4 Proportionality

The proportionality principle as set out under Article 26(3) of Directive (EU) 2019/2034 aims to match remuneration policies and practices consistently with the individual risk profile, risk appetite and strategy of an investment firm, so that the objectives of the remuneration requirements are effectively achieved.

When applying the remuneration requirements and the provisions of these guidelines in a proportionate manner, investment firms and competent authorities should consider the nature, scale and complexity and the risks inherent in the business model and the activities of the investment firm.

The obligation to have sound and effective remuneration policies and practices applies to all investment firms with respect to all staff, regardless of the investment firms’ different characteristics.

When assessing what is proportionate and in determining the required level of sophistication of the remuneration policies and risk measurement approaches, investment firms and competent authorities should take into consideration the combination of qualitative and quantitative aspects of all the criteria above. For instance, a business activity may well have a small scale but could still include complex activities and risk profiles because of the nature of its activities or the complexity of its products.

Where investment firms are authorised to provide the services and activities listed in point (2), (3), (4), (6) and (7) of Section A of Annex 1 to Directive 2014/65/EC, as a general principle a higher level of sophistication should be expected, in particular, if the investment firm is authorised to hold clients’ money or assets.

For the above purposes, investment firms and competent authorities should take into account at least the following criteria:

• a. the on and off-balance-sheet assets of the investment firm and whether the investment firm meets the criteria and the thresholds set out in paragraphs 4 of Article 32 of Directive (EU) 2019/2034;
• b. if the investment firm is authorised to hold clients’ money or assets;
• c. the type of authorised activities and services (e.g. Sections A and B of Annex I to Directive 2014/65/EU) and other services (e.g. clearing services) performed by the investment firm;
• d. the amount of assets under management;
• e. the assets safeguarded and administered;
• f. the volume of client orders handled;
• g. the volume of daily trading flow;
• h. the geographical presence of the investment firm and the size of the operations in each jurisdiction, including in third countries;
• i. the legal form and the available equity and debt instruments;
• j. the methods used to determine the capital requirements;
• k. whether the investment firm is part of a group and, if so, the proportionality assessment done for the group and the characteristics of the group to which the investment firm belongs;
• l. the underlying business strategy;
• m. the structure of the business activities and the time horizon, measurability and predictability of the risks of the business activities;
• n. the funding structure of the investment firm;
• o. the internal organisation of the investment firm, including the level of variable remuneration that can be paid to identified staff;
• p. the main sources and structure of profits and losses of the investment firm;
• q. the type of clients (e.g. retail, corporate, small businesses, public entity);
• r. the complexity of financial instruments or contracts;
• s. the outsourced functions and distribution channels;
• t. the existing information technology (IT) systems, including continuity systems and outsourcing functions in this area.

Before remuneration requirements and the provisions set out in these guidelines are applied in a proportionate way, the identification of staff, based on the criteria provided in Article 30(1) of Directive (EU) 2019/2034 and the Commission Delegated Regulation mandated under Article 30(4) of that Directive (RTS on identified staff) and additional internal criteria, should be performed¹⁷ .

¹⁷ Please refer to guidelines for the identification process outlined in section 5 of these guidelines.

When implementing specific remuneration policies for different categories of identified staff in line with sections 3 and 4 of these guidelines, the application of proportionality should take into account the impact on the risk profile of the investment firm or the assets it manages of that category of identified staff.

Competent authorities should ensure that investment firms comply with the remuneration requirements and the provisions set out in these guidelines in a manner that provides for a level playing field among different investment firms. Waivers of the variable remuneration pay-out process

Without prejudice to the implementation of Article 32(4) of Directive 2019/2034/EU by Member States, an investment firm with total assets under the threshold defined in national law may not apply the requirements to defer variable remuneration and to pay it out in instruments as set out in points (j), (l) of Article 32(1) and the third subparagraph of Article 32(3) of Directive (EU)2019/2034.

When establishing the amount of the annual variable remuneration paid to a staff member and the effective ratio between the variable and fixed annual remuneration for the purposes of point (b) of Article 32(4) of Directive (EU) 2019/2034, i.e. the application of waivers to the requirement to defer and pay out in instruments the variable remuneration to individual staff members, investment firms should take into account the amounts specified in point (a) and (b) and apply the further conditions in points (c) to (h):

• a. the annual variable remuneration awarded for the performance period that equals the financial year for which it is determined if the waiver can be applied and all performance periods that ended in this financial year, independent of the length of the underlying performance periods that have ended in this financial year, e.g. it should include the full amount of variable remuneration based on revolving and non-revolving multi-year accrual periods and retention bonuses for periods longer than one year where the underlying period ended in the given financial year;
• b. the annual fixed remuneration awarded for the preceding performance year; investment firms may not take into account other awards that are considered fixed remuneration under paragraphs 127 and 128;
• c. the variable remuneration awarded for the preceding performance year, independent on how the remuneration is paid, i.e. cash, instruments or other forms of variable remuneration;
• d. the variable remuneration should consist of all forms of variable remuneration awarded, including performance-based variable remuneration, amounts paid as guaranteed variable remuneration, retention bonuses, severance payments or discretionary pension benefits;
• e. the amount of variable remuneration awarded for performance periods that are longer than one year, e.g. based on long-term incentive plans or multi-year accrual periods, taking into account the full amount for the performance year in which the performance periods end;
• f. the full amount of variable remuneration awarded within the performance year as guaranteed variable remuneration, retention bonuses, severance payments and discretionary pension benefits;
• g. the amounts should be based on the definition for fixed and variable remuneration within these guidelines and should be calculated based on the gross remuneration awarded;
• h. where the amount is determined on an individual basis, the remuneration awarded by the investment firm should be taken into account; where the amount is determined on a consolidated basis, all remuneration awarded within the scope of prudential consolidation should be taken into account; and
• i. where the remuneration is paid in a currency other than EUR, the amounts should be converted into EUR using the exchange rate published by the Commission for financial programming and the budget for the last month of the investment firm’s financial year.¹⁸

¹⁸ The exchange rates can be found on the website of the European Commission under: http://ec.europa.eu/budget/contracts_grants/info_contracts/inforeuro/inforeuro_en.cfm

When calculating the average of the value of the assets for the four-year period immediately preceding the current financial year for the purpose of point (a) of Article 32 (4) of Directive (EU) 2019/2034, investment firms should use the simple average of this value at the end of the four preceding financial years. Where the accounts are kept in a currency other than EUR, the amounts should be converted into EUR using the exchange rate published by the Commission for financial programming and the budget for the last month of each financial year.

Where national law empowers competent authorities to set the thresholds under point (a) of Article 32(4) of Directive (EU) 2019/2034 for individual investment firms, competent authorities should, when lowering or increasing the thresholds, take into account the investment firms' nature, scope and complexity of its activities, its internal organisation or, if applicable, the characteristics of the group to which it belongs, and also take into account the proportionality criteria set out within these guidelines. The same applies with regard to reductions of the thresholds set in points (c), (d) and (e) Article 32(5) and Article 32(6).

Where national law empowers competent authorities to set the thresholds under Article 32(7) of Directive (EU) 2019/2034 for individual staff members, competent authorities should, when lowering the threshold, take into account the criteria within this Article and the impact of the staff members’ professional activities on the risk profile of the investment firm and the assets it manages compared to other identified staff. For example, where a more material impact on the risk profile exists, it might be appropriate to require deferral and pay-out in instruments to be applied.