6. Capital base

Investment firms and competent authorities should ensure that the award, pay-out and vesting of variable remuneration, including the application of malus and clawback arrangements under the investment firms’ remuneration policy, is not detrimental to the investments firms’ ability to ensure a sound capital base.

When assessing if the capital base is sound, the investment firm should take into account its overall own funds, its composition and in particular the Common Equity Tier 1 capital and its own funds’ requirements. The requirement to maintain a sound capital base also applies on a consolidated basis. Additionally, competent authorities should take into account the results of their supervisory reviews.

Investment firms should include the impact of variable remuneration - both upfront and deferred amounts - in their capital and liquidity planning and in their overall internal capital adequacy assessment process.

The total variable remuneration awarded by an investment firm must not limit the ability of the investment firm to maintain or restore a sound capital base in the long term and should consider the interests of shareholders and owners, investors and other stakeholders. Variable remuneration should not be awarded or paid out when the effect would be that the capital base of the investment firm would no longer be sound. The investment firm should consider these requirements, the results from the internal capital adequacy assessment process, its multi-year capital planning and recommendations on distributions by competent authorities and European Supervisory Authorities, when determining:

• a. the overall pool of variable remuneration that can be awarded for that year; and
• b. the amount of variable remuneration that will be paid out or will be vesting in that year.

Investment firms which do not have a sound capital base or where the soundness of the capital base is at risk should take the following measures with regard to variable remuneration:

• a. reduce the variable bonus pool, including the possibility to reduce it down to zero;
• b. apply the necessary performance adjustment measures, in particular malus;
• c. use the net profit of the investment firm for that year and potentially for subsequent years to strengthen the capital base. The investment firm should not compensate for any reduction of the variable compensation made in order to ensure a sound capital basis in later years or by other payments, vehicles or methods which lead to a circumvention of this provision.

Competent authorities should intervene where the awarding of variable remuneration is detrimental to the maintenance of a sound capital base by requiring the investment firm to reduce or apply a cap to the overall pool of variable remuneration determined until the capital adequacy situation improves; and if necessary to apply performance adjustment measures, in particular malus, and require investment firms to use net profits to strengthen own funds.