The EBA recently published an update on the use and classification of role-based allowances.
The bonus cap limits variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval. In light of this, several institutions changed their remuneration policies by introducing “role based allowances” which they treated as part of fixed remuneration.
European Banking Authority (“EBA”) Investigation
The EBA carried out an investigation of role based allowances and, in their opinion, found that they were variable remuneration. Their view is that for remuneration to be fixed it must be predetermined, transparent to staff, maintained over time and tied to the specific role and organisational responsibilities. The allowance should not promote risk taking and should be irrevocable.
In light of this, regulatory authorities were asked to ensure that institutions’ remuneration polices were compliant with this opinion.
Findings
The EBA found that no regulatory authority had adopted specific legal/regulatory instruments following publication of its opinion on the use of allowances. This is perhaps because the final guidelines on remuneration, which would incorporate the criteria for fixed remuneration, are not due to be published until the end of this year. However, all regulatory authorities had confirmed that the opinion had been considered in their supervisory assessments.
The report highlighted the variances in the supervisory measures taken by regulators following the opinion. The UK will change its supervisory instruments for 2015 to verify that institutions should comply with the EBA opinion and should take appropriate measures, when necessary, to change their remuneration practices.
Share schemes
Interestingly, the report highlighted that an institution classified a share appreciation right that was subject to performance conditions as fixed remuneration. The EBA update also highlighted, by way of example, that another institution had classified matching shares (i.e. for each share owned or acquired by participants, the employer would grant a number of shares and the additional cash to cover the taxes which would be levied on the additional grant) to be fixed remuneration. However, the competent/regulatory authority determined, following an investigation, that this was variable remuneration and requested that the institution change its policy accordingly. While it is clear that share appreciation rights, with performance conditions, would be variable remuneration, this serves as a reminder for institutions to review their share plans and policies to ensure they have been classified appropriately.
Guidelines on Sound Remuneration Policies
The EBA is currently finalising its guidelines on sound remuneration policies which will contain further provisions on the classification of fixed/variable remuneration. It is clear that the guidelines will impose significant requirements on institutions. The EBA’s update is a reminder that institutions will continuously have to assess their remuneration policies and practices to ensure compliance.