Summary of main remarks:
The guidelines require that the most recently available data is used when the remuneration is awarded. This implies that the actual maximum ratios between variable and fixed remuneration is unknown during the earning period. We believe it is important to withhold the possibility for institutes to communicate the discount rate upfront
It is unclear what the purpose is to require a retention period and not a prolonged deferral period.
We also lack the rationale for the requirement of additional detailed public disclosures, opposed to reporting to the competent supervisory authority.
Q1: Yes, however the possibility for Member States to deviate from the guidelines, article 94 (1) g iii, contradicts the overall purpose of EBA guidelines, being to ensure a harmonised and coherent approach of a level playing field across the internal market. Having a guideline detailing a harmonised and coherent application of a discount rate only creates a level playing field across the internal market if Member States allow institutions to apply the discount rate as per the guideline.
Yes, the Swedish Bankers´ Association does however prefer sup-option 2 – using inflation rate for the Member State in which remuneration is awarded. Further, in section 7 it is stated “For paragraphs 8 to 10 the most recently available data should be used when remuneration is awarded”. This implies that the institution, when entering the earning period for the variable compensation, is not able to calculate what the actual discount rate allowed is or should be. It is common practice in many institutions to agree upfront the Terms & Conditions for variable remuneration, including what the maximum ratio between fixed and variable remuneration should be for the earning period. This would not be possible if the discount factor remains unknown until the award is concluded, i.e. after the earning period in question, as suggested in the draft guidelines. We believe it is important to withhold the possibility for institutes to communicate the discount rate upfront.
We therefore suggest that the last sentence of section 7 is rephrased as follows “For paragraphs 8 to 10 the institution can choose between using the most recently available data when the maximum ratio between fixed and variable remuneration for the year is agreed with the employee or when the variable remuneration is awarded”. This change would have limited effects on the actual discount rate since the inflation in a specific Member State does not differ over time and further, Member State inflation as such represents a small fraction of the totality when calculating the discount rate.
Long-term government bonds in countries outside EU may have a risk weight. Section 10 should thereby be rephrased to “For remuneration awarded in a third country the following should apply:
a. if the remuneration is paid in a currency issued by a third country, institutions should use equivalent official statistical data available for the country issuing the currency or should use the average yield on the EU government bonds with a residual maturity of around ten years, as published by Eurostat;
b. if the remuneration is awarded in a currency issued by an EU Member State,
institutions should use the average yield on the EU government bonds with a residual maturity of around ten years, as published by Eurostat.” See also response to Q2 above.
It is recognised that a retention period of x years counts for less than a deferral period of x years due to adding half the % in the incentive factor and due to the fact that retention period is not taken into account in the exponential (n being the vesting period only).
Still, we question the purpose of requiring the usage of retention as such on top of deferrals. It is recognised that retained variable remuneration is linked to the performance of the institution. However this also goes for deferred variable remuneration, where deferrals have clear advantages such as malus provisions tailor-made for the position, relevant business unit (or similar) and the institution. Further negative aspects of requiring retention (as oppose to deferral) are:
• Unclear when retained money is taxed in different Member States – and whether retention applies to pre- or post-taxed amounts vested
• Even if adding clawback provisions for vested variable remuneration subject to retention, national labour law in Member States often prevents such provisions from being possible to use in practice
• The administrative burden of ensuring that shares (or similar) are kept during retention period is significant and costly
An alternative approach to retention requirements would be that retention periods could be compensated by the institution through prolonged deferral periods of not less than half the length of the relevant retention period (applying the ratio between incentive factors for deferrals and retention respectively).
Regarding documentation and transparency we initially want to highlight that too detailed public disclosures do not only trigger additional administrative burdens/costs but also encourage employees to compare and question the institutions numbers compared to peers. When basing the discount rate on e.g. the most recently available data on inflation and interest rate for EU government bonds (and these fluctuating), institutions will arrive at different discount rates despite having identical deferral models as having different dates for awards. A preferred approach would be that relevant information instead is reported to Member State supervisory authority.
The additional cost that would be triggered by the documentation and transparency requirements could be estimated to around EUR 50.000 per institution plus EUR 5.000 per additional country.
There seems to be a calculation error on the total amount of variable remuneration for the purpose of calculating the ratio between variable and fixed remuneration, where EUR 132.797,96 is stated instead of EUR 132.622,76 (as stated later in the example). Otherwise the example is both clear and helpful (addresses several complex areas).
There are confusing assumptions made in this example, where e.g. figure 2 shows no retention on non-deferred variable remuneration. Furthermore the present value formula is not general, but applies when the ratio is 100% (not e.g. 200%). Further, longer deferral periods are not favoured in the pro-rata model where discounted variable remuneration does not necessarily decrease with the deferral length (is rather a U-curve).
Q 9-11: It would further be preferred also having examples assumed a maximum ratio between variable and fixed remuneration above 100%, e.g. at 200%.