Is a “retention bonus”, i.e. a bonus solely granted for staying with a credit institution for a pre-defined time, still admissible in the light of remuneration principle Article 94(1)(e) of Directive 2013/36/EU (replacing Annex V, Section 11, point 23 (j) of Directive 2006/48/EC (CRDIII))?

Supervisory experience shows that “retention bonuses” are quite common in credit institutions. Especially institutions under restructuring (e.g. new ownership, partial or complete wind down) use this kind of additional remuneration to keep “key” staff members and thus to ensure orderly continuation of operations. A uniform application by all competent authorities is desirable since the result will have considerable impact on institutions´ remuneration policies.

"Retention bonuses" are a form of additional remuneration granted if an employee stays in the institution for a pre-defined period of time. The payment of such a bonus is therefore not necessarily linked to the staff member´s performance and/or results of the institution, but the fact that the staff member is still employed by the institution for a pre-defined time period.

The principle in Article 94(1)(e) of Directive 2013/36/EU (CRD)(replacing Annex V, Section 11, point 23 (j) of Directive 2006/48/EC (CRD III)) referenced in the question notes that:  "guaranteed variable remuneration is exceptional, occurs only when hiring new staff and where the institution has a sound and strong capital base and is limited to the first year of employment;". In the CEBS Guidelines on Remuneration, paragraph 69, it is clarified that:  "Guaranteed variable remuneration can take several forms such as a "guaranteed bonus", "welcome bonus", "sign-on bonus", "minimum bonus", etc. and can be granted either in cash or in instruments...".

In the CEBS Guidelines on Remuneration, paragraph 12, it is stated that  "A "retention bonus" is a form of variable remuneration and can only be allowed to the extent that risk alignment requirements are properly applied".

Consequently, retention bonuses (as a form of variable remuneration), where paid to staff whose professional activities have a material impact on the institution's risk profile (identified staff), have to respect all the criteria applicable to variable remuneration under CRD (payment in instruments, deferral, retention, malus, claw back etc.). Failing this, such retention bonuses would not be admissible under Article 94(1) of CRD.

Application of the criteria for variable remuneration, especially maluses and claw back, would mean in practice that the 'retention bonus' would be paid or vested in full "only if it is sustainable according to the financial situation of the institution as a whole, and justified according to the performance of the institution, the business unit and the individual concerned" (c.f. Article 94(1)(n) of CRD.

Further, a retention bonus is only awarded on the condition that the staff member stays in the contract for the given time period, which is also a reason for not considering a retention bonus as guaranteed.

In conclusion, under the provisions of Article 94 (1) of Directive 2013/36/EU (CRD), retention bonuses are only admissible as long as they are treated as variable remuneration, as provided in paragraph 12 in the CEBS Remuneration Guidelines, meaning that all criteria applicable to variable remuneration under CRD are applied.

Any form of variable remuneration should always be in line with sound and effective risk management and the institution's remuneration policy, and therefore institutions should be able to substantiate their legitimate interest in awarding retention bonuses. For example, retention bonuses could be used under restructurings, in wind down or after a change of control, but also in other situations where the institution can provide a rationale for its legitimate interest in retaining a relevant staff member.

However, retention bonuses would not be in accordance with remuneration principles, and therefore inadmissible, if they were awarded to merely compensate for bonuses not paid due to insufficient performance or the institution's (negative) financial situation, in a business-as-usual scenario, or in other non-legitimate situations.

Update 26.03.2021: This Q&A has been archived as the issue it deals with has been addressed in section 8.4 of EBA/GL/2015/22.