Risk adjustment of Variable Compensation

Through a series of measures, we ensure that effective risk management processes are embedded into compensation systems addressing both ex ante and ex post adjustments.

Ex ante Risk Adjustment

To ensure appropriate ex ante risk adjustments, we use a consistent, bank-wide standardised methodology to measure risk-adjusted bonus-eligible performance (RA BE Net Income before Bonus and Tax (“NIBBT”)) by business. This measure is based on the NIBBT reviewed during monthly business review meetings, adjusted for performance-relevant items and an allocation of specific Non Core Operating Unit items, and subsequently risk-adjusted on the basis of an Economic Capital charge.

Economic Capital measures the capital associated with unexpected losses. It is a forward-looking measure which quantifies the risk taken on by the bank, i.e., it measures the risk profile at a certain point in time. Economic Capital was verified by the Risk function as being the Bank’s best estimate for future but not materialized losses from its current portfolio and therefore the best metric to adjust VC pools. The SECC reviewed the appropriateness of the risk-adjustment methodology and does so on an annual basis.

As a general rule, we capture all material risks within the four prime risk types of our economic capital framework (Credit, Market, Operational, and Business Risk). Other risks are mapped into the appropriate overarching risk type. Specific examples of risks captured within each of the sub-risk types are as follows:

Credit Risk

  • rating migration risk, country transfer risk, settlement risk.

Market Risk

  • banking book interest-rate risk, deposit modelling risk, fund guarantee risk (partially includes reputational risk), building society business and collective risk.

Operational Risk

  • legal and regulatory risk, IT risk, staff risk, business continuity risk, vendor risk, transaction processing risk, origination and execution risk, business support risk, financial reporting/recording risk, fiduciary service risk, real estate risk, security risk.

Business Risk

  • strategic risk (includes general reputational risk), tax risk.

NIBBT already takes into account liquidity risks via transfer pricing of funding costs, credit risk through the recognition of credit charges taken as Loan Loss Provisions and General Value Adjustments on the loan book (one year view on unexpected losses), market risk through mark-to-market accounting including the application of a Credit Valuation Adjustment charge on the derivatives book, and long-dated risks through an appropriate revenue recognition methodology.

Ex post Risk Adjustment

Performance conditions and forfeiture (clawback) provisions are a key element of our deferred compensation structures and ensure that awards are aligned to future conduct and performance. As illustrated by the statistics in this report the percentage of VC awards subject to deferral, and therefore performance and forfeiture conditions, increases in line with seniority. In conjunction with the scope of the risk adjustment measures, the duration for which they are applicable is equally as important. We have enhanced the forfeiture provisions in respect of the 2013 deferred awards with regards to both of these elements.

The following performance and forfeiture provisions have been applied to 2013 deferred VC awards (awarded in February 2014).

Group Clawback

This performance condition is only met if Group Net Income Before income Taxes (NIBT) is zero or greater. If the Management Board in its discretion determines that Group NIBT is negative for any year during the vesting period, the performance condition will not be met and 100 % of the REA tranche due to vest in respect of that year will be forfeited by all employees. Furthermore, if at any quarter end prior to the vesting date the Group’s Common Equity Tier 1 capital ratio is below the applicable regulatory minimum capital level, inclusive of an additional risk buffer of 200 basis points, at the discretion of the Management Board, the full unvested REA will be forfeited (the CET 1 provision). From 2014, this performance condition is applicable to all staff with deferred equity awards. This is the first time that non-Regulated Employees with deferred awards (approximately 3,400 individuals) have been subject to a specific Group performance forfeiture provision. This is a significant governance enhancement and aligns the compensation of a much larger group of employees to the future performance of the Bank than ever before.

For the Senior Management Group subject to the five year REA cliff vesting and retention period, if for any year during this period the Group NIBT is negative (but the CET 1 provision is not triggered), 20 % of the award will be forfeited in respect of that year.

For Regulated Employees, the tranche aspect of the Group NIBT provision also applies to their RIA so that if the Management Board determines that Group NIBT is negative during any year of the vesting period, the performance condition will not be met and 100 % of the RIA tranche due to vest in respect of that year will be forfeited.

Divisional Clawback

This performance condition is applicable to Regulated Employees only and is met if an employee’s respective division’s NIBT is zero or greater. If NIBT is negative for any division during any year of the vesting period, the performance condition will not be met and 100 % of the REA and RIA tranches due to vest in respect of that year will be forfeited (at the discretion of the Management Board) by all Regulated Employees in the applicable division even if Group performance remains positive. For the Senior Management Group subject to the five year REA cliff vesting and retention period, if for any year during this period the divisional NIBT is negative, 20 % of the award will be forfeited in respect of that year. The divisional clawback measure does not apply to the Management Board or employees working in Regional Management or Infrastructure divisions. Only the Group clawback applies.

Revenue Impairment Provision

This clawback applies to RIA and REA and allows us to determine whether adjustments may be necessary based on actual outcomes following award. Up to 100 % of an employee’s awards can be forfeited in the event that we discover that the original award value was inappropriate because a performance measure is later deemed to be materially inaccurate or if a deal, trade or transaction considered to be attributable to an employee has a significant adverse effect on any Group entity, Division or the Group as a whole.

This provision has been extended to include EUA for Regulated Employees for the first time in 2013 ensuring that a greater percentage of awards for Regulated Employees than ever before are subject to potential performance based forfeiture. Furthermore, it is now also applicable during the retention period following REA vesting therefore ensuring performance forfeiture measures stretch over a minimum 3.5 year period for equity awards to Regulated Employees (five years for the Senior Management Group).

Policy/Regulatory Breach Provision

This behavioral based clawback is applicable to both REA and RIA and includes provisions providing for the forfeiture of up to 100 % of outstanding deferred compensation as a result of misconduct, including but not limited to, dishonesty, fraud, misrepresentation or breach of trust. An award may be clawed back for an internal policy or procedure breach, or breach of any applicable laws or regulations imposed other than by us.

This provision has been extended to include the six month retention period following REA vesting therefore ensuring behavioural forfeiture measures remain applicable for a minimum of 3.5 years for equity awards granted to Regulated Employees (five years for the Senior Management Group).

A summary of the above provisions and the 2013 enhancements is set out below.

2013 deferred compensation awards: expanded forfeiture provisions

Existing Performance Conditions & Forfeiture provisions

Senior Management Group and other Regulated Employees

All other staff with Deferred Awards

Group Performance (Negative NIBT) – Applicable to REA & RIA tranches during vesting periods

yes

 

Divisional Performance (Negative NIBT) – Applicable to REA and RIA tranches during vesting periods

yes

 

Revenue Impairment Forfeiture – Applicable to RIA and REA during the vesting periods

yes

yes

Breach of Policy – Applies to RIA and REA during vesting periods

yes

yes

Breach of Policy – Applies to the Equity Upfront Award (EUA) for Regulated Employees

yes

 

 

 

 

 

 

Agreed expansion of forfeiture provisions for awards granted in 2014 for performance year 2013

 

 

Expand the definition and scope of the Group Performance (Negative NIBT) provision applicable to REAs during vesting periods for all employees with deferred awards

Tranche forfeiture in the event of Negative Group NIBT. Full forfeiture of unvested award if CET1 capital ratio falls below the regulatory minimum capital level (inclusive of a risk buffer of 200 basis points)

yes

yes

Add the Revenue Impairment provision to the EUA and retention periods following vesting of REA tranches for Regulated Employees (6 month period)

yes

 

Revenue Impairment provision also strengthened to allow further “look-back” upon the materialization of legacy losses

yes

yes

Add the Breach of Policy provision to the retention period following vesting of REAs for Regulated Employees (6 month period)

yes

 

Breach of Policy provision also strengthened to apply at lower levels of disciplinary sanction

yes

yes


Key figures comparison

Compare key figures of the past years. more