Eurostat does not publish forecast values for inflation, so which value should be used as indicator for evaluations? From the examples included in the consultation paper, it would seem that reference should be made to the latest available value for inflation at the time when the variable remuneration is awarded, and then left unchanged over the five-year period. Is this the correct interpretation?
It would be expedient to simplify quantification of the parameters used to calculate the discount rate. In particular, in the context of institutions or groups that operate in multiple countries, it is necessary to allow the use of a unique factor in order to simplify the administrative burden on companies, and ensure equal treatment among workers within the same group/institution.
In ABI’s opinion it would be appropriate to use the inflation rate of the country of the parent company in the case of a group, and the inflation rate of the country where the company is headquartered in the case of a bank that operates in multiple countries.
Alternatively, ABI proposes using an average European inflation rate, published by the EBA or Eurostat, in view of the joint supervision of equality and equal conditions.
The text of the proposed guidelines is not clear about whether the rate to be considered is that relating to each State or the European average.
Should EBA mean the values for each State, we confirm our proposed simplification in terms of referring to the values of the country of the parent company, or the country where the company is headquartered.
ABI proposes using an objective measure represented by an average European inflation rate, published by the EBA or Eurostat.
For each year of deferral the measure could be twice the average European inflation rate.
Alternatively, ABI proposes increasing the incentive factor for the use of long-term deferred variable remuneration to 15%, it means 3% for each year of deferral.
The consultation paper proposes an incentive factor for retention that is substantially lower than the incentive factor for deferral, and the exponent of the proposed discounting formula does not take the retention period into account (only the vesting period).
ABI proposes inclusion of the retention period in the discounting formula.
ABI also proposes using an incentive factor for each year of retention that is higher than the implicit annual incentive factor for the long-term deferral of variable remuneration, since it is additional to the deferral period.
In the consultation paper, application of the discount rate is limited to financial instruments that are deferred for at least five years.
Accordingly, when transitioning from variable remuneration paid in financial instruments deferred for 3 years to that paid in instruments deferred for 5 years, a discount factor is envisaged in order to encourage the use of instruments that are deferred for a longer period.
This discount factor is a function of the annual rate of inflation, the yield on long-term EU government bonds and an incentive factor for variable remuneration paid in instruments deferred for five years. This discount rate is believed to represent the benefit of transitioning from 3 to 5 years of deferral, i.e. the advantage deriving from an additional two years of deferral.
ABI believes that the benefit to employees of adding a retention period of one year must be at least equal to that recognized annually for increasing the number of years of deferral.
This means that for each year of retention, the annual incentive factor should be at least equal to the half the discount rate.
ABI further observes that this would represent an incentive for deferrals of longer than 5 five years consistent with that recognized for 5-year deferrals.
1) Factor for inflation: 2.0%
2) Factor for EU government bonds: 3.0%
3) Incentive factor long term deferral: 10.0%
1)+2)+3) is 15.0%
Incentive factor for retention is 15.0%/2=7.5% for one year.
The calculation of the discount rate is sufficiently clear.
In points 15 and 16 it would be appropriate to specify that the variable remuneration considered is that awarded to an individual staff member, as indicated in point 17.
There are two kinds of cost related to the documentation and transparency requirements:
- one-off costs of implementing the recording and reporting mechanism;
- annual costs of recording and reporting.
Implementation costs include training the staff of the HR department, as well as creating the procedures and software needed for identification of the relevant data and documents and their storage.
Ongoing costs include preparing the required reports (compliance with the guidelines by the institution and disclosure, on a country by country basis, of actual application of the discount rate to variable remuneration). The costs of internal control and approval procedures should also be taken into account.
As mentioned, these costs could be significantly reduced by applying a unique discount factor at institution/group level.
Example 1 is sufficiently clear and helpful to understand the application of the guidelines.
Example 2 is sufficiently clear and helpful to understand the application of the guidelines.
Example 3 is sufficiently clear and helpful to understand the application of the guidelines.
Whilst we generally agree with the impact analysis of the proposals, there is some feeling that the guidelines do not provide the best means of incentivising long-term deferral structures due to a lack of practicality, and complexity. This is due to the discount depending heavily on external factors and the resulting volatility makes it difficult to explain and not reliable enough to be used in real life compensation strategies. As an alternative, the regulator could decide on a fixed discount table of at least 25% if certain criteria for deferral and retention periods and / or structures are met.