14.2.2 The ex ante risk adjustment in the award process

Investment firms should determine the bonus pool and variable remuneration to be awarded based on an assessment of performance and risks taken. The adjustment for risks before the award is made (‘ex ante risk adjustment’) should be based on risk indicators and ensure that the variable remuneration awarded is fully aligned with the risks taken. The criteria used for the ex ante risk adjustment should be sufficiently granular to reflect all relevant risks.

Depending on the availability of risk adjustment criteria, investment firms should determine at what level they apply ex ante risk adjustments to the calculation of the bonus pool. This should be at the level of the business unit or at the level of organisational substructures thereof, e.g. the trading desk or the individual staff member.

Risk alignment should be achieved by using risk-adjusted performance criteria, including performance criteria that are adjusted for risk based on separate risk indicators. Quantitative and qualitative criteria should be used.

The ex ante risk adjustments made by investment firms, where based on quantitative criteria, should largely rely on existing measures within the investment firms, used for other risk management purposes. Where adjustments to such measures are made within risk management processes, investment firms should also make consistent changes in the remuneration framework.

When measuring the profitability of the investment firm and its business units, the measurement should be based on the net revenue where all direct and indirect costs related to the activity are included. Investment firms should not exclude costs of corporate functions, e.g. IT costs, group overheads or discontinued businesses.

Investment firms should make qualitative ex ante risk adjustments when determining the bonus pool and identified staff’s remuneration through, for example, the use of balanced scorecards that explicitly include risk and control considerations such as compliance breaches, risk limit breaches and internal control indicators (e.g. based on internal audit results) or other similar methods.