BBVA’s remuneration system is applied to the Identified Staff with a number of particular features under a special settlement and payment system for their variable annual remuneration, as explained below. The remuneration system is made up of:
1. Fixed remuneration
Fixed remuneration in BBVA is established by taking into consideration the employee’s level of responsibility and professional career history in the Group. A benchmark salary is fixed for each function that reflects its value for the Organization. This benchmark salary is defined by analyzing what is fair internally and comparing it with the market through the advice of leading firms specializing in remuneration.
The fixed component in the employee’s total remuneration represents a sufficiently high proportion to allow maximum flexibility with respect to the variable components.
2. Variable remuneration
BBVA’s variable remuneration represents a key element in the Bank’s remuneration policy, as it rewards the creation of value in the Group through each of the areas and units that make up BBVA. In short, it rewards individuals and teams and their combined contributions to the Group’s recurrent earnings.
The Annual Variable Remuneration of the Identified Staff in BBVA is made up of ordinary variable remuneration paid in cash and a share-based variable remuneration for the Management Team (hereinafter “Annual Variable Remuneration”). It has been designed to reflect the interests of shareholders, prudent risk management and generation of long-term value for the Bank. The essential aspects of Annual Variable Remuneration are detailed below:
Ordinary variable cash remuneration
BBVA’s ordinary variable remuneration model is based on a series of value creation indicators established for each unit. The variable remuneration to be paid to the members of the unit in question depends on these indicators, and on the results for the unit’s area and those of the Group as a whole. The distribution of the remuneration between the staff members is based on individual performance, which is calculated through an individual evaluation of the indicators.
The unit indicators used are of two types: each unit’s own financial and non-financial indicators.
BBVA considers that prudent risk management is a key element within its variable remuneration policy. That is why it has established recurrent Economic Value Added (EVA) as one of the main financial indicators used to calculate the ordinary variable remuneration of all its workforce.
Technically, EVA is recurring economic profit minus the cost of capital used in each business or the rate of return expected by investors. Economic profit differs from accounting profit because of the use of economic criteria rather than regulatory accounting criteria in some operations.
It can therefore be said that conceptually, EVA is the recurring economic profit generated above market expectations in terms of capital remuneration.
This indicator is considered to be in line with the CEBS Guidelines (1), which has been adopted by the Bank of Spain as an adequate measure of results, as it incorporates adjustments for current and future risks and the cost of capital.
(1) Section 96 of the Guidelines on Remuneration Policies and Practices of the Committee of European Banking Supervisors, dated December 10, 2010.It has also been established that indicators of the units themselves that are responsible for control functions (Internal Audit, Legal Compliance, Global Accounting & Information Management, General Secretary, Risks and Human Resources) should have a greater weight than the financial indicators.
This is in order to make the staff who are responsible for the control functions more independent with respect to the areas supervised.
Thus BBVA’s Ordinary Variable Remuneration combines the employees’ results (financial and non-financial) with those of their unit, the area to which they belong and the Group as a whole; and it uses the EVA indicator, which takes into account both present and future risks, an the capital cost incurred to obtain these profits.
Variable share-based remuneration
BBVA understands that in order to optimize its alignment with the interests of its shareholders and to promote the generation of long-term value, it must maintain a specific variable share-based remuneration system for the Bank’s executive managers (around 2,200 people in 2013), given their special influence on the Group’s strategy and results. This specific variable remuneration is also an essential element in this group is as motivated and loyal to BBVA as possible.
The remuneration is based on an incentive for the management team consisting of an annual allocation to each executive manager of a number of units that will serve as a basis for determining the number of shares to grant at the settlement date of the incentive. The number will be linked to the level of compliance with a series of indicators at Group level, which will be determined every year.
For 2013, the indicators approved by the General Meeting were related to:
- The Total Shareholder Return (TSR), which measures the return on investment for the shareholder as the sum of the change in share price plus dividends and other similar items received by shareholders in a reference period, which for 2013 was from January 1, 2012 to December 31, 2013.
- The Group’s recurring Economic Value Added (EVA) without one-offs. As explained above, this includes adjustments for current and future risks.
- The Group’s net attributable profit without one-offs.
The number of units initially assigned to each beneficiary in the system will be divided into three parts, each associated with a weighted indicator. It will be multiplied by coefficients of between 0 and 2 in accordance with a scale defined annually for each of them.
In the case of TSR the coefficient applied will be zero if the Bank occupies positions below the average of its peer group. This reinforces the alignment of the team’s variable remuneration with shareholder interests.
The same indicators have been maintained for the Incentive for 2014, but the period for measuring the TSR will be three years, from January 1, 2012 to December 31, 2014, thus strengthening the multi-year factor of the remuneration elements.
Settlement and payment system for annual variable remuneration
The Bank has a specific settlement and payment system for annual variable remuneration that applies to the Identified Staff.
This system has been created to promote prudent risk management in the Group. It is adapted to the requirements of Royal Decree 216/2008 and has the following rules:
- At least 50% of the total annual variable remuneration for the members of the management team of the Identified Staff will be paid in BBVA shares.
- 50% of the ordinary variable remuneration for the Identified Staff who are not members of the management will be paid in BBVA shares.
- The payment of 40% of their variable remuneration, both from the part in cash and the part paid in shares, will be deferred. The deferred amount will be paid out in thirds over the next three years. The percentage deferred increases in the case of executive directors and members of the Management Committee, up to 50% of their Annual Variable Remuneration.
- All the shares that are delivered according to the aforementioned rules may not be used for a period of one year starting from the date of their provision. This retention is applied on the net amount of the shares, after discounting the part necessary to make the tax payment for the shares received. Using the shares delivered which are unavailable and the shares pending delivery for hedging purposes is also prohibited.
The deferred parts of the annual variable remuneration will be updated as established by the Board of Directors.
In addition, the Bank’s Board of Directors, acting on a proposal by the Remuneration Committee, has established that the parts of the Annual Variable Remuneration that are deferred and pending payment in accordance with the above rules will not be paid to the members of the Identified Staff if one of the following circumstances occurs before the payment date (“malus clauses”):
i. If the beneficiary has not generated the right to ordinary variable remuneration for the year as a result of the effect on results for the year of transactions accounted for in previous years which generated the right to payment of the ordinary variable remuneration.
ii. If the beneficiary has been sanctioned for a serious breach of the code of conduct or other applicable internal rules, in particular related to risks.
iii. If the contractual relationship has been terminated, except in the case of retirement, early retirement, declaration of permanent incapacity for employment to any degree, or death: in these cases the right to payment shall be maintained under the same terms as if the employee had remained active.
In addition, if in one year the BBVA Group had negative financial results (presented losses), not including one-off results, the beneficiaries will not receive either the Annual Variable Remuneration corresponding to the year of the losses, or the deferred amounts that were payable for the year in which the annual accounts reflecting these negative results were approved.
In any event, the variable remuneration shall be paid only if it is sustainable with respect to the BBVA Group’s situation as a whole and if it is justified by its results.
As indicated, the remuneration system described above is applicable to the Identified Staff, which includes the Bank’s executive directors. However, BBVA’s remuneration policy for members of its Board of Directors distinguishes between the remuneration system of executive directors and that applicable to its non-executive directors.
Thus, the description of the remuneration system applicable to non-executive directors of BBVA is included in detail in the Annual Report on the Remuneration of BBVA Directors. As set out in that Report, non-executive directors do not receive variable remuneration; they receive an annual amount in cash for holding the position of director and another for the members of the various Committees, with a greater weight being given to the exercise of the function of chairman of each committee, and the amount depending on the nature of the functions attributed to each committee.