Prudential Regulation Authority Rulebook

15.A1

In this Chapter:

1. (1) All the requirements of this Chapter apply to a firm that is neither a small CRR firm nor a small third country CRR firm.
2. (2) 15.1 to 15.14 and 15.20(1) apply to a small CRR firm or a small third country CRR firm.
3. (3) A firm is not required to comply with 15.15 to 15.19 in respect of an employee whose annual variable remuneration:
1. (a) does not exceed £44,000; and
2. (b) does not represent more than one third of the employee's total annual remuneration.

15.1

A firm must ensure that the structure of an employee's remuneration is consistent with and promotes effective risk management.

15.2

A firm must ensure that its remuneration policy makes a clear distinction between criteria for setting:

1. (1) basic fixed remuneration that primarily reflects an employee's professional experience and organisational responsibility as set out in the employee's job description and terms of employment; and
2. (2) variable remuneration that reflects performance in excess of that required to fulfil the employee's job description and terms of employment and that is subject to performance adjustment in accordance with this Part.

[Note: Art. 92(2)(g) of the CRD]

[Note: CRD]

15.3

A firm must not award variable remuneration to a non-executive director in relation to his or her role as such.

15.4

A firm must ensure that where remuneration is performance-related:

1. (1) the total amount of remuneration is based on a combination of the assessment of the performance of:
1. (a) the individual;
2. (b) the business unit concerned; and
3. (c) the overall results of the firm; and
2. (2) when assessing individual performance, financial as well as non-financial criteria are taken into account.

[Note: Art. 94(1)(a) of the CRD and Standard 6 of the FSB Compensation Standards]

[Note: CRD]

15.5

A firm must clearly explain the performance assessment process referred to in 15.4 to relevant employees.

15.6

A firm must ensure that the assessment of performance is set in a multi-year framework in order to ensure that the assessment process is based on longer-term performance and that the actual payment of performance-based components of remuneration is spread over a period which takes account of the underlying business cycle of the firm and its business risks.

[Note: Art. 94(1)(b) of the CRD]

[Note: CRD]

15.7

A firm must ensure that guaranteed variable remuneration is not part of prospective remuneration plans. A firm must not award, pay or provide guaranteed variable remuneration unless:

1. (1) it is exceptional;
2. (2) it occurs in the context of hiring a new employee;
3. (3) the firm has a sound and strong capital base; and
4. (4) it is limited to the first year of service.

[Note: Arts. 94(1)(d) and (e) of the CRD and Standard 11 of the FSB Compensation Standards]

[Note: CRD]

15.8

[Deleted.]

15.9

A firm must set an appropriate ratio between the fixed and variable components of total remuneration and ensure that:

1. (1) fixed and variable components of total remuneration are appropriately balanced; and
2. (2) the level of the fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable remuneration component.
3. (3) [Deleted]

[Note: Art. 94(1)(f) of the CRD]

[Note: CRD]

15.10

[Deleted]

15.11

[Deleted]

15.12

[Deleted]

15.13

[Deleted]

15.14

A firm must ensure that payments relating to the early termination of a contract reflect performance achieved over time and are designed in a way that does not reward failure or misconduct.

[Note: Art. 94(1)(h) of the CRD and Standard 12 of the FSB Compensation Standards]

[Note: CRD]

15.15

A firm must ensure that:

1. (1) a substantial portion, which is at least 50%, of any variable remuneration consists of an appropriate balance of:
1. (a) shares or, subject to the legal structure of the firm concerned, equivalent ownership interests; or, subject to the legal structure of the firm concerned, share-linked instruments or equivalent non-cash instruments; and
2. (b) where possible other instruments which are eligible as Additional Tier 1 instruments or are eligible as Tier 2 instruments or other instruments that can be fully converted to Common Equity Tier 1 instruments or written down, that in each case adequately reflect the credit quality of the firm as a going concern and are appropriate for use as variable remuneration; and
2. (2) the instruments referred to in paragraph (1) are subject to an appropriate retention policy designed to align incentives with the longer-term interests of the firm.

15.16

A firm must apply 15.15 to both the portion of the variable remuneration component deferred in accordance with 15.17 and 15.18 and the portion not deferred.

[Note: Art. 94(1)(l) of the CRD and Standard 8 of the FSB Compensation Standards]

[Note: CRD]

15.17

1. (1) Unless a longer deferral period is required under (2), a firm must not award, pay or provide a variable remuneration component unless a substantial portion of it, which is at least 40%, is deferred over a period which is not less than:
1. (a) in the case of a material risk taker who is not subject to (b), four years, vesting no faster than on a pro-rata basis;
2. (b) in the case of a material risk taker who is a member of the management body or senior management of a significant firm, five years, vesting no faster than on a pro-rata basis.
2. (2) A firm must not award, pay or provide a variable remuneration component to a higher paid material risk taker unless a substantial portion of it, which is at least 40%, is deferred over a period which is not less than:
1. (a) in the case of a higher paid material risk taker who does not perform a PRA senior management function, but:
2. 1. (i) who meets the criteria in 3.1(1)(a) or (b); or
   2. (ii) whose professional activities meet the qualitative criteria set out in 3.2A(1), 3.2A(2) or 3.2A(5)
3. five years vesting no faster than on a pro-rata basis; or
4. (b) in the case of a higher paid material risk taker who performs a PRA senior management function, seven years, with no vesting to take place until three years after award, and vesting no faster than on a pro-rata basis thereafter.

15.18

In the case of a variable remuneration component:

1. (1) of £500,000 or more; or
2. (2) payable to a director of a firm that is significant in terms of its size, internal organisation and the nature, scope and complexity of its activities;

at least 60% of the amount must be deferred on the basis set out in 15.17.

15.19

Subject to 15.17, the length of the deferral period must be established in accordance with the business cycle, the nature of the business, its risks and the activities of the employee in question.

[Note: Art. 94(1)(m) of the CRD and Standards 6 and 7 of the FSB Compensation Standards]

[Note: CRD]

15.20

A firm must ensure that:

1. (1) any variable remuneration, including a deferred portion, is paid or vests only if it is sustainable according to the financial situation of the firm as a whole, and justified on the basis of the performance of the firm, the business unit and the individual concerned; but in the case of a small CRR firm or a small third country CRR firm, this does not require a firm to impose malus or clawback;
2. (2) any variable remuneration is subject to clawback, such that it is only awarded if an amount corresponding to it can be recovered from the individual by the firm if the recovery is justified on the basis of the circumstances described in 15.21(2) or in respect of a higher paid material risk taker, 15.23; and
3. (3A) unless 15.20A applies, any variable remuneration is subject to a clawback period from the date on which the variable remuneration is awarded, in the case of:
   1. (a) the deferred portion of variable remuneration of a material risk taker who is a member of the management body or senior management of a significant firm, of at least six years.
   2. (b) the deferred portion of variable remuneration of a material risk taker who is not subject to (a), of at least five years.
   3. (c) an undeferred portion of variable remuneration, of at least one year.

[Note: Art. 94(1)(n) of the CRD and Standards 6 and 9 of the FSB Compensation Standards]

[Note: CRD]

15.20A

In respect of a higher paid material risk taker, a firm must ensure that:

1. (1) any variable remuneration is subject to a clawback period from the date on which the variable remuneration is awarded of at least 7 years from the date on which the variable remuneration is awarded;
2. (2) in the case of a higher paid material risk taker who performs a PRA senior management function, the firm can, by notice to the employee to be given no later than 7 years after the variable remuneration was awarded, extend the period during which variable remuneration is subject to clawback to at least 10 years from the date on which the variable remuneration is awarded, where:
1. (a) the firm has commenced an investigation into facts or events which it considers could potentially lead to the application of clawback were it not for the expiry of the clawback period; or
2. (b) the firm has been notified by a regulatory authority (including an overseas regulatory authority) that an investigation has been commenced into facts or events which the firm considers could potentially lead to the application of clawback by the firm were it not for the expiry of the clawback period; and
3. (3) it considers on an ongoing basis whether to use the power in (2).

15.21

A firm must:

1. (1) set specific criteria for the application of malus and clawback; and
2. (2) ensure that the criteria for the application of malus and clawback in particular cover situations where the employee:
1. (a) participated in or was responsible for conduct which resulted in significant losses to the firm; or
2. (b) failed to meet appropriate standards of fitness and propriety.

[Note: Art. 94(1)(n) of the CRD]

[Note: CRD]

15.22

In respect of a higher paid material risk taker:

1. (1) a firm should reduce unvested deferred variable remuneration when, as a minimum:
1. (a) there is reasonable evidence of employee misbehaviour or material error;
2. (b) the firm or the relevant business unit suffers a material downturn in its financial performance; or
3. (c) the firm or the relevant business unit suffers a material failure of risk management.
2. (2) For performance adjustment purposes, awards of deferred variable remuneration made in shares or other non-cash instruments should provide the ability for a firm to reduce the number of shares or other non-cash instruments.
3. (3) Contravention of any of (1) or (2) may be relied on as tending to establish contravention of 15.20(1). Contravention of (1) or (2) does not give rise to any of the consequences provided for by provisions of FSMA other than section 138C.

15.23

In respect of a higher paid material risk taker, a firm must make all reasonable efforts to recover an appropriate amount corresponding to some or all vested variable remuneration where either of the following circumstances arise during the period in which clawback applies (including any part of such period occurring after the relevant employment has ceased):

1. (1) there is reasonable evidence of employee misbehaviour or material error; or
2. (2) the firm or the relevant business unit suffers a material failure of risk management.

A firm must take into account all relevant factors (including, where the circumstances described in (2) arise, the proximity of the employee to the failure of risk management in question and the employee’s level of responsibility) in deciding whether and to what extent it is reasonable to seek recovery of any or all of their vested variable remuneration.