11.3. Key features of the remuneration system

The remuneration system applicable to the Identified Staff in BBVA contains a series of special features as compared with the one applicable to the rest of staff, since a special variable incentive system has been established for this group, aligned with legal requirements, recommendations and best market practices, as described later.

According to BBVA's remuneration policy, 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 in BBVA for 2014 was made up of ordinary variable remuneration paid in cash and a share-based variable remuneration (hereinafter "Annual Variable Remuneration"). It has been designed to reflect the interests of shareholders, prudent risk management and generation of long-term value.

The essential aspects of Annual Variable Remuneration in 2014 are detailed below:

2.a) Ordinary variable remuneration in cash.

BBVA's ordinary variable remuneration model for 2014 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.

As set out in the Guidelines on Remuneration Policies and Practices issued by the Committee of European Banking Supervisors (now the European Banking Association – EBA) on December 10, 2010*), this indicator is regarded as an appropriate way of evaluating results, as it incorporates adjustments for current and future risks and the cost of capital.

It has also been established that indicators of the units 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, and the capital cost incurred to obtain those profits.

*) Section 96 of the Guidelines on Remuneration Policies and Practices of December 2010.

2.b) Variable share-based remuneration.

The variable shared-based remuneration for 2014 has been based on an incentive in shares approved by the management team consisting of an annual allocation to each executive manager of a number of units that served as a basis for determining the number of shares to grant on the date of settlement of the incentive. The number was linked to the level of compliance with a series of indicators at Group level, determined every year.

For 2014, 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 from January 1, 2012 to December 31, 2014.
• 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 in 2014 has been zero, as the Bank has occupied a final position below the average of its peer group set by the Meeting in March 2014. This reinforces the alignment of variable remuneration with shareholder interests.

2.c) Settlement and payment system for annual variable remuneration

According to the specific settlement and payment system for annual variable remuneration in 2014 that applies to the Identified Staff:

• At least 50% of the total variable remuneration in 2014 for the Identified Staff will be paid in BBVA shares.
• 50% of the ordinary variable remuneration for the Identified Staff who do not receive the incentive for the management team will be paid in BBVA shares.
• Payment of 40% of their annual 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 senior management, 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 in 2014 will be updated as established by the Board of Directors.
• Lastly, the variable component of the remuneration for a year for the Identified Staff will be limited to a maximum amount of 100% of the fixed component of total remuneration, except for those positions approved by the General Meeting, which may reach up to 200%.

In addition, 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"):

• If the beneficiary has not generated the right to ordinary variable remuneration for the year as a result of the effect on the year's earnings of transactions accounted for in previous years which generated the right to payment of the ordinary variable remuneration.
• 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.
• 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.

Starting in 2015, and to achieve better alignment with the best market practices, regulatory requirements and internal organization and strategy, the Bank's Board of Directors, at the proposal of the Remuneration Committee, as indicated previously, has approved a series of amendments to the remuneration policy for the Identified Staff for the years 2015, 2016 and 2017, in line with the Remuneration Policy for directors that will be submitted to the General Meeting for consideration. These amendments will involve a series of changes to the described system of settlement and payment of annual variable remuneration for the Identified Staff. These amendments can be summed up as follows:

• The variable components of remuneration (ordinary variable remuneration and incentive in shares) are unified in a single annual incentive based on value creation indicators that combine the employee's results (financial and non-financial) and those of their Unit, the Area they belong to and the Group as a whole (“Annual Variable Remuneration”);
• 50% of the Annual Variable Remuneration will be paid in BBVA shares, taking the share price established by the Board of Directors as a reference for paying the part in shares;
• If the conditions are met, 60% of the Annual Variable Remuneration –50% in the case of executive directors and members of senior management– will be paid in equal parts in cash and in shares during the first quarter of the year following the year in which such remuneration is due;
• The rest will be deferred in its entirety for a period of 3 years, and its accrual and payment will be subject to a series of multiannual indicators related to the performance of the BBVA share and the Group's fundamental risk metrics, calculated over the 3-year period of deferment;
• The multiannual evaluation indicators have associated achievement scales which, in the event of failing to reach the goals set for each one, may reduce the deferred amount of Annual Variable Remuneration, never increase it, and may even result in the loss of the beneficiary's entire deferred amount;
• The shares may not be used for a period of time from their delivery. This retention is applied on the resulting number of shares, after discounting the part necessary to make the tax payment;
• No hedging transactions may be carried out on the shares received as Annual Variable Remuneration or on those deferred and pending receipt;
• Payment of the variable remuneration may be limited or prevented in certain cases (malus clauses);
• The deferred component of the Annual Variable Remuneration finally settled will be updated as established by the Board of Directors; and
• The variable component of the remuneration for a year for the Identified Staff will be limited to a maximum amount of 100% of the fixed component of total remuneration, unless the General Meeting decides to increase that limit to 200%, as set out in Act 10/2014.

As indicated earlier, the remuneration system described applies to the Identified Staff, which includes the Bank's executive directors.

Notwithstanding the foregoing, BBVA's remuneration policy for the members of the Board of Directors makes a distinction between the remuneration system for executive directors and the system applicable to non-executive directors, as set out in the Bank's Bylaws.

A detailed description of the remuneration system applicable to BBVA's non-executive directors is included in the Remuneration Policy for BBVA Directors and in the Annual Report on the Remuneration of Directors. As set out in those documents, non-executive directors do not receive variable remuneration; they receive a fixed 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.

In addition, the Bank has a remuneration system for its non-executive directors with deferred delivery of shares, approved by the Annual General Meeting, that also constitutes fixed remuneration. It consists of the annual allocation to those directors, as part of their remuneration, of a number of “theoretical shares” of the Bank that will be effectively delivered, where applicable, on the date of their termination as directors for any cause other than serious breach of their obligations. The annual number of “theoretical shares” to be allocated to each non-executive director will be equivalent to 20% of the total remuneration in cash received by each in the previous year. This is based on the average closing prices of the BBVA share during the 60 trading sessions prior to the dates of the ordinary General Meetings approving the financial statements for each year.