13.2 Ratio between fixed and variable remuneration

When setting the fixed remuneration components for staff under Article 30(1), the investment firm should set them at a level that would allow a fully flexible policy on variable remuneration for all staff. To this end the remuneration policy should set an appropriate ratio between the variable and the fixed components of the total remuneration.

The ratio set is the ratio between the variable component of remuneration that could be awarded as a maximum for the following performance period and the fixed component of remuneration of the following performance period. The maximum ratios allowable should include levels of pay-outs that would cover ‘above target’ or exceptional performance and should not only reflect ‘on target’ or expected performance. The effective ratio between variable remuneration awarded and fixed remuneration should increase with the performance achieved.

When setting the ratio, investment firms should take into account their business activities, risks and the impact of the staff or categories of staff on the risk profile of the investment firm or the assets it manages as well as the incentives for staff to act in the best interest of the investment firm and the need to maintain cost flexibility in light of changes of profits and losses over time.

When setting the ratio, investment firms should consider that a variable component linked to performance can have a positive effect on ‘risk-sharing’ and incentivising prudent risk taking behaviour in line with the investment firms risk appetite, while a variable component that is inappropriately balanced could, under certain circumstances, have negative effects. The higher the possible variable remuneration compared to the fixed remuneration, the stronger the incentive will be to deliver the needed performance, and the bigger the associated risks may become. Investment firms should consider that staff may become accustomed to and expect to receive a considerable variable remuneration. If the fixed component is too low compared to the variable remuneration, an investment firm may find it difficult to reduce or eliminate variable remuneration in a poor financial year.

Investment firms may set different ratios for different jurisdictions, different business units, corporate and internal control functions and different categories of staff, e.g. identified staff, unidentified staff responsible for managing assets, sales staff, staff in control functions or staff within administrative functions. In exceptional and duly justified cases, the remuneration policy may provide for a different ratio for individual identified staff members belonging to a certain category of staff compared with other staff members included in the same category of staff.

The maximum ratio should be calculated as the sum of all variable components of remuneration that could be awarded as a maximum in a given performance year, including the amount to be taken into account for the retention bonus, divided by the sum of all fixed components of remuneration to be awarded in relation to the same performance year. In any case, all remuneration components should be correctly allocated to either variable or fixed remuneration in line with these guidelines. Investment firms may omit some of the fixed remuneration components where they are immaterial, e.g. where proportionate non-monetary benefits are awarded.

The effective ratio should be calculated as the sum of all variable components of remuneration that have been awarded for the last performance year as set out in these guidelines, including amounts awarded for multi-year accrual periods, divided by the sum of fixed components of remuneration awarded for the same performance year. For multi-year accrual periods that do not revolve annually, investment firms may alternatively take into account in each year of the performance period the maximum amount of variable remuneration that can be awarded at the end of the performance period divided by the number of years of the performance period.

Investment firms may not take into account the amount of guaranteed variable remuneration awarded that may be awarded as a sign-on bonus to new staff in the calculation of the ratio between the variable and fixed components of the total remuneration for the first performance period when determining if they comply with the ratio set within their remuneration policy.

Investment firms should be able to explain the reasoning for the maximum ratios set between the variable and fixed remuneration components through their remuneration policy and how the actual ratios would change compared to the maximum ratio depending on risk and performance indicators.