Single Rulebook Q&A

Question ID: 2018_4027
Legal act : Directive 2013/36/EU as amended by Directive (EU) 2019/878 – CRD5
Topic : Remuneration
Article: 94
Paragraph: 1
Subparagraph: (g)(i)
COM Delegated or Implementing Acts/RTS/ITS/GLs: EBA/GL/2015/22 - Guidelines on sound remuneration policies under Articles 74(3) and 75(2) of CRD and disclosures under Article 450 of CRR
Article/Paragraph : Section 9.3, paragraph 154.b
Type of submitter: Law firm
Subject matter : Calculation of the ratio between fixed and variable components of the total compensation.
Question:

Do credit institutions have to include in the ratio between fixed and variable components of the total compensation the actual value of the amount of early retirement that will be paid out over a period of 5 years subject to a non-competition clause?

Background on the question:

The question refers specifically to a credit institution that will pay early retirement to certain employees belonging to its Identified Staff. The amount of early retirement will be paid out over a period of 5 years and subject to a non-competition clause. Accordingly, the employee is not permitted to work in another credit institution during that period of 5 years. In addition, the amount of early retirement will not exceed, in any of the 5 years, the amount of the fixed remuneration which would have been paid for this period if staff were still employed in the credit institution.

Date of submission: 26/06/2018
Published as Final Q&A: 18/01/2019
EBA answer:

In accordance with Article 94(1)(h) of Directive 2013/36/EU (CRD) payments relating to the early termination of a contract should reflect performance achieved over time and do not reward failure or misconduct.

The guidelines on sound remuneration policies (EBA/GL/2015/22) define severance payments as payments relating to the early termination of a contract. In line with Section 9.3 of the EBA guidelines on sound remuneration policies (EBA guidelines), severance payments should not provide for a disproportionate reward, but for an appropriate compensation of the staff member in cases of early retirement. They should not be awarded where there is an obvious failure which allows for the immediate cancellation of the contract or the dismissal of staff. Early retirement payments should not lead to a circumvention of remuneration requirements as set out in paragraph 164 (i) of the EBA guidelines. Early retirement payments that are paid over a defined period of years and are subject to a non-competition clause to staff identified under the RTS on identified staff are a form of  severance payment (as they are a compensation for early termination of the contracts and therefore they should qualify as variable remuneration) and should be treated in the same way in line with section 9.3 of the EBA guidelines.

Specifically, in line with paragraph 154 b) of the EBA guidelines settlements made for the loss of office where they are subject to a non-competition clause (‘gardening leave’) in the contract and paid out in future periods up to the amount of the fixed remuneration which would have been paid for the non-competition period if staff were still employed, should not be taken into account for the purpose of calculating the ratio between the variable and fixed elements of remuneration, the application of deferral and the pay out in instruments.

However, in order to calculate settlements that comply with paragraph 154 b) of the EBA guidelines it will be necessary to take into account that:

  1. The fact that a non-competition clause is included in the contract does not necessarily imply that the whole amount paid as early retirement is paid to compensate the identified staff for committing not to compete for a certain period of time. In fact, it usually includes other amounts not linked to the non-competition clause. Only those amounts of the settlement specifically identified in the contract as a compensation for the non-competition clause would comply with paragraph 154 b) of the EBA guidelines and would be excluded for the purpose of calculating the ratio between the variable and fixed elements of remuneration, payment in instruments and deferral requirements (without prejudice to the possible concurrence of other cases foreseen in paragraph 154 of the EBA guidelines).
  1. Where national legislation limit the length of non-competition clauses, any payment made beyond those time limits cannot be considered as a “settlement made for a non-competition clause” and therefore  cannot be excluded from the ratio of variable to fixed, the application of deferral and the pay out in instruments according to paragraph 154 b) of the EBA guidelines.
Status: Final Q&A
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