Question ID
2023_6945
Legal act
Directive 2013/36/EU (CRD)
Topic
Remuneration
Article
94
Paragraph
1
Subparagraph
(g) and (l)(i)
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
Para. 139, 272, 273, 278 and 280
Type of submitter
Credit institution
Subject matter
Share-linked instruments
Question

Is it possible for listed institutions to award variable remuneration under a prospective remuneration plan in share-linked instruments which are priced based on their fair value, applying certain value tunings to the underlying share price due to regulatory availability constraints, including an adjustment to the market value of the share considering that the market value reflects a full entitlement to all expected future dividends?

Background on the question

The EBA guidelines provide for the application of a “fair value” pricing approach, without giving a clear guidance on how to ensure a fair pricing of “share-linked instruments” which have no observable market price. Different market practices are observed and there is uncertainty whether an adjustment can be applied to the market value, considering that share-linked instruments do not confer any right to dividends nor voting rights, in view of the regulatory requirements regarding the award of variable remuneration in instruments.
One practical example is an incentive plan that provides for a pay-out to be fully made in a pre-determined amount of shares, as quantified based on the share value at plan start, depending on the level of achievement of both short-term and long-term future performance conditions. Performance is initially measured over one year (i.e. the first year after the plan start). Upon completion of the first performance year, an upfront quota is awarded and paid out subject to retention requirements, which is not subject to further performance conditions, while the deferred quota is subject to a further assessment of long-term performance conditions over an additional three-year performance period, and subsequently paid out subject to deferral and retention requirements. All the plan features (plan rules, performance indicators, targets, target bonus opportunity, deferral scheme and related share conversion price, etc.) are set by the relevant corporate bodies and formalised and communicated to the beneficiaries at plan start.
At the time the incentive plan is launched, beneficiaries are not already granted listed shares of the institution, but rather the (non-transferrable) right to potentially obtain shares in the future, depending on the achievement of the future performance conditions. The granted rights do not, inter alia, confer any right to dividends nor voting rights. Since a market price for such share-linked instruments is not available, they are priced based on their fair value, whereby the fair value is calculated through specific methodology, i.e. starting from the market price of the share and then applying a formulaic model based on external market views of future dividends, to avoid any conflicts of interests, and aligned with the approach to valuing share-based instruments under IFRS 2, without considering any adjustment for the probability whether instruments will be granted or not or if their future value changes (i.e. in line with EBA Q&A, Question ID: 2016_2806).

Submission date
Final publishing date
Final answer

The Guidelines EBA/GL/2021/04 specify further the provisions of the CRD whereby Article 92, par. 2, let. (a) and (b) of Directive 2013/36/EU (CRD) sets out that the remuneration policy “is consistent with and promotes sound and effective risk management and does not encourage risk-taking that exceeds the level of tolerated risk of the institution” and “is in line with the business strategy, objectives, values and long-term interests of the institution […]”.

In line with Par. 270 of the guidelines, the instruments used for the award of variable remuneration should contribute to the alignment of variable remuneration that is based on performance with the risks of the institution. 

Par. 272 specifies that the available instruments under Article 94(1)(l)(i) of the CRD include for institutions which are stock corporations (both listed and non-listed) shares or share-linked instruments.

In line with Par. 273 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.

According to the above, listed institutions may award variable remuneration, including under a prospective remuneration plan, in the form of share-linked instruments. According to Par. 278, instruments should be priced at the market price or, if such a price does not exist, their fair value on the date of the award of these instruments or, at grant (i.e. at the beginning of the performance period) in accordance with par. 139 in exceptional situations. 

In line with paragraph 280 of the guidelines, both cases, no adjustments of the price or payments of interest or dividends to compensate for deferral periods, or for the inability to receive dividends and to vote, should be made as the identified staff to which the instruments have been awarded is not yet the legal owner of these instruments.

The only situation in which a discount rate may be used is specified under Article 94(1)(g)(iii) CRD which specifies: “Member States may allow institutions to apply the discount rate referred to in the second subparagraph of this point to a maximum of 25 % of total variable remuneration provided it is paid in instruments that are deferred for a period of not less than five years. Member States may set a lower maximum percentage...” The EBA Guidelines (EBA/GL/2014/1) on the applicable notional discount rate published on 27 March 2014 specify the application of the discount rate. 

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.

Disclaimer

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