The Capital Requirements Directive IV (CRD IV) sets out requirements concerning remuneration that apply from 1 January 2014, and mandates the European Banking Authority (EBA) to prepare draft regulatory technical standards (RTS) specifying the classes of instruments within the meaning of articles 52 or 63 of the Capital Requirements Regulation or other instruments that can be fully converted to Common Equity Tier 1 (CET 1) instruments or can be written down, that in each case adequately reflect the credit quality of the institution as a going concern and that are appropriate to be used for the purposes of variable remuneration.
At least 50% of the variable remuneration of staff whose professional activities have a material impact on an institution’s risk profile must be awarded in non-cash instruments. In accordance with article 94(1)(l) of the CRD IV, the instruments must consist of a balance of: (i) shares, share-linked or equivalent non-cash instruments; and (ii) where possible, Additional Tier 1 (AT 1), Tier 2 or other instruments, subject to the conditions set out in the CRD IV and RTS.
The EBA has now published final draft RTS on classes of instruments that can be used for the purposes of variable remuneration. The RTS specify the classes of instruments that can be used for variable remuneration under article 94(1)(l)(ii) of the CRD IV. The RTS introduce requirements for AT 1, Tier 2 and other instruments to ensure that they appropriately reflect the credit quality of the institution, and define for Tier 2 and other instruments the write-down, write-up and conversion mechanisms.