In line with recital 34 of IFD Article 21(1)(j) provides for several instruments that can be used in a flexible way for the pay out of variable remuneration, namely:

(i) shares or equivalent ownership interests, subject to the legal structure of the investment firm concerned;

(ii) share-linked instruments or equivalent non-cash instruments, subject to the legal structure of the investment firm concerned;

(iii) Additional Tier 1 instruments or Tier 2 instruments or other instruments which can be fully converted to Common Equity Tier 1 instruments or written down and that adequately reflect the credit quality of the investment firm as a going concern;

(iv) non-cash instruments which reflect the instruments of the portfolios managed.

Art. 32(1)(k) of Directive 2019/2024/EU (IFD) sets out that by way of derogation from point (j), “where an investment firm does not issue any of the instruments referred to in that point, competent authorities may approve the use of alternative arrangements fulfilling the same objectives.”

The objectives of the award of instruments is that the variable remuneration awarded is subject to implicit risk adjustments and that possible value changes have an impact of the behaviour of the staff member concerned and contributes to the alignment of the variable remuneration with the long-term interests of the investment firm, its creditors and clients.

Commission Delegated Regulation (EU) 2021/2155 of 13 August 2021 supplementing Directive (EU) 2019/2034 of the European Parliament and of the Council with regard to regulatory technical standards specifying the classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration specifies the instruments under point (j) of Article 32(1) that can be used for the pay out in instruments. Article 6(f) of these RTS also foresee value adjustments to the alternative arrangements that can go into both directions.

The EBA Guidelines on sound remuneration policies specify further the requirements included in Directive (EU) 2019/2034 EU but cannot alter them. Hence the legal text is explicitly clear, investment firms that issue the instruments listed in IFD for the purposes of remuneration cannot use alternative arrangements, unless – in line with general applicable principles of law - it would be impossible to use such instruments issued, e.g. as instruments are not available.

For listed companies, the derogation included in Article 32(1) (k) IFD does not apply, as issuing share linked instruments is always possible. It also needs to be considered that the IFD contains further derogations for the pay out in instruments and under deferral arrangements, if investment firms meet all the requirements in Article 32(4) IFD, including listed companies if this is the case.

In line with paragraph 267 of the EBA Guidelines on sound remuneration policies, which specifies that competent authorities should consider that in investment firms that issued shares have therefore in general shares and in any case share-linked instruments are available for the pay-out of variable remuneration. I.e., due to the availability of share-linked instruments, in the absence of meeting the conditions of the derogation under Article 32(1)(k) IFD, the competent authority cannot approve an alternative arrangement.

While as highlighted in the above explanations, awarded instruments are subject to validation requirements, that can have an impact on the profitability of an investment firm, it can reasonably be expected that an investment firm manages any material financial risks on its side. Furthermore, at the end of the vesting period, the listed investment firm, unless malus or clawback is or has been applied, has to award the share-linked instruments under retention conditions in accordance with the pre-set conditions, which could trigger a potential material impact at vesting on the firms costs.

Investment firms must meet the requirement in Article 32 (1) (d) IFD, that “the variable remuneration does not affect the investment firm's ability to ensure a sound capital base”, competent authorities would, if this were not the case, have the legal powers to restrict such awards in line with Article 39 (2)(g) IFD. However, no power is given in this respect to approve alternative arrangements.