Performance Measurement


Article 275(2)(b) requires that, where variable remuneration is performance related, the aggregated ‘total amount of variable remuneration’ is to be based on a ‘combination of the assessment of the performance of the individual and of the business unit concerned and of the overall result of the undertaking or the group to which the undertakings belongs’. Performance should also be assessed based on financial and non-financial criteria (Article 275(2)(d)). To encourage positive behaviours or actions, incentive plans should incorporate non-financial criteria, particularly at the individual assessment level. These criteria should include the extent of the employee’s adherence to effective risk management and compliance with the relevant regulatory requirements relating to the activities of the employee in question.


Article 275(2)(e) requires performance measurement as a basis for variable remuneration for Solvency II staff to ‘include a downwards adjustment for exposure to current and future risks, taking into account the undertaking’s risk profile and the cost of capital’. The PRA recognises that, given that the risks faced by Solvency II firms will vary subject to the business models and operational approaches to risk mitigation within the firm, it is appropriate to allow for a degree of flexibility. The PRA will expect firms to be able to demonstrate how they have taken into account the risks they face in the short to long term and the cost of capital when determining variable remuneration at aggregate and individual level. To reflect this requirement, firms should strongly consider incorporating risk-adjusted metrics where risk is calculated as a measure of the return relative to the risk taken over a specified period (eg economic profit). A firm should also apply discretionary factors to the extent that it is appropriate.


A balanced approach comprising both financial and non-financial criteria should be adopted when assessing individual performance for either bonus or LTIP awards. Firms’ attention should be drawn to the current practice in the banking sector whereby the weightings attached to profit measures (eg net income) or value creation measures (eg total shareholder return (TSR) or return on equity (RoE)) are restricted and should be employed only as part of a balanced, risk-adjusted performance scorecard.


Particular care should be taken to ensure that variable remuneration awarded to Solvency II staff identified within the risk management, compliance, internal audit and actuarial functions is not determined using criteria which measure the performance of the operational units or business areas subject to these individuals’ control (Article 275 (2)(h)).


Article 275(2)(f) stipulates that ‘termination payments shall be related to performance achieved over the whole period of activity and be designed in a way that does not reward failure’. Termination payments for Solvency II staff should be fair and proportionate relative to prior performance.