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  COM(2016) 510 final   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  {SWD(2016) 265 final} {SWD(2016) 266 final}  
 
 
I. 

INTRODUCTION 

The  Capital  Requirements  Directive1  (‘CRD’)  and  the  Capital  Requirements  Regulation2 
(‘CRR’) contain a number of requirements regarding the remuneration policies and practices 
of  credit  institutions  and  investment  firms.  These  requirements  were  introduced  in  the 
aftermath  of  the  2008  financial  crisis  to  ensure  that  remuneration  policies  do  not  encourage 
excessive risk-taking behaviour3.  

The first set of rules on remuneration in the financial sector was put forward at EU level in the 
Commission  Recommendation  of  30  April  20094.  This  was  followed  by  the  introduction  of 
binding  rules  on  remuneration  for  credit  institutions  and  investment  firms  in  CRD  III5, 
adopted in 2010. Those rules, which had to be implemented by the Member States by January 
2011, were further extended following the adoption of CRD IV in 2013 (with the new rules 
applicable as of 2014). 

This report was prepared to meet the obligation under Article 161(2) of the CRD that requires 
the  Commission  to  report  to  the  European  Parliament  and  the  Council  on  the  efficiency, 
implementation and enforcement of the remuneration rules, and in particular on the impact of 
the maximum ratio between variable and fixed remuneration.  

In  carrying  out  this  review,  the  Commission  engaged  in  several  work  streams.  It  studied 
available academic literature and commissioned a study from an external contractor to assist 
with  its  assessment6.  It  sought  stakeholders’  input  through  a  public  consultation7,  a  fact-
finding stakeholder event and bilateral meetings with industry representatives. Moreover, the 
Commission  engaged  with  Member  State  representatives  and  supervisory  authorities.  In 
accordance with the CRD mandate, the European Banking Authority was closely associated 
with  the  review  process  and  delivered  valuable  information.  In  particular,  the  European 
Banking Authority reports on high earners and on benchmarking of remuneration practices at 
EU level8 were a valuable source of data covering the years 2010-2014. 

The  details  of  the  assessment  required  by  the  CRD  of  the  efficiency,  implementation  and 
enforcement of the remuneration rules in general are set out in the Commission Staff Working 
Document SWD(2016)265 that accompanies this report. This assessment allowed identifying 
a  number  of  rules  in  respect  of  which  the  Commission  may  consider  further  action,  and  a 
detailed  evaluation  of  those  individual  rules  is  presented  in  the  Commission  Staff  Working 
Document SWD(2016)266. This assessment will be taken into account in the context of the 
wider revision of the CRD and CRR now under consideration.  

1 Directive 2013/36/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. 
2 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements 
for credit institutions and investment firms. 
3 Recitals 62-68, CRD. 
4  Commission  Recommendation  2009/384/EC  on  remuneration  policies  in  the  financial  services  sector,  available  at 
http://ec.europa.eu/internal_market/company/docs/directors-remun/financialsector_290409_en.pdf. 
5  Directive  2010/76/EU  of  the  European  Parliament  and  of  the  Council  of  24  November  2010  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. 
6  institut  für  finanzdienstleistungen  e.V.  (IFF,  2016),  report  available  at  http://ec.europa.eu/justice/civil/company-
law/corporate-governance/index_en.htm.  
7 Public consultation on impacts of maximum remuneration ratio under Capital Requirements Directive 2013/36/EU (CRD 
IV), and overall efficiency of CRD IV remuneration rules (22.10.2015 – 14.01.2016). 
8  All  publications  are  available  at  https://www.eba.europa.eu/regulation-and-policy/remuneration/-/topic-documents/ 
ckV8kFRsjau9/more. 

2 

 
 
                                                            
The  Commission’s  review  of  the  CRD  and  CRR  remuneration  rules  is  also  linked  to  the 
Commission’s  ongoing  work  with  respect  to  the  Call  for  Evidence9  on  the  EU  regulatory 
framework for financial services that was launched on 30 September 2015 to investigate the 
impact  of  legislation  (including  the  CRD  and  CRR).  A  number  of  responses  to  this  call  for 
evidence related to the CRD remuneration rules have been taken into account in this review. 

Overall, the review exercise has been hampered to some extent by the relatively recent entry 
into force of some remuneration rules and by the fact that the rules are not always applied to 
their  full  extent,  often  on  the  grounds  of  proportionality  considerations.  This  has  created 
limitations in terms of data availability and has affected the ability to formulate, at this time, 
conclusive findings  on some of the  aspects of the analysis. Another difficulty  resulted from 
the very nature of the rules: the rules are meant to curb incentives which may send the wrong 
signals to individuals and thus to impact individuals’ behaviour. Measuring concrete impact 
on  individuals’  behaviour  is  very  complex.  Finally,  it  is  important  to  recognise  that  the 
remuneration  rules  are  just  one  element  of  the  regulatory  framework  that  was  put  in  place 
with the purpose of fostering financial stability. For all these reasons, it has not been possible 
to precisely quantify the impact of the remuneration rules alone on financial stability, and a 
more qualitative assessment of certain aspects has been carried out. 

II. 

CONTEXT 

The  introduction  of  the  remuneration  rules  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.  It  is  broadly  recognised  that  financial  incentives 
which  sent  the  wrong  signals  to  staff  were  one  of  the  contributing  factors  to  the  crisis. 
Remuneration practices in the financial services industry meant that those incentives were not 
in line with the long-term objectives of firms and the need for responsible risk-taking. 

At  the  international  level,  the  G20  Leaders  in  their  Declaration  from  the  Washington  DC 
Summit  on  Financial  Markets  and  the  World  Economy  of  15  November  200810  called  for 
priority  work  on  ‘Reviewing  compensation  practices  as  they  relate  to  incentives  for  risk 
taking  and  innovation’.  The  G20  London  Summit  Declaration  of  2  April  2009  on 
Strengthening the Financial System11 and the Statement from the Pittsburgh Summit of 24-25 
September 200912 both confirmed agreement on the part of the global leaders that ‘reforming 
compensation  policies  and  practices  is  an  essential  part  of  our  effort  to  increase  financial 
stability’, and sealed their commitment to endorse and implement the principles and standards 
on sound compensation practices adopted by the Financial Stability Board (FSB)13.   

The  CRD  aims  to  implement  those  internationally  agreed  principles  in  the  EU.  One  of  the 
main  differences  between  the  EU  rules  and  these  principles  and  standards  is  the  maximum 
ratio between variable and fixed remuneration, which is defined only in the EU. 

Remuneration  remains  a  high  priority  on  the  international  policy  agenda.  The  international 

regulatory 

for  Evidence  on  EU 

9  Call 
http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-review/docs/consultation-document_en.pdf. 
10 http://www.un.org/ga/president/63/commission/declarationG20.pdf. 
11 https://www.imf.org/external/np/sec/pr/2009/pdf/g20_040209.pdf. 
12 http://www.g20.utoronto.ca/2009/2009communique0925.html. 
13  The  Principles 
http://www.fsb.org/what-we-do/policy-development/building-resilience-of-financial-institutions/compensation/. 

for  Sound  Compensation  Practices  and 

Implementation  Standards,  available  at 

(30.9.2015), 

framework 

available 

financial 

services 

their 

for 

at 

3 

 
 
                                                            
debate is now focusing  on the role of remuneration practices in incentivising good conduct. 
The  Financial  Stability  Board  is  examining  whether  there  is  a  need  to  strengthen 
remuneration-linked disincentives to misconduct. 

III.  ASSESSMENT OF THE REMUNERATION RULES 

This  section first briefly discusses the implementation and enforcement of the remuneration 
rules (sub-section A). It then looks at the overall scope of their application (sub-section B). It 
subsequently  looks  at  the  different  components  of  the  rules:  sub-section  C  focuses  on  the 
remuneration rules that have been in place since the adoption of CRD III (i.e. except for the 
maximum ratio)14; sub-section D focuses on the maximum ratio that was only introduced by 
CRD IV. 

A. 

Implementation and enforcement of the rules 

Member States had the obligation to transpose and apply the CRD IV remuneration rules by 
the end of 2013. By the time this report was drafted, all Member States had communicated to 
the  Commission  their  transposition  (with  one  Member  State  having  communicated  partial 
transposition).  The  Commission  has  completed  a  prima  facie  assessment  of  these 
communicated  measures  for  17  Member  States;  a  full  transposition  check  of  all  Member 
States is ongoing. 

This  report  focuses  on  one  recurring  issue  across  the  EU  that  was  identified  during  the 
transposition  check  process,  and  one  issue  on  which  shortcomings  in  effective  enforcement 
were revealed in several jurisdictions. 

The first issue concerns the interpretation by Member States of the principle of proportionality 
that underlies the CRD remuneration rules in accordance with Article 92(2) of the CRD. It has 
been revealed that most Member States have put in place thresholds or criteria under which 
certain remuneration rules do not need to be applied, which are not in line with the text of the 
Directive (this issue is discussed in detail in section III.C.(ii)). 

The  second  issue  concerns  the  interpretation  of  what  is  ‘fixed’  and  what  is  ‘variable’ 
remuneration.  Indeed,  it  transpires  that  some  institutions  have,  in  view  of  the  CRD 
requirements  on  remuneration,  incorrectly  classified  ‘role-based  allowances’15  as  fixed 
remuneration, and that this practice has not immediately been ended by the supervisors (this 
issue is discussed in detail in section III.D.(i)). 

B. 

Scope of application of the remuneration rules 

This sub-section examines a number of questions concerning the scope of application of the 
remuneration rules. 

14 Some of the CRD remuneration rules have been strengthened by CRD IV. For the purposes of our assessment we looked at 
the rules as they are today. 
15  Role-based  allowances  are  payments based  on  the  role,  function  or  organisational  responsibility  of  a  staff  member.  The 
label may differ according to the institution: ‘role based pay, staff allowance, adjustable role allowance, fixed pay allowance’, 
etc. 

4 

 
 
 
 
 
 
                                                            
Application  to  identified  staff:  An  important  step  in  ensuring  the  effectiveness  of  the 
remuneration  rules  is  to  correctly  identify  the  staff  to  whom  they  should  apply  (i.e.  staff 
members  whose  professional  activities  have  a  material  impact  on  institutions’  risk  profile). 
Commission Delegated Regulation (EU) No 604/201416 has put in place harmonised criteria 
for  identifying  such  staff.  Thanks  to  this  harmonisation,  which  has  generally  been  well 
received  by  the  industry,  there  are  fewer  discrepancies  in  the  approaches  followed  by 
supervisors and institutions. Concerns have nevertheless been raised by the industry over the 
material  increase  in  the  number  of  identified  staff.  However,  they  still  represent  only  a 
relatively  small  part  of  total  staff  (2.34 %  on  average  in  201417).  Experience  with  the 
application of the relatively new criteria still needs to be gained and there will be a continued 
evaluation.18  

Application  to  investment  firms:  Investment  firms  argue  that  the  remuneration  rules  have 
been developed for credit institutions and are not suitable for their own business model and 
risk  profile,  which  they  maintain  is  very  different  from  that  of  credit  institutions.  The 
Commission's review took note of the concerns raised by investment firms but was confronted 
with a limited availability of data, which did not make it possible to come to a conclusion on 
this  aspect  at  this  stage.  As  requested  under  the  CRR19,  the  Commission  is  currently 
reviewing the prudential regime applicable to investment firms. The question of applying in 
general  the  remuneration  rules  to  investment  firms  may  need  to  be  revisited  in  light  of  the 
findings of this ongoing review.  

Application  at  group  level:  Managers  of  undertakings  for  collective  investment  in 
transferable  securities  (UCITS)  or  of  alternative  investment  funds  (AIF)  that  are  part  of  a 
CRD-regulated  group  are  concerned  about  needing  to  comply  in  full  with  the  CRD 
remuneration  rules  (in  particular  the  maximum  ratio),  in  addition  to  having  to  comply  with 
their  sector-specific  legislation,  which  also  regulates  remuneration20.  They  argue  that  this 
would distort the level playing field with independent UCITS and AIF managers that are not 
part of a CRD-regulated group and have to comply only with the sectoral legislation (which is 
very  similar  to  the  CRD  remuneration  rules  but  does  not  contain  the  maximum  ratio).  It  is 
important  to  note  that,  under  the  terms  of  the  CRD,  staff  of  UCITS  and  AIF  manager 
subsidiaries only need to comply with the CRD remuneration rules applicable to their parent 
undertaking  if,  on  the  basis  of  the  harmonised  criteria  for  the  identification  of  staff,  it  is 
determined  that  such  staff  have  a  material  impact  on  the  risk  profile  of  the  CRD  group  to 
which they belong. 

16  Commission  Delegated  Regulation  (EU)  No  604/2014  of  4  March  2014  supplementing  Directive  2013/36/EU  of  the 
European  Parliament  and  of  the  Council  with  regard  to  regulatory  technical  standards  with  respect  to  qualitative  and 
appropriate  quantitative  criteria  to  identify  categories  of  staff  whose  professional  activities  have  a  material  impact  on  an 
institution’s risk profile. 
17 EBA ‘Benchmarking of Remuneration practices at Union level and data on high earners’, data as of end 2014. 
18 It is worth noting that also at the level of the Financial Stability Board, re-evaluation of the identification of material risk 
takers is planned for 2016-2017. 
19 Articles 493(2), 498(2), 508(2) and 508(3), CRR. 
20 For AIF managers, Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative 
Investment Fund Managers, and for UCITS managers, Directive 2009/65/EC of the European Parliament and of the Council 
of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective 
investment  in  transferable  securities  (UCITS),  amended  by  Directive  2014/91/EU  of  the  European  Parliament  and  of  the 
Council of 23 July 2014. 

5 

 
 
                                                            
C. 

The rules introduced by CRD III 

This section starts with an overall assessment of the various remuneration rules introduced by 
CRD III in the aftermath of the 2008 financial crisis (i). It then focuses on the concerns of the 
industry, Member States and supervisors about the need for a proportionate application of the 
rules (ii). 

(i) Overall assessment 

The  requirements  concerning  the  criteria  and  time  horizon  that  need  to  be  taken  into 
consideration  when  measuring  performance  for  the  purpose  of  awarding  variable 
remuneration21 have been positively assessed by stakeholders in general, who see the merit 
of  combining  individual  with  collective  performance  assessment,  and  financial  criteria  with 
non-financial  ones.  While  supervisory  authorities  have  seen  progress  in  complying  with  the 
rules,  there  is  still  room  for  better  incorporating  risk-adjusted  criteria  in  the  assessment  of 
performance. 

The governance-related requirements22 were designed to ensure that institutions’ boards had 
overall responsibility for and oversight  of the general  principles of the remuneration policy, 
that risk management was embedded in the establishment of sound remuneration policies and 
that remuneration committees were set up in ‘significant’ institutions. These governance rules 
have been generally assessed positively. 

The  requirements  for  institutions  to  disclose23  information  on  their  remuneration  practices 
serve to increase transparency, and are seen to contribute to better alignment of remuneration 
with institutions’ performance and to facilitate supervisory oversight. 

The  CRD  limitations  on  guaranteed  variable  remuneration24  and  severance  pay25  seem  to 
have  been  effective:  the  use  of  both  sign-on  bonuses  and  severance  pay  has  decreased 
considerably in recent years, suggesting a better framed use of these forms of remuneration, 
as intended by the CRD.26  

Data  shows  that  the  use  of  deferral27  (as  opposed  to  an  immediate  pay-out)  and  pay-out  in 
instruments28  (as  opposed  to  a  pay-out  in  cash)  have  increased  considerably  since  the 
introduction of the rules by CRD III.29  

Overall,  deferral  has  been  positively  assessed  in  terms  of  ensuring  long-term  performance 
alignment  and  deterring  excessive  risk-taking.  It  is  a  key  mechanism  for  aligning  variable 
remuneration  with  the  long-term  risks  and  performance  of  an  institution,  by  enabling  the 

21 Article 94(1)(a), (b) and (j), CRD. 
22 Articles 74, 76(4), 92(2) and 95, CRD. 
23 Articles 450, CRR and Article 96, CRD. 
24 Article 94(1)(d) and (e), CRD. 
25 Article 94(1)(h). 
26 In 2014, only 281 identified staff received sign-on bonuses, compared with 2 274 in 2011, and only 467 identified staff 
received severance pay, compared with 1 011 in 2011). 
27 Article 94(1)(m), CRD. 
28 Article 94(1)(l), CRD. 
29 While in 2010 on average 55.22% of the variable remuneration of identified staff was deferred, the deferred part went up to 
62.50% in 2014. While in 2010 on average 48.50% of variable remuneration of identified  staff was paid out in shares, the 
pay-out in shares increased to 55.69% of variable remuneration in 2014. 

6 

 
 
                                                            
application of malus. It is even deemed by some that in certain cases a longer deferral period, 
better aligned with the length of financial cycles, would be desirable. 

Pay-out  in  shares  or  equity-based  instruments  allows  the  interests  of  identified  staff  to  be 
aligned with those of an institution’s owners. Coupled with deferral and additional retention 
periods, during which staff member cannot access or sell the awarded instruments, pay-out in 
equity  instruments  helps  to  counter  potential  short-termism  in  the  actions  of  identified  staff 
and ensures alignment of their remuneration with the long-term risks and performance of the 
institution.  Moreover,  the  use  of  debt  instruments  that  can  be  bailed  in  helps  to  ensure 
alignment  with  the  interests  of  creditors.  The  evidence  to  date  nevertheless  shows  that  in 
practice institutions predominantly use equity or equity-based instruments. 

The CRD provides that variable remuneration can be reduced or cancelled through malus or 
through clawback.30 These tools have generally been positively assessed. While recognising 
that  the  mere  existence  of  these  ex-post  mechanisms  has  a  certain  deterrent  effect  on 
excessive risk-taking, their actual use to reduce or cancel variable remuneration remains low 
in practice.  

(ii) Specific concerns about the need for a proportionate application of the rules 

While  the  requirements  on  the  structure  and  pay-out  of  variable  pay  of  staff  are  generally 
considered as effective mechanisms for linking remuneration with the long-term performance 
of an institution, many industry representatives and nearly all Member States and supervisors 
expressed serious concerns about the need for proportionate application of the remuneration 
rules and warned against a ‘one size fits all’ approach. 

Most Member States have put in place thresholds or criteria under which certain remuneration 
rules do not need to be applied. This was based on their interpretation of the proportionality 
clause  in  the  CRD  and  the  Guidelines  issued  by  the  predecessor  of  the  European  Banking 
Authority,  the  Committee  of  European  Banking  Supervisors  (CEBS)  under  CRD  III  .  Such 
dis-application  of  rules  is  commonly  referred  to  as  ‘waivers’.  The  scope  of  these  waivers 
differs  significantly  across  Member  States  in  terms  of  both  the  type  of  institution  and  staff 
which may benefit from them and the remuneration rules to which they apply. Thresholds or 
criteria  put  in  place  by  Member  States  concern,  for  example,  the  size  of  an  institution,  the 
nature  of  its  business  and  the  level  of  variable  staff  remuneration.  Rules  that  have  been 
subjected  to  such  waivers  are  most  often  the  requirements  on  deferral  and  pay-out  in 
instruments and, in some Member States (following the adoption of CRD IV), the maximum 
ratio between variable and fixed remuneration for some types of institutions.   

When  the  European  Banking  Authority  (EBA)  and  the  Commission  confirmed  that  such 
waivers  are  legally  inadmissible,  this  led  to  strong  concerns  being  expressed  last  year  by 
many industry representatives and nearly all Member States and supervisors. Moreover, EBA 
last  year  issued  an  Opinion  recommending  a  legislative  change  to  the  CRD31,  which  would 
ensure  that  some  waiver  practices  could  be  allowed  to  continue  lawfully.  In  particular,  the 
EBA  argued  in  favour  of  introducing  in  the  CRD  the  possibility  of  waivers  from  the 

30 Article 94(1)(n), CRD. 
31  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. 

7 

 
 
                                                            
application of the rules on deferral and pay-out in instruments for institutions which are small 
and non-complex and for staff receiving low levels of variable remuneration. 

EBA estimates show that the requirements on deferral and pay-out in instruments may indeed 
be  excessively  costly  and  burdensome  for  small  institutions  and  for  staff  with  low  variable 
remuneration.  One-off  costs  to  small  institutions  for  applying  these  rules  are  estimated  at 
between EUR 100 000 and EUR 500 000 and ongoing costs at between EUR 50 000 and EUR 
200 000  per  year.  These  costs  relate  to  the  fact  that  small  institutions  need  to  make 
considerable  investments  in  human  resources,  IT  and  advisory  services,  and  are  often  faced 
with  difficulties  in  creating  appropriate  instruments,  often  due  to  their  corporate  statute  or 
ownership structure.  One-off costs to large institutions for applying the rules to staff on low 
levels of variable remuneration are estimated at between EUR 1 million and EUR 5 million 
and an ongoing annual cost of between EUR 400 000 and EUR 1.5 million. These costs relate 
to the fact that large institutions need to apply the rules to all of their identified staff, which 
will include a high number of individuals. 

Moreover,  the  Commission’s  assessment  of  the  effectiveness  of  these  rules,  on  the  basis  of 
arguments put forward by the industry, supervisors and the EBA, showed that, if the rules on 
deferral and pay-out in instruments were actually to be applied within small and non-complex 
institutions  and  to  staff  with  a  non-material  level  of  variable  remuneration,  this  would 
probably  lead  to  the  disappearance  of  variable  remuneration  in  many  cases,  and  thus  of  the 
link between pay and performance. In such a case, the objective of aligning remuneration with 
the risk profile of the institutions concerned would not be achieved. 

In  the  case  of  small  and  non-complex  institutions  and  staff  with  non-material  amounts  of 
variable  remuneration,  it  can  be  concluded  that  the  application  of  the  rules  on  deferral  and 
pay-out  in  instruments  is  not  efficient  if  consideration  is  given  to  the  particular  costs  and 
burdens triggered by the rules on the one hand and the absence of clear beneficial effects on 
the other. Given that the current CRD text does not allow the rules on deferral and pay-out in 
instruments  to  be  waived  for  small  and  non-complex  institutions  and  for  staff  with  non-
material levels of variable remuneration, the Commission will consider proposing a legislative 
amendment  allowing  the  use  of  some  waivers.  Before  proposing  any  such  amendment,  an 
impact  assessment  will  be  conducted.  Any  flexibility  in  the  application  of  the  deferral  and 
pay-out in instruments requirements would need to be properly framed and delineated in order 
to  prevent  circumvention or  an overly  permissive interpretation  of the rules  and to ensure a 
level-playing field across the EU. 

A second issue that was identified concerns the requirement for listed institutions to use only 
shares  (and  not  share-linked  instruments)  to  meet  the  CRD  pay-out  in  instruments 
requirement. 

The  Commission’s  assessment  of  the  arguments  put  forward  by  listed  institutions  and  by 
supervisors confirmed that there are impediments to the repeated use of shares for the purpose 
of  paying  out  variable  remuneration.  Share-linked  instruments  on  the  other  hand  are  as 
effective  as  shares  in  terms  of  aligning  the  interest  of  staff  members  with  those  of 
shareholders and with the long term interest of the institution, provided that they closely track 
the  value  of  shares  (without  a  leverage  effect).  It  is  therefore  acceptable  to  allow  listed 
institutions  to  use  share-linked  instruments  under  these  terms  and  the  Commission  will 
consider proposing a legislative amendment to that effect, following an impact assessment. 

8 

 
 
 
D. 

The maximum ratio between variable and fixed remuneration 

CRD  IV  introduced  a  maximum  ratio  between  the  variable  and  the  fixed  remuneration 
component  of  identified  staff32.  Variable  remuneration  must  not  exceed  the  fixed 
remuneration or, with shareholders’ approval, twice the fixed remuneration. Article 161(2) of 
the  CRD  requires  the  Commission  to  report  on  the  impact  of  the  maximum  ratio  on 
competitiveness,  financial  stability  and  on  staff  working  in  non-EEA  subsidiaries  of  EEA 
parent institutions. 

This  sub-section  first  looks  at  an  issue  concerning  the  correct  mapping  of  ‘fixed’  and 
‘variable’ remuneration (i). It subsequently looks at the overall impact of the maximum ratio 
on remuneration packages (ii). It then examines the effects of the maximum ratio on financial 
stability  from  two  angles:  the  effects  on  risk-taking  and  conduct  (iii)  and  how  it  impacted 
firms’ fixed costs and profitability (iv). It also examines the impact of the maximum ratio on 
firms’ competitiveness in terms of attracting and retaining talented staff  (v). It concludes by 
considering  whether  the  rule  should  continue  to  apply  to  staff  working  for  subsidiaries  of 
EEA institutions outside the EEA (vi).   

It is too early to appropriately and fully assess the impact of the maximum ratio, given that the 
rule  has  been  in  force  for  only  one  year  of  the  period  covered  by  this  report’s  analysis. 
Moreover,  some  Member  States  used  proportionality  considerations  to  waive  the  maximum 
ratio  for  some  institutions,  or  staff  and  institutions  avoided  the  application  of  the  rule  by 
making use of specific remuneration mechanisms (the role-based allowances as discussed in 
paragraph (i) below). The analysis is also affected by the fact that harmonised rules on staff 
identification  entered  into  force  in  2014,  and  thus  statistics  from  before  and  after  the 
maximum ratio entered into force (in 2014) concern a somewhat different staff population. 

It is therefore important to keep in mind that the below represents the Commission’s findings 
to date, based only on the limited data available, given the short period of time since the rule 
is in force and the limited experience with its application. 

(i) Classification of ‘fixed’ and ‘variable’ remuneration 

Following  the  entry  into  force  of  CRD  IV,  institutions  made  frequent  use  of  so-called  role-
based  allowances,  which  were  treated  as  fixed  remuneration  (thus  allowing  more  variable 
remuneration). At the Commission’s request, the EBA looked into the use of these allowances 
and  found  that  they  were  often  wrongly  classified  as  ‘fixed’  remuneration.  Following  an 
Opinion issued by the EBA, all Member States have meanwhile reported that they have taken 
measures to ensure the correct mapping of these allowances. 

(ii) How does the maximum ratio affect remuneration packages? 

The  maximum  ratio  does  not  impact  directly  on  the  level  of  pay  but  sets  the  proportions 
between  the  variable  and  fixed  components.  The  proportion  of  staff  affected  by  the  rule  is 
limited.  The  maximum  ratio  only  applies  to  identified  staff  who,  in  2014,  represented  on 
average 2.34 % of all staff33. Most of them were not receiving variable pay above the CRD 
maximum ratio before its introduction. 

32 Article 94(1)(g), CRD. 
33 EBA ‘Benchmarking of Remuneration practices at Union level and data on high earners’, data as of end 2014. 

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Looking  at  European  averages,  data  collected  by  the  EBA  shows  that,  while  average  fixed 
remuneration per identified staff has increased in recent years, average variable remuneration 
has  decreased.  It  therefore  follows  that  the  relative  weight  of  variable remuneration  of  total 
remuneration  has  decreased.  However,  these  trends  had  already  begun  several  years  before 
the introduction of the maximum ratio. There are elements other than the maximum ratio that 
would  impact  on  the  levels  and  proportions  of  remuneration  components  (e.g.  financial 
performance, profitability and general prudential requirements). Moreover, an increase in the 
fixed  portion  of  remuneration  has  also  been  observed  in  several  non-EU  jurisdictions 
(including the US and some Asian countries).   

These findings have been reached on the basis of averages of data collected mainly from large 
banking  groups,  and  need  to  be  interpreted  with  care.  While  the  overall  shift  towards  fixed 
remuneration  cannot  clearly  be  attributed  to  the  maximum  ratio,  it  is  likely  that  in  some 
individual cases the maximum ratio has led to a shift from variable to fixed remuneration. 

(iii) How does the maximum ratio affect risk taking and conduct? 

The maximum ratio was introduced as a form of behavioural safeguard, aimed at curbing the 
excessive risk-taking incentives caused by the high level of variable remuneration. Part of the 
industry,  some  Member  States  and  some  academics  nevertheless  consider  that  increased 
reliance  on  fixed  pay  may  adversely  affect  the  alignment  of  the  staff’s  incentives  with  the 
interests of the firm and society. 

The impact on individuals’ behaviour is difficult to measure. A recent survey34 showed that 
institutions  were  divided  on  the  expected  impact  of  the  maximum  ratio  on  behaviour,  with 
suggestions being  made  that  it  may  also  depend  on  cultural  background.  Surveyed staff  did 
not  seem  to  feel  that  a  greater  proportion  of  fixed  remuneration  had  an  impact  on  their 
motivation or risk-taking (neither to take more, nor less risks). 

Arguments  have  been  advanced  that  the  maximum  ratio  would  limit  the  portion  of 
performance-related  remuneration  to  which  risk-aligning  tools  such  as  deferral,  pay-out  in 
instruments and malus and clawback can be applied. However, data suggests that the variable 
remuneration  that  can  be  awarded  within  the  limits  imposed  by  the  maximum  ratio  can 
accommodate  greater  use of these mechanisms, especially  malus and  clawback (see Section 
III.C (i)).  

Moreover,  ex-post  adjustment  tools,  even  if  they  have  some  deterrent effect,  are  inadequate 
on  their  own  in  mitigating  adverse  risk  incentives  or  misconduct,  given  that  they  are 
essentially applied as a reactive tool in the event that damage materialises. 

Given  the  recent  introduction  of  the  maximum  ratio  and  the  limited  experience  with  its 
application, it is too early to draw clear conclusions on its impact on incentives for excessive 
risk-taking behaviour and on misconduct. This has also been recognised by some supervisors. 

(iv) Impact of the maximum ratio on fixed costs and profitability 

According  to  EBA  estimates,  the  fixed  remuneration  of  identified  staff  is  of  relatively  low 
importance for most institutions examined: it represents below 5 % of the total administrative 
costs and 1 % of own funds. The EBA also found that the increase in fixed costs from 2013 to 

34 IFF, 2016. 

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2014  was  very  small  for  most  of  the  institutions  examined35.  Similarly,  other  sources  have 
suggested that the impact of the variable-to-fixed shift  on the fixed cost base of institutions 
would not be material36.   

In  any  event,  the  extent  to  which  institutions  can  reduce  their  total  cost  base  by  reducing 
variable remuneration should not be overstated given that, as shown by the EBA’s analysis, in 
2014  the  total  amount  of  variable  remuneration  of  identified  staff  accounts  for  only  1 %  to 
2 %  of  the  total  administrative  costs  of  most  of  the  institutions  examined.  Moreover,  the 
extent  to  which  institutions  can  use  the  variable  remuneration  of  identified  staff  to  reduce 
their cost base even increased in 2014, due to the larger population of identified staff. 

With  respect  to  the  impact  of  the  maximum  ratio  on  institutions’  profitability,  the  EBA’s 
analysis  noted  that  between  2013  and  2014  the  profitability  of  institutions  remained  largely 
stable.  Moreover,  according  to  EBA  estimates,  in  2014  the  total  fixed  remuneration  cost  of 
identified  staff  on  an  aggregate  basis  was  relatively  small  compared  with  the  net  profits  of 
institutions. This suggests there is a non-negligible margin for fixed remuneration to increase 
before reaching a level that would threaten the overall profitability of institutions. 

Finally, unlike some other remuneration provisions (i.e. deferral and pay-out in instruments), 
which in some cases can be associated with significant implementation and compliance costs 
and  burdens,  as  explained  in  Section  III.C.(ii),  the  rule  on  the  maximum  ratio  is 
uncomplicated, its implementation is not linked to notable administrative costs and it is easy 
to apply37. 

At this early stage, considering the recent introduction of the maximum ratio and the limited 
experience  with  its  application,  the  assertions  as  to  loss  of  cost  flexibility,  increased 
vulnerability  of  institutions  to  business  cycles  and  the  negative  impact  on  institutions’ 
regulatory  capital  ratios  and  profitability,  can  be  considered  to  be  unsubstantiated,  in 
particular with respect to credit institutions. 

(v) Impact of the maximum ratio on competitiveness 

Concerns have been raised that the maximum ratio would reduce institutions’ competitiveness 
by negatively affecting their ability to attract and retain talented staff in comparison with non-
regulated firms (either within the financial industry sector or in other sectors to which skills 
are transferable). Many elements play a part in a staff member’s decision to move, such as job 
security, promotion prospects, the reputation enjoyed by the sector, taxation, family, language 
and living conditions. Also, the question on whether a staff member prefers variable or fixed 
remuneration  may  essentially  be  down  to  personal  or  cultural  preferences.  So  far,  besides 
general and often rather theoretical claims made by the industry, there is no concrete evidence 
suggesting that the competitiveness of EU institutions in terms of attracting and retaining staff 
has  been  affected  by  the  maximum  ratio,  but  this  may  merit  further  assessment  when  more 
experience with the rule is gained. 

35 EBA ‘Benchmarking of Remuneration practices at Union level and data on high earners data as of end 2014’. 
36  Autonomous  ‘Bonus  cap  versus  bowler  hat’  (2013);  New  Financial  ‘Feeling  the  squeeze?’  (2015),  available  at 
http://newfinancial.eu/wp-content/uploads/2015/02/Feeling-the-squeeze-July-2015-updated.pdf. 
37 The EBA in its Opinion on the application of proportionality of 21 December 2915 (EBA/Op/2015/25) stated that ‘waivers 
of the limitation of the ratio between variable and fixed remuneration should not be introduced for institutions falling under 
the scope of Directive 2013/36/EU’ considering that ‘The so-called bonus cap is easy to apply and does not create additional 
administrative costs. The cap ensures that no inappropriate incentives for risk-taking can be provided’. 

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 (vi) Staff working for non-EEA subsidiaries 

Some internationally active institutions with EEA headquarters suggested that it is difficult to 
compete for talent with local firms abroad, and that staff turn-over in non-EEA locations has 
increased.  They  could  however  not  quantify  this  nor  show  that  this  can  be  attributed  to  the 
maximum ratio. It has also been suggested that differences in the rules across countries may 
have  hampered 
in  setting  consistent,  organisation-wide 
compensation  strategies  and  that  there  might  be  compatibility  concerns  with  local 
remuneration regimes. 

internationally  active  banks 

The  reason  why  internationally  active  institutions  with  EEA  headquarters  need  to  apply  the 
remuneration  rules  on  a  consolidated  basis,  including  to  their  non-EEA  subsidiaries,  is  that 
these  subsidiaries  can  have  an  impact  on  the  soundness  and  stability  of  the  group.  Another 
reason is to address the risk that non-EEA subsidiaries are used to avoid the application of the 
remuneration rules. Staff working for non-EEA subsidiaries will only need to comply with the 
CRD  remuneration  rules  applicable  to  their  parent  undertaking  if  it  is  determined  that  they 
have a material impact on the risk profile of the CRD group to which they belong. Thus, the 
number of staff generally affected is likely to be limited. Also, the CRD explicitly stipulates 
that the rules do not need to be applied if it can be demonstrated that their application would 
be unlawful under the laws of the third country where the subsidiary is established38.  

The  assessment  of  the  impact  of  the  maximum  ratio  in  non-EEA  jurisdictions  is  currently 
subject to the relatively limited experience with this rule. Based on the available information, 
there  are  insufficient  elements  to  suggest  at  this  stage  that  the  maximum  ratio  should  not 
continue to apply to such staff. 

IV.  CONCLUSION 

The Commission has carried out a review of the CRD and CRR remuneration rules, following 
the  mandate  set  out  in  Article  161(2)  of  the  CRD  and  in  line  with  its  ongoing  work  with 
respect to the Call for Evidence on the EU regulatory framework for financial services39. 

This  review  allows  for  a  largely  positive  assessment  of  the  rules  on  the  governance  of 
remuneration  processes,  performance  assessment,  disclosure  and  pay-out  of  the  variable 
remuneration of identified staff, introduced by CRD III.  These rules were found to contribute 
to  the  overall  objectives  of  curbing  excessive  risk-taking  and  better  aligning  remuneration 
with performance, thereby contributing to enhanced financial stability. 

The  review  also  revealed  that  the  deferral  and  pay-out  in  instruments  requirements  are  not 
efficient in the case of small and non-complex credit institutions and investment firms, and of 
staff  with  low  levels  of  variable  remuneration.  The  Commission  will  therefore  conduct  an 
impact  assessment  which  will  examine  options  for  addressing  this  issue  in  particular  by 
exempting  these  institutions  and  staff  from  these  specific  requirements.  This  impact 
assessment will also look at allowing listed institutions to use share-linked instruments under 
the CRD pay-out in instruments requirement. This will be part of the wider work to prepare 
the revision of the CRD and CRR now under consideration. 

38 Article 109(3), CRD. 
39 The summary of the contributions to the 'Call for Evidence' is available at 
http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-review/docs/summary-of-responses_en.pdf  

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With  regard  to  the  maximum  ratio  between  variable  and  fixed  remuneration  introduced  by 
CRD IV, the review found that for the time being there is insufficient evidence to draw final 
conclusions on the impact of the rule on competitiveness, financial stability and staff working 
for  non-EEA  subsidiaries.  It  seems  that  conclusive  findings  can  only  be  reached once  more 
implementation experience is gained. 

13