Title II - Requirements concerning the discount rate for variable remuneration

Variable remuneration which can be discounted

5. Institutions can discount up to a maximum of 25%, or a lower percentage prescribed by the Member State, of the total variable remuneration which is calculated as the sum of all components of variable remuneration before the discount rate is applied. Only variable remuneration which is deferred for at least five years and is paid in equity or debt-instruments or instruments linked to such instruments which are eligible for the purposes of variable remuneration in accordance with point (l) of Article 94(1) of Directive 2013/36/EU should be discounted. This includes parts of the deferred variable remuneration that vest during the deferral period. Variable remuneration payable under deferral arrangements cannot vest faster than on a pro rata basis⁵ .

6. The amount of variable remuneration which can be discounted should be calculated on the basis of the total nominal amount of variable remuneration as set out in the EBA’s guidelines on remuneration policies and practices.

⁵ Article 94(1)(m) of Directive 2013/36/EU. 6 Harmonised Indices of Consumer Prices (HICPs). The rate referred to can be accessed via the following link: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tec00118&plugin=1. 7 ‘Third countries’ refers to countries which are not Member States of the Union.

Elements included in the calculation of the discount rate

7. As no distributions should be paid to staff with respect to instruments during the deferral period the discount rate should comprise the following three factors: inflation, interest rate for government bonds and an incentive factor linked to the use of long-term deferred instruments as set out in the following paragraphs of this section. For paragraphs 8 to 10, as part of their remuneration policy the institutions should implement the use of one of the following:

• a. the most recently available data as at the date when the remuneration is awarded;
• b. the most recently available data as at the date when the variable remuneration which could be awarded for the next performance period is determined.

8. For remuneration awarded in a Member State institutions should use one of the following with regard to the factor for inflation:

• a. if the remuneration is to be paid in the currency issued by the Member State where the staff member mainly works, the average annual rate of change for the HICP published by Eurostat⁶ for that Member State;
• b. if the remuneration is to be paid in a currency issued by another Member State or a third country, official statistical data equivalent to that referred to in (a) above available for the country issuing the currency or the HICP rate applicable for the Member State in which the staff members carry on the predominant part of their activities;
• c. the average annual rate of change under (a) or (b) above for the Member State of the EU parent institution.

9. For remuneration awarded in a third country⁷ institutions should use the following for determining the inflation factor:

• a. if the remuneration is to be paid in a currency issued by a third country, the official statistical data equivalent to that referred to in paragraph 8(a) available for the country issuing the currency or the HICP rate for the Member State of the EU parent institution;
• b. if the remuneration is to be paid in a currency issued by an EU Member State, the HICP rate for the Member State of the EU parent institution.

10. For the interest rate for government bonds institutions should use:

• a. If the remuneration is to be paid in a currency issued by a Member State, the average yield for all Member States of the EU of long-term government bond yields as published by Eurostat;⁸
• b. if remuneration is paid in a currency issued by a third country to staff predominantly located outside the EU, equivalent official statistical data available for the country issuing the currency or the rate under (a) above.

11. The incentive factor for deferred variable remuneration paid in instruments deferred for five years should be 10%. The factor should increase by four percentage points for each additional full year of deferral.

⁸ For the calculation EU government bonds with a residual maturity of around 10 years are used. The information on the long-term EU government bond rates can be found under the following link: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=teimf050&plugin=1.

Calculation of the discount rate

12. Institutions should calculate the applicable discount rates for different parts of variable remuneration which are subject to different deferral and vesting arrangements and apply the discount rates accordingly. Institutions should use the applicable deferral periods documented within their remuneration policy.

13. The applicable discount rate equals one divided by the sum of one plus the three factors set out in section 2, raised to the power of the number of years of the vesting period, as shown in the formula below. The vesting period is the period after which the awarded variable remuneration vests. For this purpose the vesting period should be rounded down to the next integer. For pro rata vesting, institutions may also use a present value formula as described in the Annex, example 2.

( ) i = inflation rate of the Member State or third country g = interest rate for EU government bonds, EU average id = incentive factor for use of long-term deferral n = number of years of the vesting period

The application of the formulas is further explained in examples 1, 2 and 3 in the Annex to these guidelines.