Example 2

Assume the last available HICP rate for this Member State is 2%.

Assume the last available average rate for long-term EU government bonds as published by Eurostat is 2.73%.

For a deferral period of 6 years, the incentive factor is 10% + 4% = 14%.

Pro rata vesting of the portion of variable remuneration of EUR 37 500 paid in instruments deferred for six years implies that every year EUR 6 250 vests. Hence, in the formula for the discount rate the length of the vesting period is: n=1 for the EUR 6 250 vesting after the first year, n=2 for the portion vesting after two years, n=3 for the portion vesting after three years, and so on until n=6.

The discounted variable remuneration for the above example 2 is calculated as follows:

In this example, EUR 37 500, which represents 25% of the total variable remuneration is paid in instruments deferred for at least five years and can be discounted. The discounted value of the amount of EUR 37 500 of variable remuneration deferred for

= 5 264.04 ( )

= 4 433.63 ( )

= 3 734.21 ( )

= 3 145.13 ( )

= 2 648.97 ( )

= 2 231.09 ( )

The sum of the discounted variable remuneration is EUR 21 457.07 (5 264.04 + 4 433.63 + 3 734.21 + 3 145.13 + 2 648.97 + 2 231.09). In case of pro rata vesting, the calculation can also be done using the present value formula:

( ) ( )

dvr = discounted variable remuneration

vrpr = pro rata amount of variable remuneration (in the above example EUR 6 250)

r = 1+i+g+id (i= inflation rate; g = rate for government bonds, id = incentive factor deferral)

n = length of the deferral period

The total variable remuneration for the purpose of calculating the ratio between the variable and fixed component of remuneration and the ratio between variable and fixed components of remuneration is calculated as follows.

The amount of variable remuneration that can be discounted, because it is paid in instruments deferred for a period of at least five years, is EUR 37 500. However, different discount factors (or the present value formula of the box above) have been used, because this amount vests pro rata over a six-year period. The total amount of the discounted part of variable remuneration equals EUR 21 457.07, resulting in a total amount of variable remuneration for the purpose of calculating the ratio between variable and fixed remuneration of EUR 133 957.07; that is (150 000 - 37 500 + 21 457.07). The ratio between variable and fixed components of total remuneration in this example is (133 957.07/135 000)*100 = 99.23%.

Comparison of the effect of the discount rate between pro rata vesting and full vesting after

If the EUR 37 500 had vested in full after the six-year deferral (no pro rata vesting), the discounted amount of the total variable remuneration would have been EUR 13 386.54.

= 13 386.54 ( )

The ratio fixed/variable remuneration would be equal to (125 886.54/135 000)*100 = 93.25%, which is lower than the one obtained with pro rata vesting.