From Regulatory Constraint to Strategic Advantage: Fractioning Variable Remuneration

In drawing incentive plans consistent with the latest supervisory regulations on remuneration and incentives, the real issue is hardly 'whether' to defer or 'how much' of the bonus to allocate to equity or cash. The real issue is how aligning incentives to real risk and behaviour that matters in the medium to long termAvoiding drifts of opportunism and formal interpretations that do not stand up to scrutiny by authorities and stakeholders.

European and national rules - from CRD IV to the supervisory provisions on variable remuneration - require the adoption of clearly documented remuneration policiesproportionate to the nature and complexity of the intermediary and consistent with risk management.

In this context, the splitting is not a mere technical fulfilmentbut a governance lever: if well designed, it can steer behaviour towards sustainable strategic objectives; if poorly managed, it opens the door to regulatory reprimands, motivational ineffectiveness and weakness in defence in front of the supervisory authority.

Applying proportionality: from theory to practice

The principle of proportionality is not just a theoretical concept to be mentioned in policy documents: it represents a fundamental guide to designing incentive plans consistent with the complexity and actual risk of the intermediary. Applying proportionality means analysing several factors in a structured way: the size of the organisation, the degree of operational complexity, the interconnections between business units and functions, and above all the underlying risk model. Only by understanding these variables is it possible to effectively modulate deferral, splitting and remuneration instruments.

Practical advice:

• It documents motivations and choices on deferment and splitting for each role.
• Construct a clear regulatory narrative, showing awareness of trade-offs.

Risk takers: how to identify them defensibly

Identifying so-called risk takers does not mean simply compiling lists of 'at-risk' corporate roles or positions: it is necessary to apply a structured approach, based on real decision-making power and the actual ability to influence the organisation's risk profile. The aim is to identify who, with their own operational or strategic choices, can generate significant impacts on riskboth financial and reputational, and ensure that remuneration instruments are proportionate and consistent with this level of exposure.

Practical advice:

• It applies clear quantitative and qualitative criteria.
• Involve Risk, Compliance and Internal Audit to validate the choices.
• It documents all decisions and gives reasons for any exclusions.

TSI vs LTI: distinguishing short and long term

When designing incentive plans, it is crucial to understand that STI (Short-Term Incentives) and LTI (Long-Term Incentives) are not interchangeable. Three consecutive annual TSIs are not equivalent to a multi-year LTI: the functioning, risk exposure and effect on behaviour differ substantially.

The TSI are premiums that crystallise immediately, usually annually, linked to short-term results. This structure reduces risk exposure because the reward is paid out quickly and does not remain tied to future scenarios. STIs are effective tools for incentivising immediate results, but if used as the sole mechanism they risk rewarding opportunistic or purely short-term oriented behaviour.

On the contrary, the LTI link the bonus to multi-year performance and often include conditional vesting and retention mechanisms. This means that the actual benefit depends not only on the results achieved, but also on the employee's permanence and behaviour consistent with the intermediary's strategy and risk profile. LTI, therefore, incorporates a higher level of real risk, aligns managers' interests with long-term goals and supports a culture of sustainability and responsibility.

Practical advice:

• Clearly distinguish STI and LTI in the design of the plan.
• Simulate impacts on retention, risk and provisions.
• Explain to management the conceptual differences between fractional STI and LTI.

Malus and clawback: concrete ex post rules

The clauses ex postsuch as malus and clawback, represent key tools for guarding against real risk of variable remuneration plans. These are not formal requirements, but concrete mechanisms that allow the company to intervene even after the bonus has been paid, if opportunistic behaviour, improperly corrected results or events that substantially alter the risk initially assessed emerge.

• The malus allows for the reduction or cancellation of the payment of an award that has not yet been paid, on the basis of negative events or performance that does not meet the established criteria.
• The clawback allows the recovery of already settled premiums, acting retroactively in case of errors, policy violations, misconduct or risk deterioration.

The practical application of these instruments is essential to ensure that variable remuneration remains consistent with actual risk and governance objectives.

Practical advice:

• It applies malus and clawback concretely and documents each intervention.
• It integrates ex post rules into governance to demonstrate their effectiveness.

Integrated Governance: HR, Risk, Compliance and Finance

To design and manage coherent and sustainable variable remuneration plans, a integrated governance cannot be limited to formal procedures or checklists. A real, structured and shared process must be created between all key functions: SOLUTIONS, Risk, Compliance and Finance. This is the only way to ensure consistency between strategic objectives, risk management and incentive instruments, making the plan defensible before the Board, the Supervisory Board and external stakeholders.

Integrated governance makes it possible to

• Quickly identify any inconsistencies or deviations from long-term objectives
• Aligning remuneration choices with the intermediary's strategy and risk profile.
• Ensure transparency and traceability at all stages of the plan.

Practical advice:

• It documents roles, tools and modulation of fractioning.
• It tracks all decisions, calculations and revisions.
• Simulate scenarios (best case, base case, worst case) to verify the soundness of the plan.

Clear Communication: Transparency to Managers and Supervision

La transparent communication is a crucial element for the success of any variable remuneration plan. An opaque or incomprehensible plan generates perceptions of arbitrariness, reduces the motivation of managers and compromises the defensibility of the plan before the board and the supervisory authority. Clarity is not only about the language, but also about the structure of the information, the way it is conveyed and the supporting documentation.

Effective communication must therefore be bilateraltowards the recipients of the plan and towards the governance and supervisory bodies.

Practical advice:

• Towards the recipients: clarifying payoff, downside, accrual, retention and lock-up.
• Towards Board and Supervision: provide technical documentation and scenario simulations to demonstrate consistency between instruments, time horizon and risk profile.

Quick check for consistent and defensible incentive plans

• Reasoned and documented proportionality.
• Defensible and traceable identification of risk takers.
• Clear distinction between TSI and LTI.
• Malus and clawback applied in practice.
• Integrated governance and end-to-end traceability.

HCMS of Alveria: turning fractioning into strategic leverage

HCMS of Alveria you to:

• Automatically apply deferral rules, instruments and ex post clauses.
• Identify target audiences based on role and risk.
• Plotting decisions and simulating STI/LTI scenarios with impacts on retention, risk and provisions.

In this way, splitting becomes coherent, defensible and motivating instrumenttransforming a regulatory obligation into a competitive advantage for risk management and variable remuneration.

Find out how Alveria can optimise the split of your variable remuneration: contact us now for a demo!