate the bonus cap under Article 94(1)(g) on the same basis – i.e., after having discounted any long-term deferred remuneration.
Inflation rates – Question 2
While it may be necessary to allow this as an option (i.e. for countries with particularly high inflation rates), in the interests of simplification we believe that institutions should have in all cases the option of using the HICP rate applicable for the EU parent institution (i.e., even for employees working and paid in another Member State). If inflation rates between the relevant EU Member States are relatively comparable, institutions might prefer to use one single reference inflation rate rather than having to create multiple options in IT systems for slightly differing inflation rates which will have a relatively minor impact on the actual discount. In addition, requiring a different inflation rate per country complicates the reporting provided for in Section 5, which has to be done on a country-by-country basis.
Incentive factors – Question 4
With reference to the discussion above about the need to appropriately incentivise the use of instruments deferred for five years or more, we believe that the discount factor needs to be increased and broadened to reflect the real value for employees of deferred awards. Please see the ‘overarching comments’ section of our submission for more detail.