Does a credit institution have the obligation to hold the instruments (as shares, for example) during the deferral period of variable remuneration in instruments?
Article 94 (1) (l) (i) and 94(1) (m) of CRD IV state that:
“(l) a substantial portion, and in any event at least 50 %, of any variable remuneration shall consist of a balance of the following: (i) shares or equivalent ownership interests, subject to the legal structure of the institution concerned or share-linked instruments or equivalent non-cash instruments, in the case of a non-listed institution; […]
(m) a substantial portion, and in any event at least 40 %, of the variable remuneration component is deferred over a period which is not less than three to five years and is correctly aligned with the nature of the business, its risks and the activities of the member of staff in question. Remuneration payable under deferral arrangements shall vest no faster than on a pro-rata basis. In the case of a variable remuneration component of a particularly high amount, at least 60 % of the amount shall be deferred. The length of the deferral period shall be established in accordance with the business cycle, the nature of the business, its risks and the activities of the member of staff in question;”
The Guidelines on sound remuneration policies specify at the point 10 that deferral period means the period of time between the award and the vesting of the variable remuneration during which staff is not the legal owner of the remuneration awarded. Regarding the deferral of variable remuneration, the Guidelines specify in point 237 that this can be applied to both types of variable remuneration, cash and instruments.
Regarding the award of variable remuneration in instruments (as shares, for instance) as part of the deferred remuneration (over a period which is not less than three to five years) the Guidelines specify, inter alia, that:
“- the availability of instruments under Article 94(l)(i) of the CRD depends on the legal form of an institution (point 251 of Guidelines);
- institutions should not pay any interest or dividend on instruments which have been awarded as variable remuneration under deferral arrangements to identified staff; this means also that interest and dividends payable during the deferral period should not be paid to staff after the deferral period ends. Such payments should be treated as received and owned by the institution (point 258 of Guidelines).
- instruments should be priced at the market price or their fair value on the date of the award of these instruments. This price is the basis for the determination of the initial number of instruments and for later ex post adjustments to the number of instruments or their value. Such valuations should also be done before the vesting to ensure that ex post risk adjustments are applied correctly and before the retention period ends (point 256 of Guidelines).
The provisions above mentioned do not clarify if the credit institutions which award the remuneration in instruments have the obligation to hold the instruments (as shares, for example) during the deferral period of variable remuneration in instruments.
In accordance with Article 94(1)(l) and (m) of Directive 2013/36/EU (CRD) institutions should pay the variable remuneration partly upfront and partly deferred and in an appropriate balance between equity, equity-linked and other eligible instruments and cash. Variable remuneration payable under deferral arrangements, either instruments or cash, is subject to ‘vesting’, which according to paragraph 10 of the EBA Guidelines on sound remuneration policies means the effect by which the staff member becomes the legal owner of the variable remuneration awarded, independent of the instrument which is used for the payment or if the payment is subject to additional retention periods or clawback arrangements. The CRD does not require institutions to hold the instruments (or cash) during the deferral period.
Paragraph 257 of the aforementioned EBA Guidelines specifies however that ‘institutions may award a fixed number or nominal amount of deferred instruments using different techniques, including trustee depot facilities and contracts, provided that in every case the number or nominal amount of the instruments awarded is provided to identified staff at vesting, unless the number or nominal amount is reduced by the application of malus’.
It follows that, it is only at the time of vesting that the institution should be able to transfer the legal ownership of the instruments and cash. But it belongs to the institution to decide and ensure how it organises itself in order to be able to fulfil that, in every case, the number or nominal amount of the instruments awarded is provided to identified staff at vesting.