Prudential Regulation Authority Rulebook

11.1

1. (1) A firm must ensure that any measurement of performance used to calculate variable remuneration components or pools of variable remuneration components:
1. (a) includes adjustments for all types of current and future risks and takes into account the cost and quantity of the capital and the liquidity required; and
2. (b) takes into account the need for consistency with the timing and likelihood of the firm receiving potential future revenues incorporated into current earnings.
2. (2) A firm must ensure that the allocation of variable remuneration components within the firm also takes into account all types of current and future risks.

[Note: Arts. 94(1)(j) and (k) of the CRD and Standard 4 of the FSB Compensation Standards]

[Note: CRD]

11.2

A firm must have a clear and verifiable mechanism for measuring performance, with risk adjustment applied thereafter in a clear and transparent manner.

11.3

A firm must base assessments of financial performance used to calculate variable remuneration components or pools of variable remuneration components principally on profits. To determine profits for this purpose, a firm (other than a branch) must adjust its fair valuation accounting model profit figure by the incremental change in its regulatory prudent valuation adjustment figure across the relevant performance period.

11.4

A firm’s risk-adjustment approach must reflect both ex-ante adjustment (which adjusts remuneration for intrinsic risks that are inherent in its business activities) and ex-post adjustment (which adjusts remuneration for crystallisation of specific risk events).

11.5

A firm must not base the ex-ante risk adjustments referred to in 11.4 on revenue-based measures, except as part of a balanced, risk-adjusted scorecard.

11.6

A firm must ensure that its total variable remuneration is generally considerably contracted where subdued or negative financial performance of the firm occurs, taking into account both current remuneration and reductions in payouts of amounts previously earned, including through malus or clawback arrangements.

[Note: Art. 94(1)(n) of the CRD and Standard 5 of the FSB Compensation Standards]

[Note: CRD]