COMMISSION STAFF WORKING DOCUMENT Evaluation of the deferral and pay-out in instruments rules under Directive 2013/36/EU Accompanying the document Report from the Commission to the European Parliament and the Council Assessment of the remuneration rules under Directive 2013/36/EU and Regulation (EU) No 575/2013
Date: 2016-07-28
Institutions: Directorate-General for Justice and Consumers, European Commission
Subjects: business management, credit institution, financial legislation, financial market, investment company, remuneration of work, right of establishment, wage determination

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 28.7.2016  SWD(2016) 266 final   COMMISSION STAFF WORKING DOCUMENT Evaluation of the deferral and pay-out in instruments rules under Directive 2013/36/EU     Accompanying the document Report from the Commission to the European Parliament and the Council  Assessment of the remuneration rules under Directive 2013/36/EU and Regulation (EU) No 575/2013  {COM(2016) 510 final} {SWD(2016) 265 final}  
 
 
1. EXECUTIVE SUMMARY 

This Staff Working Document, annexed to the Commission Report COM(2016)510, provides 
a detailed assessment of the Capital Requirements Directive provisions on deferral and pay-
out  in  instruments  in  function  of  their  relevance,  effectiveness,  efficiency,  coherence, 
acceptability  and  EU  added  value.  The  focus  of  the  assessment  in  this  Staff  Working 
Document on the deferral  and pay-out in  instruments requirements is due to the findings in 
the Commission Report COM(2016)510, which revealed certain shortcomings with regard to 
the proportional implementation of these rules.   

The Commission has engaged in several work streams in order to carry out its assessment of 
the Capital Requirements Directive remuneration rules. The evaluation strategy consisted of 
a  mix  of  stakeholders’  engagement,  own  research,  input  from  the  European  Banking 
Authority  and  a  study  commissioned  to  an  external  contractor.  The  output  of  these  work 
streams was consistent in supporting the main findings with respect to deferral and pay-out 
in instruments: the requirements are in general positively assessed, on condition that they be 
applied in a more flexible and proportionate manner. 

The  evaluation  criteria  yielded  positive  results  with  regard  to  the  relevance,  effectiveness, 
efficiency  and  acceptability  of  these  provisions  overall,  but  revealed  shortcomings  in  the 
particular cases of small and non-complex institutions and of staff with low levels of variable 
remuneration.  A  negative  assessment  was  also  made  with  respect  to  the  efficiency  and 
acceptability  of  the  provision  requiring  listed  institutions  to  the  use  shares,  without  the 
possibility to use share-linked instruments, for the mandatory pay-out of part of the variable 
remuneration in instruments under the Capital Requirements Directive. The coherence of the 
analysed  provisions  in  the  absence  of  implementation  flexibilities  for  the  above-mentioned 
types of institutions and staff is considered as rather low, whereas the overall EU added value 
of the rules is assessed positively. 

2. INTRODUCTION 

The  Capital  Requirements  Directive1  (CRD)  and  Regulation2  (CRR)  prescribe  rules  for  the 
remuneration  of  staff  working  for  credit  institutions  and  investment  firms  (the  CRD 
remuneration rules), and in particular for staff who can materially influence the risk profile of 
the institution (the so-called “Identified Staff”). 

In line with the mandate in Article 161(2) CRD, the Commission, in close  cooperation with 
the  European  Banking  Authority  (EBA),  has  assessed  the  implementation,  enforcement  and 
efficiency of the remuneration provisions in CRD and CRR. The outcome of this assessment 
is  reflected  in  the  Commission  report  COM(2016)510.  The  main  findings  in  this  report  are 
that  the remuneration requirements which existed prior to CRD IV3 can be overall positively 

1 Directive 3013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of 
credit institutions and the prudential supervision of credit institutions and investment firms, available at http://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32013L0036 
2  Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on  prudential 
requirements 
firms,  available  at  http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:32013R0575 
3  i.e.  already  existing  in  a  very  similar  form  in  the  Directive  2010/76/EU  amending  Directives  2006/48/EC  and 
2006/49/EC  as  regards  capital  requirements  for  the  trading  book  and  for  re-securitisations,  and  the  supervisory 
review of remuneration policies (CRD III) 

institutions  and 

for  credit 

investment 

2 

 
 
 
                                                       
assessed.  As  for  the  assessment  of  the  effectiveness  and  impacts  of  the  maximum  ratio 
between  variable  and  fixed  remuneration,  introduced  by  CRD  IV,  the  evidence  to  date  is 
scarce and the issue may need to be revisited when more practical experience is gained.  

The review also revealed certain shortcomings with regard to the proportional implementation 
of the rules: in the case of small and non-complex institutions and of staff with low levels of 
variable  remuneration,  the  rules  on  deferral  and  pay-out  in  instruments  applicable  to  the 
variable  remuneration  of  Identified  Staff  appear  costly  and  burdensome  to  implement, 
compared  with  their  prudential  benefits.  The  present  Staff  Working  Document  aims  to 
evaluate these two provisions and their proportional application more in detail. 

This  introductory  section  explains  the  general  calls  for  a  more  proportionate  financial 
framework,  looks  at  how  proportionality  is  being  dealt  with  in  the  context  of  the  CRD 
remuneration rules and explains the objective and scope of this Staff Working Document. 

General calls for a more proportionate financial framework 

Policy-makers,  the  industry  and  supervisors  share  the  view  that  the  principle  of 
proportionality enshrined in financial regulation is important and needs to be fostered.  

In  a  recent  Report4,  the  European  Parliament  notes  that  efficient  and  effective  financial 
services regulation should take due account of the proportionality principle, and calls on the 
Commission  and  the  European  Supervisory  Authorities  (ESAs)  to  conduct  regular 
proportionality  and  effectiveness  checks,  particularly  with  regard  to  the  requirements 
applicable to small and medium-sized market participants. The Banking Stakeholder Group of 
EBA  has  recently  released  a  report5  calling  on  EU  supervisors  and  policymakers  to  better 
apply the principle of proportionality in order to find a balance between the costs and benefits 
of EU financial regulation. 

Moreover, the Commission's recent Call for Evidence6 on the EU regulatory framework for 
financial services aimed  to investigate the impacts of legislation  (including CRD and CRR) 
put  in  place  to  restore  financial  stability  and  public  confidence  in  the  financial  system, 
including potential unintended regulatory burdens of that legislation. The objective was also 
to  gather  information  on  the  application  of  the  principle  of  proportionality.  Numerous 
responses  suggested  that  a  more  proportionate  approach  (i.e.  allowing  some  exemptions) 
should be reflected in the application of remuneration rules, especially deferral and pay-out in 
instruments. 

Proportionality in remuneration 

The CRD remuneration rules are largely inspired by the Principles for Sound Compensation 
Practices  and  their  Implementation  Standards7  adopted  by  the  Financial  Stability  Board. 

(9.12.2015) 

4  Report  on  stocktaking  and  challenges  of  the  EU  Financial  Services  Regulation:  impact  and  the  way  forward 
towards  a  more  efficient  and  effective  EU  framework  for  Financial  Regulation  and  a  Capital  Markets  Union 
(2015/2106(INI)) 
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-
//EP//TEXT+REPORT+A8-2015-0360+0+DOC+XML+V0//EN  
5  Proportionality  in  bank  regulation,  a  report  by  the  EBA  Banking  Stakeholder  Group,  available  at 
http://www.eba.europa.eu/documents/10180/807776/European+Banking+Authority+Banking+Stakeholder+Group
-+Position+paper+on+proportionality.pdf  
6  Call  for  Evidence  on  EU  regulatory  framework  for  financial  services  (30.9.2015),  available  at 
http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-review/docs/consultation-
document_en.pdf 
7  The  Principles  for  Sound  Compensation  Practices  and  their  Implementation  Standards,  available  at 
http://www.fsb.org/what-we-do/policy-development/building-resilience-of-financial-institutions/compensation/   

3 

 
 
                                                       
While those internationally agreed principles apply only to “significant” institutions, most of 
the CRD remuneration rules apply to all credit institutions and investment firms established in 
the European Economic Area (EEA), regardless of their size or significance8. However, CRD 
requires that institutions comply with the principles regarding remuneration "in a manner and 
to the extent that is appropriate to their size, internal organisation and the nature, scope and 
complexity  of  their  activities"  (the  principle  of  proportionality  as  reflected  in  Article  92(2) 
CRD). An analogous provision was already included in Annex V, Section 11 of CRD III9. 

Many  financial  entities  and  supervisors  plead  for  the  disapplication  of  some  remuneration 
rules  with  respect  to  certain  entities,  staff  or  awards  on  the  basis  of  the  principle  of 
proportionality.  This  concerns  in  particular  Article  94(1)  CRD  points  (l)  on  pay-out  in 
instruments  and  (m)  on  deferral,  which  were  carried  over  from  CRD  III  and  had  been 
applicable  since  2011.  Arguments  have  been  advanced  that  these  requirements  entail 
compliance costs that tend to outweigh their prudential benefits in case of smaller and non-
complex firms or relatively low levels of variable remuneration.  

After the adoption  of CRD III,  Member States  applied  an interpretation  according to which 
the  provisions  on  deferral  and  pay-out  in  instruments  could  in  certain  circumstances  be 
“waived”  on  the  basis  of  the  principle  of  proportionality.  The  main  beneficiaries  of  such 
waivers were institutions considered small and non-complex and individuals with low levels 
of variable remuneration. The gross majority of Member States allowed waivers from some 
(but  not  always  the  same)  remuneration  requirements,  and  for  all  or  some  of  these 
beneficiaries. The CRD remuneration provisions most often waived were deferral and pay-out 
in instruments. Waiver practices were nevertheless highly diverse across the Member States, 
and it could be argued that in some cases exemptions were allowed too easily.  

The  waiver  practices  continued  after  the  adoption  of  CRD  IV  in  2013.  However,  at  the 
occasion  of  EBA  revising  the  Guidelines  on  remuneration,  it  was  clarified  that  waivers  are 
not in line with the legal reading of the principle of proportionality enshrined in Article 92(2) 
CRD  IV10.  This  standpoint  has  met  with  strong  opposition  from  the  industry  and  by 
supervisors,  who  argued  that  disallowing  waivers  would  lead  to  excessive  costs  without 
bringing sufficient added value in terms of prudential results.  

investigation  of 

the  practical  application  of 

the  CRD  remuneration 
Following  an 
requirements,  EBA  issued  on  21  December  2015  an  Opinion11  addressed  to  the  European 
Commission, European Parliament and the Council. In it, EBA calls for a more harmonised 
approach  to  the  application  of  the  remuneration  requirements  in  CRD,  and  for  legal 
clarification concerning the application of deferral and pay-out in instruments in accordance 

8  Very  few  rules  are  applicable  to  “significant”  institutions  only,  for  example  the  requirement  to  establish  a 
remuneration committee set out in Article 95 CRD.  
9 Directive 2010/76/EU amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the 
trading book and for re-securitisations, and the supervisory review of remuneration policies, available at http://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32010L0076 
10  Article  92(2)  CRD  enables  and  compels  competent  authorities  to  distinguish  between  different  institutions, 
adjusting  the  concrete  manner  in  which  the  remuneration  principles  are  applied  in  practice.  However,  the 
application of the proportionality principle does not allow to "neutralize", that is to disregard remuneration criteria 
the  co-legislators  (the  European  Parliament  and  the  Council)  have  themselves  specified  in  CRD.  This  is  in 
particular the case for points (l) and (m) of Article 94(1) regulating deferral and pay-out in instruments of variable 
remuneration, which lay down clear rules and leave no room for exemptions. 
11    Opinion  of  the  European  Banking  Authority  on  the  application  of  the  principle  of  proportionality  to  the 
remuneration provisions in Directive 2013/36/EU, available at 
https://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-
25+Opinion+on+the+Application+of+Proportionality.pdf 

4 

 
 
                                                       
with  the  principle  of  proportionality.  EBA  considered  that  it  would  be  justified  to  exclude 
certain small, non-complex institutions, as well as staff who receive low amounts of variable 
remuneration  from  the  requirements  to  apply  deferral  and  pay-out  in  instruments12.  It 
considered, however, that the tools available to it are not sufficient to achieve this objective 
and recommended amending CRD.  

Objective and scope of this Staff Working Document 

This Staff Working Document, annexed to the Commission Report COM(2016)510, provides 
a  detailed  assessment  of  the  CRD  provisions  on  deferral  and  pay-out  in  instruments  in 
function of their relevance, effectiveness, efficiency, coherence, acceptability and EU added 
value, taking into account differences in the size and type of institutions, as well as the level 
of  the  individual  variable  remuneration.  This  analysis  provides  a  contribution  to  the 
Commission's  considerations  about  the  need  for  putting  forward  a  CRD  legislative 
amendment. 

3. BACKGROUND  

This  section  explains  the  objectives  behind  the  introduction  of  the  remuneration  rules  and 
describes  what  the  regulatory  situation  was  before  the  introduction  of  the  rules  (i.e.  the 
baseline scenario). 

The CRD remuneration rules and their objectives 

The  CRD  remuneration  rules  were  introduced  by  Directive  2010/76/EU  (CRD  III)  and 
slightly amended and complemented by CRD IV and CRR. The overarching goal of CRD III 
was  formulated  as  “to  ensure  that  the  effectiveness  of  bank  capital  regulation  in  the  EU, 
represented by the Capital Requirements Directive, is  strengthened and any of its excessive 
pro-cyclical  impacts  on  the  real  economy  are  contained  while  maintaining  the  competitive 
position of the EU banking industry."13 

The remuneration rules, including those set out in points (l) and (m) of Article 94(1) CRD, 
must be seen against the background of the financial crisis that emerged in 2008. Measures to 
restore financial stability involved unprecedented levels of public support.  

Prior to the 2008 financial crisis there was typically a high reliance on variable remuneration; 
variable remuneration usually made up a substantial portion of staff’s pay, sometimes more 
than 75% of total remuneration14.  Staff had grown to see variable remuneration (intended by 
the  institutions  to  motivate  and  retain  employees)  as  a  normal  and  expected  part  of  their 
remuneration package. There was an insufficient link with the institution’s profitability, in the 
sense that while staff would share in profits, losses were predominantly borne by shareholders 
and, in bail-out situations, by taxpayers. The fact that the bonus systems were typically short-
term focused and that variable remuneration constituted an important part of variable pay was 
seen  to  incentivize  excessive  risk-taking  geared  at  maximizing  short-term  profits  to  the 
detriment  of  the  long-term  performance  of  the  institution.  Shortcomings  in  remuneration 

12By waiving the requirement on pay-out in instruments set out in Article 94(1) point (l) CRD, Article 94(1) point 
(o) second paragraph CRD, requiring institutions to hold staff's discretionary pension benefits for a period of five 
years in the form of instruments referred to in point (l), will also be implicitly waived. 
13 CRD III Impact Assessment, available at 
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52009SC0974 
14 CRD III Impact Assessment 

5 

 
 
 
                                                       
policies  and  practices  were  thus  seen  as  a  contributing  factor  to  the  impairment  of  the 
soundness of institutions and to the disruption of financial stability15. 

The remuneration  rules, including those set out in points (l) and (m) of Article 94(1) CRD, 
were expected to strengthen the link between pay and long-term performance and to prevent 
incentives for excessive risk-taking in remuneration policies16. 

Baseline 

As explained above, before the crisis little attention was paid to the short-term focus and lack 
of risk adjustment of variable remuneration in the financial services industry.  

In April 2009 the European Commission issued a Recommendation on remuneration policies 
in  the  financial  services  sector17.  The  Recommendation  introduced  a  number  of  important 
principles  with  regard  to  institutions’  remuneration  policies,  including  the  structure  of 
remuneration  packages,  governance  and  performance  measurement,  as  well  as  their 
supervision  by  competent  authorities.  The  principles  were  however  not  binding  on  firms  or 
competent authorities.  

A Commission report of June 201018 revealed that a relatively high number of Member States 
had  not  initiated  any  measures  or  had  taken  unsatisfactory  measures  to  implement  the 
Recommendation.  On  the  other  hand,  some  Member  States  had  implemented  the  more 
stringent  rules  contained  in  the  FSB  Implementation  Standards.  Consequently,  there  were 
wide differences in the national rules on remuneration. 

Before the introduction of the CRD III remuneration rules in 2010, at EU level there were no 
binding rules on the structure of remuneration packages of credit institutions and investment 
firms,  no  binding  governance  rules  ensuring  that  risk  management  is  embedded  in 
remuneration policies and no rules ensuring adequate oversight of remuneration practices by 
supervisors.   

4. EVALUATIONS QUESTIONS 

This  Staff  Working  Document  seeks  to  answer  the  following  questions  regarding  the 
relevance,  effectiveness,  efficiency,  coherence,  acceptability  and  EU  added  value  of  the 
requirements on deferral and pay-out in instruments: 

Relevance 

  To what extent are the CRD rules on deferral and pay-out in instruments still relevant for 
meeting  their  underlying  policy  objectives,  and  do  these  objectives  still  correspond  to 
policy needs? 

15 In addition to a problem with the structure of remuneration policies, there were shortcomings in the  corporate 
governance systems of institutions and a lack of adequate oversight of remuneration policies by supervisors. 
16 CRD III Impact Assessment  
17 Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services 
sector, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32009H0384 
18 COM(2010) 286 final - Report on the application by Member States of the EU of the Commission 2009/384/EC 
Recommendation  on  remuneration  policies  in  the  financial  services  sector  (02.06.2010),  available  at 
http://ec.europa.eu/internal_market/company/docs/directors-remun/com-2010-286-2_en.pdf 

6 

 
 
 
 
                                                       
 
Effectiveness 

  To what extent have the rules on deferral and pay-out in instruments met the prudential 

objectives of the CRD remuneration rules?  

Efficiency 

  To  what  extent  do  the  benefits  achieved  through  deferral  and  pay-out  in  instruments 

outweigh the costs and difficulties resulting from their implementation? 

Coherence 

  To  what  extent  are  the  CRD  rules  on  deferral  and  pay-out  in  instruments  coherent 

internally? 

  To what extent are the CRD rules on  deferral and pay-out in  instruments coherent with 
requirements  on  deferral  and  pay-out  in  instruments  in  other  EU  legislation  in  the 
financial sector? 

  To what extent are the CRD rules on deferral and pay-out in  instruments coherent with 

relevant international principles? 

Acceptability 

  To  what  extent  can  we  observe  changes  in  the  perception  of  the  CRD  rules  on  deferral 

and pay-out in instruments by the targeted stakeholders? 

EU added value 

  To  what  extent  do  the  CRD  rules  on  deferral  and  pay-out  in  instruments  continue  to 

require action at EU level? 

5. METHOD 

The Commission has engaged in several work streams in order to carry out its assessment of 
the  CRD  and  CRR  remuneration  rules.  The  assessment  strategy  consisted  of  a  mix  of 
stakeholders’ engagement, own research, input from the European Banking Authority and a 
study commissioned to an external contractor. 

Between  May  2015  and  March  2016  the  Commission  sought  industry  feedback  through 
numerous bilateral meetings with stakeholders. These were dedicated to understanding their 
business  specificities  as  well  as  their  practical  experience  and  concerns  with  regard  to  the 
application of the CRD remuneration rules. These exchanges revealed a number of concerns 
related  to  the  implementation  of  deferral  and  pay-out  in  instruments  in  a  proportional 
manner, which constituted valuable input for the Commission’s assessment of the efficiency 
and  effectiveness  of  these  provisions.  The  acceptability  of  the  rules  with  regard  to  certain 
types  of  entities  and  levels  of  remuneration  could  also  be  assessed  on  the  basis  of  these 
stakeholders’ input.  

The  efficiency  and  effectiveness  of  deferral  and  pay-out  in  instruments  were  specifically 
targeted  through  dedicated  questions  in  the  Commission  Public  Consultation  on  the 
CRD/CRR  remuneration  rules.  The  consultation  ran  between  October  2015  and  January 
2016  and  yielded  40  responses  covering  the  industry  (credit  institutions,  investment  firms, 

7 

 
 
 
asset  managers  and  their  associations),  the  legal  profession,  employee  representatives  and 
five Member States authorities19.  

The  Consultation  was  complemented  by  a  fact-finding  stakeholder  event  hosted  by  the 
Commission  in  December  2015,  which  featured  a  segment  dedicated  to  the  participants’ 
assessment  of  the  efficiency  and  effectiveness  of  deferral  and  pay-out  in  instruments.  A 
recurrent  theme  throughout  the  exchanges  was  an  argument  about  the  alleged  excessively 
wide  application  of  the  CRD  remuneration  rules,  and  a  plea  from  participants  to  allow  the 
disapplication  of  some  of  those  rules  on  the  basis  of  the  principle  of  proportionality  with 
respect to certain entities, staff or awards20.  

Moreover, the Commission invited Member States’ participation in the Public Consultation 
on the occasion of the Commission’s Expert Group on Banking, Payments and Insurance, 
and  engaged  with  Member  States’  representatives  and  supervisory  authorities  in  the 
framework of EBA’s Standing Group on Governance and Remuneration.  

The contributions received in the context of these work streams provided substantive input 
regarding  the  requirements  on  deferral  and  pay-out  in  instruments,  in  terms  of  both  the 
compliance difficulties faced by certain types of institutions and the perceived low prudential 
benefits  of  those  requirements  when  applied  to  small  and  non-complex  firms  and  to  staff 
with low levels of variable remuneration.  

As  part  of  the  assessment  exercise  the  Commission  also  awarded  a  service  contract  for  a 
study21  on  a  number  of  aspects  relevant  for  evaluating  the  CRD  remuneration  rules.  As 
reflected in the Terms of Reference of this study, one of the main work streams was to assess 
the  efficiency  and  effectiveness  of  the  remuneration  provisions  of  the  Directive,  including 
deferral and pay-out in instruments. This included collecting factual data -through a survey, 
interviews and desk research- on how the institutions apply these rules in practice depending 
on  their  size,  internal  organization  and  activities.  In  particular  with  regard  to  deferral  and 
pay-out  in  instruments,  the  Commission  requested  factual  information  about  the  cost  and 
potential difficulties that compliance with these requirements induced for certain institutions. 
The relevance dimension was addressed through the requirement for the contractor to assess 
the suitability of the CRD/CRR rules in addressing the identified pre-crisis shortcomings in 
remuneration policies, and coherence with other jurisdictions’ practices was addressed in the 
tender section dealing with relevant international developments. 

Last  but  not  least,  in  accordance  with  the  terms  of  the  Directive  and  commonly  agreed 
cooperation  modalities,  EBA  was  closely  associated  to  the  process  of  evaluating  the  CRD 
remuneration  rules.  The  EBA  reports  on  High  earners  and  Benchmarking  remuneration 
practices at EU level22 offered significant data for the assessment of the implementation and 
effectiveness  of  CRD  remuneration  rules.  The  EBA  Public  Consultation  on  its  draft 
Guidelines  on  sound  remuneration  policies  also  contained  a  number  of  questions  directly 
relevant for the assessment of the efficiency, effectiveness and acceptability of deferral and 

The 

summary 

19  A  summary  of  consultation  responses  [as  well  as  the  non-confidential  contributions]  is  available  at 
http://ec.europa.eu/justice/newsroom/civil/opinion/151015_en.htm  
20 
the 
http://ec.europa.eu/justice/newsroom/civil/events/151116_en.htm 
21 institut für finanzdienstleistungen e.V. (IFF, 2016), report available at http://ec.europa.eu/justice/civil/company-
law/corporate-governance/index_en.htm. 
22  All 
at 
publications 
documents/ckV8kFRsjau9/more 

https://www.eba.europa.eu/regulation-and-policy/remuneration/-/topic-

participants 

discussions 

available 

available 

and 

list 

the 

of 

of 

at 

is 

8 

 
 
                                                       
pay-out in instruments and their proportional application23. The consultation ran from March 
to June 2015 and received 127 responses, most of which raised concerns about the perceived 
limited application of the proportionality principle. Moreover, of particular relevance for the 
Commission’s  assessment  is  the  report  EBA  issued  in  December  2015  on  the  Member 
States’ implementation of the rules under the principle of proportionality. As explained more 
in  detail  in  the  following  section,  the  report  sheds  light  on  Member  States’  diversity  of 
approaches  with  regard  to  deferral  and  pay-out  in  instruments  and  is  accompanied  by  an 
Opinion to the Commission setting out EBA’s assessment of these provisions and outlining 
the  main  elements  of  a  possible  proposal  for  a  legislative  change  aiming  at  ensuring  their 
proportional application. 

The data gathering exercise has been hampered to some extent by the relatively recent nature 
of some remuneration rules and by the waiver practices applied in a non-uniform manner by 
a  significant  number  of  Member  States.  The  analysis  of  remuneration  trends  was  further 
affected by a number of factors: (i) the harmonised criteria for the identification of the staff 
concerned  entered  into  force  only  in  2014;  (ii)  the  EBA  Benchmarking  of  Remuneration 
practices covers only a part of the banking system24, captures mainly large credit institutions 
and is not broken down per Member State; (iii) participation in the survey carried out by the 
external contractor was low in the case of investment firms and asset managers. The extent 
of the waiver practices applicable to deferral and pay-out in instruments in terms of market 
share of the beneficiary institutions and number of exempted Identified Staff is also difficult 
to quantify, given the relatively scarce information available at the moment. 

these 

limitations  affecting  mainly 

Despite 
information  at 
Commission’s disposal on the basis of the broad outreach described above was sufficient in 
order to enable a conclusive assessment of the relevance, effectiveness, efficiency, coherence, 
acceptability and EU added value of deferral and pay-out in instruments. 

the  numerical  data, 

the 

6. IMPLEMENTATION STATE OF PLAY 

The deadline for transposing CRD IV into national law was 31 December 2013, with the new 
rules applying as of 1 January 2014.  

Different practices and approaches have been observed regarding the way in which Member 
States  interpreted  and  applied  in  national  law  and/or  supervisory  practices  the  principle  of 
proportionality associated with the remuneration provisions. The notable trend was to allow 
waivers in particular for the deferral and pay-out in instruments requirements.  

EBA  has  recently  performed  a  stock-taking  exercise  on  the  way  in  which  Member  States 
implement the principle of proportionality with respect to the CRD remuneration provisions. 
Its findings are presented in a report annexed to EBA’s Opinion of 21 December 2015 on the 

sound 

23  Consultation  on  Guidelines  on 
http://www.eba.europa.eu/news-
press/calendar;jsessionid=92FD1BDDBB8AF7D0F0F1ECA3CEACD1AB?p_p_auth=BlMpQNY7&p_p_id=8&p
_p_lifecycle=0&p_p_state=normal&p_p_mode=view&_8_struts_action=%2Fcalendar%2Fview_event&_8_eventI
d=1002371 
24 Member States are required to ensure that at least 60% of their banking system based on total assets is covered 
by the data. 

(EBA/CP/2015/03),  available  at 

remuneration  policies 

9 

 
 
 
 
 
                                                       
application  of  the  principle  of  proportionality  addressed  to  the  European  Commission, 
European Parliament and the Council25. 

As  per  EBA’s  conclusions  based  on  the  information  provided  by  national  competent 
authorities,  18  Member  States  allow  the  non-application  of  deferral  and  20  Member  States 
that  of  pay-out  in  instruments.  A  smaller  number  of  Member  States  allow  for  the 
“neutralisation”  of  other  remuneration  requirements  as  well  (i.e.  the  identification  of  staff 
having a material impact on the risk profile of the institution26, clawback27 and the maximum 
ratio between variable and fixed remuneration28).  

It  also  has  to  be  noted  that  when  Member  States  waive  the  deferral  requirement,  the  malus 
requirement  is  also  implicitly  waived,  and  when  they  waive  the  pay-out  in  instruments 
requirement, the requirement for institutions to hold staff’s discretionary pension benefits for 
a period of five years in the form of instruments29 is also implicitly waived. 

A  wide  variety  of  practices  are  noted  with  regard  to  the  criteria  and  thresholds  used  to 
determine the possibility of applying waivers. Two main categories of exemption criteria can 
be differentiated depending on whether they are defined at the level of the institution or at the 
level of Identified Staff. 

The criteria used in order to waive remuneration requirements at institution level concern the 
size, the activities or the type of the institution: 

  Twelve  Member  States  use  the  size  criterion,  with  most  of  them  defining  size  by 
reference  to  institutions’  balance  sheet  (ranging  from  EUR  1  billion  over  a  three-year 
period,  to  GBP  15  billion  per  year  or  EUR  30  billion  for  the  partial  application  of 
waivers);  six  competent  authorities  apply  a  case-by-case  assessment;  three  exempt 
institutions  considered  “non-significant”  and  one  uses  as  possible  exemption  criteria,  in 
addition to the balance sheet, the percentage of activities falling under CRD and the level 
of required own funds; four Member States supplement the numerical criteria with a risk 
assessment. 

  Eleven Member States take into account the activities of the institution when deciding on 
granting waivers, with the majority of them using case-by-case assessments; two Member 
States  allow  the  application  of  certain  waivers  to  investment  firms,  while  two  others 
apply  waivers  only  to  the  extent  that  the  entity’s  activity  does  not  pose  a  risk  to  the 
overall group. 

  Nine Member States use criteria linked to the nature of the institution for grating waivers, 
most  of  them  on  a  case-by-case  basis;  one  Member  State  applies  this  criterion  only  to 
asset management companies, while another applies it only to non-listed banks. 

With regard to exemptions granted at the level of Identified Staff, two options exist: 

  Entire categories of Identified Staff are exempted when it is judged that they do not have 
a  material  impact  of  their  institutions’  risk  profile;  three  Member  States  adopted  this 
approach. 

25  Opinion  of  the  European  Banking  Authority  on  the  application  of  the  principle  of  proportionality  to  the 
remuneration provisions in Directive 2013/36/EU, available at  
https://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-
25+Opinion+on+the+Application+of+Proportionality.pdf 
26 Three Member States 
27 Nine Member States  
28 Five Member States 
29 Article 94(1) point (o) second paragraph CRD 

10 

 
 
                                                       
  Identified  Staff  are  exempted  on  the  basis  of  their  remuneration  level  by  nineteen 
Member  States;  eight  of  them  use  a  monetary  threshold  for  the  level  of  variable 
remuneration (ranging from approx. EUR 8.000 to EUR 100.000, with a median of EUR 
50.000);  others  use  either  a  variable  remuneration  threshold  or  a  percentage  of  variable 
remuneration in fixed remuneration (e.g. less than EUR 30.000 or less than 25%); other 
Member  States  introduced  a  combination  of  variable  remuneration  threshold  and  other 
criteria  (e.g.  less  than  33%  of  total  remuneration  and  less  than  GBP  500.000  variable); 
five Member States decide on a case-by-case basis. 

As  illustrated  above,  at  present  there  is  a  very  wide  array  of  practices  in  place  and 
considerable variations exist at the level of the numerical thresholds applied. 

The  fact  that  Member  States  apply  proportionality  on  the  basis  of  mere  guidelines  which 
leave  the  concrete  exemption  thresholds  and  criteria  to  the  discretion  of  each  competent 
authority risks undermining the EU level playing field and the conditions for internal market 
competition.  

7. ANSWERS TO THE EVALUATIONS QUESTIONS 

Relevance 

To what extent are the CRD rules on deferral and pay-out in instruments still relevant for 
meeting their underlying policy objectives, and do these objectives still correspond to policy 
needs? 

As  explained  in  the  “Background”  section,  inappropriate  remuneration  policies  were 
considered  contributing  factors  to  the  financial  crisis  by  being  conducive  of  short-termism 
and  excessive  risk-taking  without  adequate  regard  to  long-term  performance.  Variable 
remuneration in particular was considered to have incentivised staff to take in their business 
decisions  risks  above  prudent  levels,  because  in  the  case  of  a  favourable  outcome  staff’s 
potential  for  gain  was  limitless,  whereas  losses  would  be  predominantly  borne  by  other 
stakeholders. The matter became all the more debated in the case of systemically important 
institutions  which,  being  considered  “too-big-to-fail”,  were  expected  to  be  bailed  out  using 
taxpayers’ money. 

The objective of the CRD remuneration rules was to introduce the much needed consideration 
of risk management in the design of remuneration policies and to promote responsible risk-
taking  through  the  way  in  which  remuneration  packages  are  conceived.  This  was  intended 
through a variety of measures ranging from the involvement of the risk management function 
in  remuneration  decisions,  to  regulating  the  structure  of  pay  and  the  way  in  which  variable 
remuneration is paid out.  

Deferral,  and  also  pay-out  in  instruments,  are  key  to  the  objective  of  aligning  variable 
remuneration with the risk profile and the long-term interests of the institution. Paying a part 
of the variable remuneration in instruments was aimed to bring the interests of Identified Staff 
in  line  with  those  of  the  institutions’  shareholders  and/or  creditors,  therefore  deterring 
Identified Staff from taking risks which would be considered excessive by these categories of 
stakeholders.  Deferring  part  of  the  variable  remuneration  over  three  to  five  years  aimed  to 
ensure  that  Identified  Staff  take  into  account  in  their  business  decisions  the  long-term 
interests  of  the  institution  (thereby  mitigating  the  risk  of  short  termism),  and  to  make  it 
possible to apply ex-post adjustments if required  by the  institution’s performance and/or by 
the staff member’s conduct. 

11 

 
 
 
The need to dis-incentivise staff from taking excessive, short-term risks still exists today, as it 
is  an  important  contribution,  amongst  other  prudential  regulations,  to  fostering  financial 
stability  and  to  limiting  the  chances  of  a  new  financial  crisis.  It  is  thus  still  appropriate  to 
design remuneration packages in a way that would avoid creating undesired incentives and it 
remains  important  to  align  variable  remuneration  with  the  risk  profile  and  the  long-term 
interests of the institution. Deferral and pay-out in instruments continue to represent adequate 
tools  to  reach  these  policy  objectives.  Therefore  the  relevance  of  these  CRD  remuneration 
rules is unchanged compared to the moment they were put forward30. 

Various stakeholders, including industry representatives, supervisors, Member States and the 
European Banking Authority have nevertheless questioned the relevance of the deferral and 
pay-out in instruments requirements for small and non-complex institutions and for staff with 
low levels of variable remuneration.  

With  the  ultimate  goal  of  the  CRD  remuneration  provisions  being  to  contribute  to  an 
increased  overall  stability  of  the  financial  services  sector  and  the  economy  as  a  whole, 
deferral and pay-out in instruments indeed appear particularly relevant for institutions above a 
certain  size  and  of  a  specific  nature  and  complexity,  given  their  weight  and  interconnected 
position in the financial system.  

The  provisions  are  also  very  relevant  for  Identified  Staff  earning  high  levels  of  variable 
remuneration,  as  these  high  levels  have  the  capacity  to  create  material  incentives  for  that 
staff’s  risk-taking  behaviour.  With  regard  to  staff  with  non-material  levels  of  variable 
remuneration,  they  are  typically  not  incentivised  by  their  remuneration  scheme  to  take 
excessive short-term risks and the prudential benefits of these mechanisms are thus reduced, 
therefore deferral and pay-out in instruments are not fully relevant in their case.   

Effectiveness 

To  what  extent  have  the  rules  on  deferral  and  pay-out  in  instruments  met  the  prudential 
objectives of the CRD remuneration rules?  

The  rules  on  deferral  and  pay-out  in  instruments  were  introduced  in  order  to  align  variable 
remuneration with the long-term risk profile and performance of institutions.     

The  review  of  the  CRD  remuneration  provisions  as  reflected  in  Commission  report 
COM(2016)510  assessed  positively  the  effectiveness  of  deferral  and  pay-out  in  instruments 
rules  in  reaching  these  objectives.  Deferral  ensures  the  adjustment  of  remuneration  in 
function of performance by enabling the application of malus. Moreover, by deferring the part 
of remuneration awarded in instruments, remuneration reflects the  changes that occur in the 
prices of the instruments over a longer period, thereby ensuring a further link with long-term 
performance.  Pay-out  in  equity  instruments  strengthens  the  alignment  of  Identified  Staff’s 
remuneration  with  the  interests  of  shareholders,  whereas  pay-out  in  bail-in-able  debt 
instruments helps to achieve alignment with creditors’ interests. 

30  This  conclusion  is  also  supported  from  a  consumers’  angle:  the  latest  Consumers  Market  Scoreboard  (10th 
edition, June 2014, available at  
http://ec.europa.eu/consumers/consumer_evidence/consumer_scoreboards/10_edition/index_en.htm)  reveals  that 
the consumers’ trust in banking services is still at a very low level. 

12 

 
 
 
 
                                                       
Commission report COM(2016)510 thus concluded that  the rules on deferral and pay-out in 
instruments allow aligning remuneration with the long-term risk  profile and performance of 
institutions, thereby contributing to the ultimate goal of fostering financial stability. They are 
therefore considered overall effective. 

Various stakeholders have nevertheless questioned the effectiveness of the deferral and pay-
out in instruments requirements for small and non-complex institutions and for staff with low 
levels of variable remuneration. As described in Section 6 “Implementation state of play”, the 
rules  on  deferral  and  pay-out  in  instruments  are  to  date  largely  not  applied  to  this  type  of 
institutions and staff. Because of this, a proper assessment of the effectiveness of these rules 
in  their  respect  is  very  difficult.  Such  assessment  will  therefore  necessarily  consist  in  a 
hypothetical exercise, looking at the likely effects if the rules were to be applied in practice. 

Provided  that  a  staff  member  receives  only  a  non-material  level  of  variable  remuneration, 
then such variable remuneration would likely be insufficient to create incentives to act against 
the  principles  of  sound  and  effective  risk  management.  In  the  absence  of  such  adverse 
incentives, the prudential effects of applying deferral and pay-out in instruments mechanisms 
would be low.   

The  above  elements  make  it  likely  that  –if  the  rules  were  to  be  applied  in  practice  to  staff 
receiving non-material variable remuneration – the institutions concerned would change their 
remuneration  policies  and  pay  out  only  fixed  remuneration  to  the  staff  concerned,  thereby 
breaking  the  link  between  pay  and  performance.  The  extensive  feedback  received  from  the 
industry, supervisors and the European Banking Authority supports this expectation.  

Conclusion can therefore be drawn that the objective of the rules on deferral and pay-out in 
instruments  of  (aligning  variable  remuneration  with  the  long-term  risk  profile  and 
performance  of  institutions)  would  not  be  achieved  in  the  case  of  non-material  levels  of 
variable  remuneration.  The  rules  are  therefore  considered  ineffective  for  these  levels  of 
variable remuneration.    

This assessment is applicable to staff earning non-material levels of variable remuneration in 
both small and non-complex institutions, and in larger ones. However, given that small and 
non-complex institutions are typically not among the institutions paying the larger portions of 
variable remuneration, this type of institutions would be particularly impacted.  

Efficiency 

To  what  extent  do  the  benefits  achieved  through  deferral  and  pay-out  in  instruments 
outweigh the costs and difficulties resulting from their implementation? 

The  benefits  associated  to  the  deferral  and  pay-out  in  instruments  rules  are  linked  to  more 
prudent risk-taking from the part of Identified Staff as a result of their remuneration structure, 
which,  along  with  other  regulatory  framework  elements,  contributes  to  increased  financial 
stability.  

While  agreement  on  these  benefits  is  widespread,  quantifying  them  is  a  difficult  task  for  a 
number of reasons. First  of all,  the positive impact of the CRD remuneration rules is at the 
level of staff’s incentives to engage in behaviour which does not exceed the institution’s pre-
defined  risk  appetite  and  a  prudent  level  of  risk-taking.  Such  behavioural  benefits  are 
inherently very difficult to capture. Secondly, given that the remuneration rules are just  one 
element of the regulatory framework put in place in the aftermath of the financial crisis, it has 
not been possible to observe their effects on financial stability in isolation.  

13 

 
 
The  deferral  and  pay-out  in  instruments  rules  are  nevertheless  considered  to  have  positive 
spill-overs in terms of enhanced stability of institutions and of the economy as a whole. Their 
social benefits consist in a contribution to a reduced probability or severity of future financial 
crisis. 

Applying  the  CRD  deferral  and  pay-out  in  instruments  requirements  undoubtedly  generates 
one-off implementation costs and on-going compliance costs31. These can relate to the setting 
up of the necessary IT infrastructure, necessary human resources or to possible legal/advisory 
costs. In some cases there might also be indirect costs resulting from possible difficulties to 
attract talent or higher capital requirements (for certain investment firms), although these are 
very difficult to quantify. 

typically  benefit  from  economies  of  scale 

The  assessment revealed that in the case of larger and more complex institutions and in the 
case  of  staff  earning  a  material  amount  of  variable  remuneration,  the  benefits  of  applying 
deferral  and  pay-out  in  instruments  outweigh  these  costs.  Larger  and  more  complex 
these 
institutions  can 
requirements, and usually already have the necessary legal and IT resources to implement the 
requirements without having to resort to external consultancy services. A significant number 
of  these  institutions  were  already  applying  these  mechanisms  before  they  became 
compulsory, which points towards an early acknowledgement of the potential of deferral and 
pay-out  in  instruments  to  align  remuneration  with  the  long-term  performance  of  the 
institution.  

implementing 

in 

The efficiency of the deferral and pay-out in instruments requirements is therefore positively 
assessed  in  the  case  of  larger,  more  complex  institutions  and  of  higher  levels  of  variable 
remuneration. 

However,  in  the  case  of  small  and  non-complex  institutions  and  of  staff  with  low  variable 
remuneration  (regardless  of  the  size/nature  of  their  institution),  it  is  widely  argued  that  the 
compliance  and  implementation  costs  of  deferral  and  pay-out  in  instruments  exceed  their 
prudential  benefits.  The  efficiency  of  the  rules  is  challenged  also  in  the  case  of  listed 
institutions which are limited to using shares (as opposed to share-linked instruments) for the 
purposes of meeting the CRD pay-out in instruments requirement. These particular cases are 
consecutively dealt with below. 

a) The case of small institutions and low variable remuneration 

In  the  context  of  its  public  consultation  on  the  draft  Guidelines  on  sound  remuneration 
policies, the European Banking Authority made an attempt to estimate the costs institutions 
would incur if they were to comply fully with the rules (i.e. if large institutions were to apply 
the  rules  also  to  their  Identified  Staff  earning  lower  variable  remuneration,  and  if  small 
institutions  were  to  no  longer  benefit  from  exemptions).  The  results  are  summarised  in  the 
table below. 

Table  1  –  Estimates  collected  by  EBA  on  the  costs  that  would  arise  if  institutions  were  to 
implement the rules on deferral and pay-out in instruments for all Identified Staff  

31 For an estimate of such costs, please see Table 1 below 

14 

 
 
                                                       
Source: EBA Final Report on Guidelines on sound remuneration policies, 21.12.2015 

While  the  cost  estimates  in  the  case  of  large  institutions  are  in  absolute  terms  higher  than 
those of smaller firms, it has to be noted that these costs would affect disproportionately the 
small institutions, for a number of reasons: 

 

compared to larger firms, they have a higher proportion of Identified Staff in their total 
staff;  therefore  the  remuneration  mechanisms  would  have  to  be  maintained  for  a 
relatively higher number of Identified Staff than in the case of their larger counterparts; 
this  led  a  number  of  small  institutions  to  estimate  that  they  would  need  one  more  staff 
member  for  administrative  purposes  if  they  were  to  apply  deferral  and  pay-out  in 
instruments;  

  because of their lower total cost base and the relatively higher number of Identified Staff 
to  process,  the  cost  of  complying  with  the  deferral  and  pay-out  in  instruments 
requirements would be higher relative to their total administrative costs than in the case 
of larger institutions; 

 

since  in  absolute  terms  they  have  fewer  Identified  Staff  than  larger  institutions,  the  per 
capita costs of setting-up the necessary systems and processes for administering deferral 
and pay-out in instruments would be higher than in the case of bigger firms.  

These cumulated effects are likely to place smaller institutions at a competitive disadvantage 
compared to larger companies.  

15 

 
 
 
 
In addition, small and non-complex institutions usually face important costs and difficulties in 
setting up instruments that are appropriate for paying out variable remuneration. As opposed 
to bigger, listed companies32, they most often do not have readily available instruments to pay 
out  variable  remuneration.  In  the  case  of  staff  with  only  low  amounts  of  variable 
remuneration, creating such instruments would be unnecessarily costly, especially taking into 
account the relatively minor contribution to risk alignment of applying pay-out in instruments 
to such levels of remuneration.  

In certain cases, difficulties with pay-out in instruments arise from the very legal form of the 
institution. This is particularly the case of cooperative and savings banks. Cooperative banks 
are  very  much  restricted  in  their  use  of  equity  rights  and,  if  at  all  possible,  would  face  a 
complex procedure. The same goes for the use of convertible bonds; cooperative banks could 
only use bail-in-able bonds that can be written down. With regard to savings banks, they are 
unable  to  use  equity  for  the  purpose  of  paying  out  variable  remuneration  as  they  are  state 
owned. 

While  it  would  be  possible  for  these  types  of  institutions  to  create  a  type  of  equity-linked 
instrument,  this  would  be  a  difficult  and  costly  procedure,  potentially  also  generating 
important  legal  costs.  In  addition,  cost  would  arise  from  having  to  carry  out  periodical 
valuations for the purpose of determining the value of instruments, which is not foreseen in 
the ordinary course of business of this type of institutions. 

These important compliance costs and difficulties outweigh the lower prudential benefits that 
deferral and instruments have in the case of small and non-complex institutions, in particular 
those  that  typically  pay  out  low  levels  of  variable  remuneration,  compared  to  their  larger 
counterparts (as explained in the Section on “Effectiveness” above). 

Taking into consideration on the one hand the particular burdens triggered by the rules and on 
the  other  hand  the  relatively  low  beneficial  effects,  it  can  on  balance  be  concluded  that  the 
application  of  the  rules  on  deferral  and  pay-out  in  instruments  to  small  and  non-complex 
institutions is not efficient. 

With regard to larger institutions, many of them are presently allowed by national regulation 
and/or practices to only apply the deferral and pay-put in instruments rules to staff members 
who  receive  variable  remuneration  above  a  certain  threshold.  If  this  de  minimis  threshold 
were no longer applied, this would lead to a substantial increase in the number of Identified 
Staff subject to deferral and pay-out in instruments33, and some staff receiving a non-material 
level of variable remuneration would have to start complying with the rules. As per Table 1, 
the full application of the rules by larger institutions would imply, in addition to other indirect 
costs,  one-off  costs  estimated  between  EUR  1  and  5  million  and  on-going  costs  estimated 
between EUR 400 000 and EUR 1.5 million.  

These  important  costs  would  need  to  be  balanced  against  the  low  prudential  benefits  that 
would be achieved by applying deferral and pay-out in instruments to staff with non-material 
levels of variable remuneration (as explained in the Section on “Effectiveness” above). 

32 Larger institutions have usually experience with creating financial instruments and therefore costs for creating 
instruments – where additional ones are needed – are relatively lower.  
33 It is important to note in this respect that the recent entry into force of the Delegation Regulation on Identified 
Staff has already led to a significant increase of the number of identified staff to whom the rules on deferral and 
pay-out  in  instruments  need  to  be  applied.  This  increase  particularly  concerned  mid-management  of  staff  often 
receiving relatively low variable remuneration. 

16 

 
 
                                                       
It can therefore be concluded on balance that it is not efficient to apply the rules on deferral 
and  pay-out  in  instruments  to  staff  in  large  institutions  with  non-material  levels  of  variable 
remuneration. 

b) The specific case of listed institutions  

Under  Article  94(1)(l)(i)  CRD,  listed  institutions  can  only  use  shares  (and  not  share-linked 
instruments)  in  order  to  meet  the  CRD  requirement  related  to  the  pay-out  of  variable 
remuneration in instruments.   

Nevertheless,  the  repeated  use  of  shares  for  the  purpose  of  granting  variable  remuneration 
generates important costs and has certain drawbacks for listed institutions. It requires a rather 
complex  procedure:  institutions  would  need  to  either  create  new  shares  or  buy  them  in  the 
market.  The  use  of  shares  generally  requires  shareholders’  approval,  which  might  not  be 
granted. 

Creating  new  shares  would  mean  that  rights  of  shareholders  get  diluted.  Indeed,  shares 
provide the staff member not only with economic interests, but also with voting rights. The 
requirement to each time award shares as part of the variable remuneration can result over the 
years in the staff member holding a considerable number of shares. The dilution of existing 
shareholdings  could  be  particularly  detrimental  for  institutions  with  a  specific  shareholding 
structure. Buying shares could trigger speculation and thus result in the institution needing to 
pay a premium for acquiring the shares. Moreover, staff may be put in a situation where, after 
receiving the shares, they may not be able to sell them (problems of insider dealing). 

Payment in shares can be additionally complex and costly because it cannot be put in place in 
a  uniform  way  in  all  countries  given  the  different  legal,  regulatory,  accounting  and  tax 
constrains  and  formalities.  In  some  international  jurisdictions  there  are  even  restrictions  on 
the possibility to pay remuneration in shares.  

At  the  same  time,  the  exclusive  use  of  shares  does  not  bring  a  notable  prudential  benefit 
compared to a situation in which the use of share-linked instruments would also be allowed: 
Article  94(1)(l)  reflects  the  legislator’s  wish  that  variable  remuneration  should  not  consist 
only  of  a  cash  payment.  To  the  contrary,  it  must  for  a  substantial  part  consist  of  non-cash 
instruments. Those non-cash instruments are meant to align the interest of the staff member 
with that of various stakeholders, such as shareholders and creditors, and their use is expected 
to  contribute  to  the  alignment  of  variable  remuneration  with  the  risk  profile  and  long-term 
interest of the institution.  

In  terms  of  achieving  these  objectives,  share-linked  instruments  whose  value  closely  tracks 
the value of the underlying shares are as effective as shares. This, provided that the value of 
the  share-linked  instruments  is  equal  to  the  price  of  the  shares  and  its  evolution  does  not 
create  an  incentive  for  risk-taking  by  having  a  leverage  effect.  It  is  also  important  that  the 
share-linked  instruments  are  not  opaque,  so  that  staff  members  fully  understand  their  link 
with the value of the shares.  

Under  the  above-mentioned  conditions,  the  use  of  shares  would  not  create  a  noteworthy 
prudential benefit compared to share-linked instruments. A significant majority of competent 
authorities  and  institutions  concerned  support  this  view.  At  the  same  time,  share-linked 
instruments have the advantage that they can be applied more easily, in a less costly way and 
in a uniform manner worldwide to all material risk takers. 

17 

 
 
 
Under  these  terms,  it  would  seem  acceptable  to  allow  listed  institutions  to  use  share-linked 
instruments whose value track the value of the underlying shares instead of or in addition to 
shares.  

On  the  basis  of  these  considerations  it  can  be  concluded  that  the  requirement  under  Article 
94(1)(l)(i) CRD for listed institutions to use only shares is not efficient. 

Coherence 

To  what  extent  are  the  CRD  rules  on  deferral  and  pay-out  in  instruments  coherent 
internally? 

As explained in Introduction, the requirements on deferral and pay-out in instruments existed 
already in CRD III and were nearly identical to those in CRD IV. Under both CRD III34 and 
CRD IV35, deferral and pay-out in instruments are subject to the application of the principle 
of  proportionality,  according  to  which  institutions  shall  comply  with  the  remuneration 
principles  "in  a  manner36  and  to  the  extent  that  is  appropriate  to  their  size,  internal 
organisation and the nature, the scope and the complexity of their activities"37.  

In addition, Recital 9 CRD III focused specifically on deferral and pay-out in instruments. It 
stated  that  regarding  those  requirements,  "the  principle  of  proportionality  is  of  great 
importance since it may not always be appropriate to apply those requirements in the context 
of small credit institutions and investment firms".  

The  Guidelines  on  sound  remuneration  practices  issued  by  CEBS  under  CRD  III  indicated 
that  the  application  of  the  proportionality  principle  may  lead  to  the  “neutralization”  of 
deferral  and  pay-out  in  instruments  if  this  is  reconcilable  with  the  risk  profile,  risk  appetite 
and the strategy of the institution. As explained in Section 6 “Implementation state of play”, 
this led Member States and national supervisors to introduce  de minims thresholds to define 
the institutions and staff that could avail of such neutralisation.  

However, when the Commission service and the EBA confirmed that waivers (neutralisation) 
are legally inadmissible, this prompted strong opposition from the industry and supervisors. . 

The elements set out above show that there is a certain discrepancy between on the one hand 
the rationale and intended application of the rules on  pay-out in instruments and deferral as 
explained  in  the  Recitals  to  the  Directive,  and  how  this  rationale  has  been  expressed  and 
operationalised  in  the  corresponding  Article  on  the  other  hand.  Internal  coherence  seems 
therefore affected. 

To  what  extent  are  the  CRD  rules  on  deferral  and  pay-out  in  instruments  coherent  with 
other EU financial legislation regulating deferral and pay-out in instruments? 

34 Point 23 of Annex V of CRD III 
35 Article 92(2) of CRD IV 
36 Instead of the phrase "in a manner", CRD III used the term "in a way" 
37 The principle of proportionality is also reflected in the very similar Recital 4 CRD III and Recital 66 CRD IV; 
the latter states that “the provisions of this Directive on remuneration should reflect differences between different 
types  of  institutions  in  a  proportionate  manner,  taking  into  account  their  size,  internal  organisation  and  the 
nature,  scope  and  complexity  of  their  activities.  In  particular,  it  would  not  be  proportionate  to  require  certain 
types of investment firms to comply with all of those provisions". 

18 

 
 
 
 
                                                       
The Directive on Alternative Investment Fund Managers - AIFMD38 (in its Annex II) and the 
Directive on Undertakings for Collective Investment in Transferable Securities39 - UCITS V 
(in its Article 14b) both  formulate requirements on deferral  and pay-out in instruments in  a 
wording  nearly  identical  to  that  of  CRD.  Moreover,  both  those  directives  echo  the  CRD 
requirement that institutions subject to those directives shall comply with those requirements 
"in  a  way  and  to  the  extent  that  is  appropriate  to  their  size,  internal  organisation  and  the 
nature, scope and complexity of their activities"40.  

The  CRD  rules  on  deferral  and  pay-out  in  instruments,  including  the  wording  on  the 
proportionality principle, is therefore coherent with the AIFMD and UCITS V.  

To  what  extent  are  the  CRD  rules  on  deferral  and  pay-out  in  instruments  coherent  with 
relevant international principles? 

CRD remuneration rules, including deferral and pay-out in instruments, are to a large extent 
based on the FSB Principles for Sound Compensation Practices. Those internationally agreed 
principles were intended to apply to significant financial institutions only.  

CRD  requires  the  application  of  those  requirements  to  all  credit  institutions  and  investment 
firms, regardless of their size or significance. They should be applied "in a manner and to the 
extent"  appropriate  to  the  size  and  type  of  the  institution  and  its  activities.  When,  however, 
the Directive does not provide a possibility of neutralising the requirements for some “non-
significant”  institutions,  the  Directive  goes  beyond  the  internationally  agreed  principles  in 
terms of scope of application. 

Acceptability 

To what extent can we observe changes in the perception of the rules on deferral and pay-
out in instruments by the targeted stakeholders? 

Several  years  after  the  first  introduction  of  the  binding  rules  on  deferral  and  pay-out  in 
instruments in CRD III, the stakeholder feedback gathered in the context of the Commission's 
review of remuneration provisions indicates that these rules are in general assessed positively. 
Deferral  is  seen  by  the  majority  of  stakeholders  as  a  key  mechanism  to  align  variable 
remuneration with the performance of an institution and to prevent short-termism in business 
decisions.  Pay-out  in  shares,  equity  instruments  or  bail-in-able  debt  instruments  is  also 
accepted by stakeholders as a useful tool to align the interests of Identified Staff with those of 
the institution’s owners and creditors, and with its long term performance. 

Member States, supervisors and the industry, however, strongly reject the idea that the rules 
on  deferral  and  pay-out  in  instruments  should  be  applied  to  small  and  non-complex 
institutions  and  to  staff  with  a  non-material  level  of  variable  remuneration.  As  explained  in 
the  previous  sections,  after  the  introduction  of  the  rules  in  CRD  III,  it  was  understood  by 
practically  all  Member  States,  supervisors  and  industry  that  the  principle  of  proportionality 

38 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment 
Fund Managers, available at  
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0001:0073:EN:PDF 
39  Directive  2014/91/EU  of  the  European  Parliament  and  of  the  Council  of  23 July  2014  amending  Directive 
2009/65/EC  on  the  coordination  of  laws,  regulations  and  administrative  provisions  relating  to  undertakings  for 
collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and 
sanctions, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014L0091 
40 Annex II AIFMD and Article 14b UCITS V  

19 

 
 
 
                                                       
enshrined in the Directive allows waivers from deferral and pay-out in instruments for these 
institutions and staff. This led to a strong opposition when it was clarified that the text of the 
Directive  does  not  in  fact  allow  for  these  exemptions.  Stakeholders  emphasize  that 
compliance  costs  affect  disproportionately  smaller  firms  and  staff  earning  low  levels  of 
variable remuneration, compared to what is considered to be low prudential benefits.  

Moreover, listed institutions, supported by the supervisors, strongly oppose the requirement to 
use  shares  (and  not  share-linked  instruments)  for  the  purpose  of  paying  out  variable 
remuneration  in  instruments  under  Article  94(1)(l)(i).  They  point  to  the  difficulties  of 
repeatedly  paying  out  variable  remuneration  in  shares  and  to  the  very  similar  prudential 
benefits that could be achieved for lesser cost through share-linked instruments.  

These  standpoints  have  been  repeatedly  expressed  in  response  to  the  public  consultations 
carried out by the European Commission and by EBA on its Remuneration guidelines, as well 
as in the frame of the Commission’s stakeholder event and numerous bilateral meetings with 
stakeholders. Some key stakeholders also expressed their strong support for the EBA Opinion 
on  the  application  of  the  principle  of  proportionality  of  21  December  2015,  which 
recommends the Commission to amend the CRD so as to allow waivers for deferral and pay-
out in instruments, and the use of share-linked instruments by listed institutions.  

In light of the above, it can unequivocally be concluded that the acceptability of the deferral 
and  pay-out  in  instruments  requirements  is  extremely  low  in  the  case  of  small  and  non-
complex institutions and of staff receiving non-material levels of variable remuneration. The 
same applies to the requirement for listed companies to use shares for the purpose of paying 
out variable remuneration in instruments under Article 94(1)(l)(i). 

EU added value 

To  what  extent  do  the  CRD  rules  on  deferral  and  pay-out  in  instruments  continue  to 
require action at EU level? 

A unique set of binding remuneration rules at the level of the EU is still  needed in order to 
ensure  the  level-playing  field,  avoid  fragmentation  of  the  internal  market  and  eliminate  the 
risk  of  similar  institutions  being  treated  differently  depending  on  the  jurisdiction  in  which 
they  are  located.  A  common  binding  framework  is  also  needed  in  order  to  set  the  basis  for 
supervisory practices by competent authorities consistent across the EU, which is all the more 
relevant given that some institutions are active in more than one EU Member State.  

While the CRD remuneration rules and associated delegated acts41 brought about a necessary 
set of common requirements with regard to deferral and pay-out in instruments, an area which 
would yield further EU added value is providing harmonised rules for the interpretation and 
application of the principle of proportionality as regards these requirements. Such harmonised 
rules  would  allow  moving  from  the  current  variety  of  national  practices  to  a  more  uniform 
application of the requirements.  

(EU)  No  527/2014 

41  Commission  Delegated  Regulation 
(available  at  http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX%3A32014R0527) introduced a harmonised definition of classes of instruments that 
adequately  reflect  the  credit  quality  of  an  institution  as  a  going  concern  and  are  appropriate  to  be  used  for  the 
purposes  of  variable  remuneration,  whereas  Commission  Delegated  Regulation  (EU)  No  604/2014  (available  at 
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0604) 
and 
quantitative  criteria  to  identify  categories  of  staff  whose  professional  activities  have  a  material  impact  on  an 
institution’s risk profile. 

laid  down  qualitative 

20 

 
 
 
                                                       
While  a  degree  of  flexibility  is  needed  in  the  application  of  deferral  and  pay-out  in 
instruments,  such  easement  should  be  properly  framed  and  made  subject  to  strictly  defined 
conditions at EU level. This would prevent an excessive use of waivers and ensure coherence 
and a level-playing field within the EU. 

8. CONCLUSIONS 

The information gathered through the different work streams underpinning this evaluation is 
consistent in supporting the main findings with respect to deferral and pay-out in instruments: 
the  requirements  are  in  general  positively  assessed,  on  condition  that  they  be  applied  in  a 
more flexible and proportionate manner.  

The  evaluation  criteria  yielded  positive  results  with  regard  to  the  relevance,  effectiveness, 
efficiency and acceptability of these provisions overall, but revealed significant reservations 
in the particular cases of small and non-complex institutions and of staff with low levels of 
variable  remuneration.  A  negative  assessment  was  also  made  with  respect  to  the  efficiency 
and  acceptability  of  the  provision  requiring  listed  institutions  to  use  shares  (and  not  share-
linked instruments) for meeting the requirement under Article 94(1)(l)(i) CRD.  

The  coherence  of  the  analysed  provisions  in  the  absence  of  implementation  flexibilities  for 
the  above-mentioned  types  of  institutions  and  staff  is  assessed  as  rather  low,  whereas  the 
overall  EU  added  value  is  assessed  positively  and  will  also  be  particularly  relevant  in  the 
context  of  harmonising  the  way  in  which  the  principle  of  proportionality  is  interpreted  and 
applied in practice. 

21