Regulation of Remuneration at Credit Institutions

The regulation of remuneration at credit institutions Following the global financial crisis of 2007-08, the incentive systems at major financial institu￾tions were one of the areas to come under scrutiny from regulatory and supervisory authorities. The financial crisis highlighted how incentive systems that primarily reward short-term success and that focus exclusively on financial performance targets can result in risks for individual finan￾cial institutions as well as for the financial sector as a whole. However, if these systems are based on long-term performance metrics and take sufficient consideration of both risk exposure and non-financial performance, they can make an important contribution to the long-term success of a financial institution and thus bolster financial stability. Here, particular focus is placed on vari￾able remuneration, commonly referred to as bonuses. This led to the development of dedicated remuneration requirements, which, since the end of 2010, have applied not only to major credit institutions, but to all credit institutions in the Euro￾pean Union (EU). In Germany, these form the basis of a comprehensive and detailed ruleset com￾prising directly applicable European regulations as well as national provisions enshrined in the German Banking Act (Kreditwesengesetz) and the Regulation on the Supervisory Requirements for Institutions’ Remuneration Systems (Remuneration Regulation for Institutions – Institutsvergü￾tungsverordnung). In essence, these requirements ensure that credit institutions’ risk management must include remuneration systems that are appropriate, transparent and oriented towards the institution’s sustainable economic development. More specifically, a distinction is made between require￾ments that apply to all members of staff and those that apply only to key decision-makers, or “risk takers”. Furthermore, for reasons of proportionality, there are also differences depending on whether or not the institution is a significant institution within the meaning of the Banking Act. Larger and more complex, and thus more systemically important, credit institutions are subject to more stringent regulatory and supervisory requirements with regard to their risk management and therefore also their remuneration systems. In this regard, the requirements comprise both material and procedural aspects. Experience from supervisory practice shows that banks and savings banks have made significant progress in ensuring that their remuneration systems are appropriately designed and, in particu￾lar, have integrated their remuneration systems more closely with the other areas of their risk management. To ensure success over the long term, the rules contained in their remuneration policies must be applied consistently by the decision-makers at each credit institution. For this to be the case, changes to the European framework must only be made if they serve a supervisory purpose. This aims to help increase acceptance of the applicable rules among credit institutions and their staff, thus reducing the risk of these being circumvented. In this regard, following the principle of proportional regulation, it is important that smaller credit institutions with less com￾plex business models are exempted from the remuneration regulations to reduce their administra￾tive burdens as far as this is acceptable from a supervisory perspective. Deutsche Bundesbank Monthly Report October 2021 85

Introduction The remuneration of staff at credit institutions is subject to comprehensive prudential regula￾tion, which largely dates back to an inter￾national initiative by the Financial Stability Forum (FSF, now the Financial Stability Board (FSB)) following the global financial crisis of 2007-08. International regulatory and supervis￾ory authorities assessed the systems of financial incentives at major enterprises in the financial sector and ascertained that inappropriate re￾muneration systems led to undesirable risk￾taking and thus contributed to instability in in￾dividual enterprises as well as the financial sys￾tem as a whole. This project resulted in the de￾velopment of the FSF Principles for Sound Compensation Practices, which were expanded the following year to include additional stand￾ards by the FSB.1 As they were approved for adoption in the respective jurisdictions of the G20 countries in April and September 2009, these FSB Principles and Standards (FSB P&S) represent a key milestone in the regulation of remuneration in the global financial sector. The FSB P&S focus on variable remuneration – i.e. bonuses – paid to what are known as “mater￾ial risk takers” at major enterprises in the finan￾cial sector. They are aimed not only at major banks, but also systemically important insur￾ance and investment companies. Risk takers are not limited just to members of manage￾ment, supervisory and administrative boards, but also include any staff members that have a material impact on the risk profile of their re￾spective enterprise. The purpose of regulating remuneration is not to prohibit variable remuneration or to make variable remuneration unattractive. Offering variable remuneration can indeed have bene￾fits. Specifically, provided that the institution’s sustainable2 interests are taken into account and that inappropriate risk-taking is not incen￾tivised, variable remuneration can contribute to the good performance and sound develop￾ment of an institution by setting suitable incen￾tives whereby employees and decision-makers participate in both the success and failure of the business. At the same time, variable remu￾neration allows for cost flexibility and provides institutions the option of sanctioning undesir￾able behaviour, which helps to promote a sus￾tainable corporate culture. While the core principles of the FSB P&S con￾tinue to apply today, international remuner￾ation regulation has evolved continually over the past 12 years, including in the EU and Ger￾many. In the EU, the Capital Requirements Dir￾ective (CRD)3 stipulates that credit institutions must have appropriate remuneration policies and practices.4 This general requirement is complemented by dedicated provisions regard￾ing the remuneration of persons with a mater￾ial impact on the risk profile of the institution, i.e. risk takers.5 In Germany, these requirements are implemented via the Banking Act (Kredit￾wesengesetz) and the Regulation on the Super￾visory Requirements for Institutions’ Remuner￾ation Systems (Remuneration Regulation for In￾stitutions – Institutsvergütungsverordnung). After some of the CRD remuneration require￾ments were amended as part of the European banking package6 in the summer of 2017, the remuneration-specific provisions in the Banking Act were changed accordingly at the end of 2020,7 and the Remuneration Regulation for Institutions was updated only recently.8 These provisions are complemented by disclosure re￾Inappropriate remuneration systems may help create dis￾torted incentives and thus jeop￾ardise financial stability 1 See Financial Stability Board (2009a, 2009b). 2 Within the context of remuneration regulation, the term “sustainability” was added to the Banking Act as early as 2010. It was understood as referring to remuneration sys￾tems that are viable or demonstrably sound over the long term. Although this also covered non-financial aspects such as good conduct from the very beginning, the focus was by and large on long-term performance. In recent years, “sustainability” has been viewed more from an environ￾ment, social and governance (ESG) perspective; these as￾pects are now also being increasingly incorporated into re￾muneration systems. 3 See Directive 2013/36/EU. 4 Article 74 CRD. 5 Articles 92 to 95 CRD. 6 See Deutsche Bundesbank (2019), pp. 31ff. 7 The Banking Act was amended as part of the Risk Reduc￾tion Act (Risikoreduzierungsgesetz). For more information, see Deutsche Bundesbank (2020), pp. 56 f. 8 Third Regulation amending the Remuneration Regulation for Institutions of 20 September 2021 (Federal Law Gaz￾ette, part I, No 67, 24 September 2021, pp. 4308 ff.). Deutsche Bundesbank Monthly Report October 2021 86

quirements in the European Capital Require￾ments Regulation (CRR).9 As is the case for two remuneration-related regulations from the European Commission,10 the CRR applies to credit institutions directly and therefore does not need to be transposed into German law.11 Basic principles of regulating remuneration at credit institutions The most important basic principle of regulat￾ing remuneration at credit institutions in Ger￾many is found in Section 25a of the Banking Act, which stipulates that banks and savings banks must ensure, as part of proper business organisation, that they have appropriate and effective risk management that comprises, amongst other things, appropriate and trans￾parent remuneration systems for both manage￾ment board members and staff geared to the institution’s sustainable development.12 This core regulation is complemented by further provisions in the Banking Act and, in particular, in the Remuneration Regulation for Institutions. Here – in line with the notion of proportional regulation  – a distinction is drawn between general requirements that fundamentally apply to all institutions13 and their staff and members of their management boards, and special re￾quirements that only apply to larger institutions (known as “significant institutions”14) and their risk takers.15 The general requirements set out in the Bank￾ing Act include a restriction on variable remu￾neration, known as the bonus cap.16 This pro￾hibits banks and savings banks from paying their staff or members of their management boards variable remuneration totalling more than 100% of their fixed remuneration each year. Variable remuneration may total up to 200% of fixed remuneration only with the ap￾proval of the shareholders and only if it is com￾patible with the requirement to maintain cap￾ital adequacy. This infringement on the free￾dom of contract is an EU-specific regulation for credit institutions and has been in effect since 2014. Exemptions and/or special calculation methods are only permissible in specific cases.17 In the German implementation of the require￾ments, the bonus cap and the general require￾ments of the Remuneration Regulation for In￾stitutions apply to all of a credit institution’s staff members, even though most of the CRD remuneration requirements are directed only towards risk takers. However, in its guidelines on sound remuneration policies, the European Banking Authority (EBA)18 recommends that bonus caps should be applied to all members of staff.19 While a maximum ratio of 200% may seem high at first glance, the European bonus cap Remuneration systems that are appropriate, transparent and oriented towards the institution’s sustainable development Restriction on variable remu￾neration for staff and members of the manage￾ment board 9 See Regulation (EU) No 575/2013. 10 Commission Delegated Regulation (EU) 2021/923 of 25  March 2021 and Commission Delegated Regulation (EU) No 527/2014 of 12 March 2014. 11 In addition, further requirements are set out, for ex￾ample, in Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (MiFID) and also in generally applicable legisla￾tion such as labour law. These are not discussed here. 12 Section 25a(1) sentence 3 number 6 of the Banking Act. 13 Beyond credit institutions, financial services institutions are also considered “institutions” within the meaning of the Banking Act and the Remuneration Regulation for Insti￾tutions. However, some financial services institutions are partially or fully exempted from the remuneration require￾ments. Leasing and factoring enterprises, for example, are exempted by Section 2(7a) of the Banking Act and Section 1(1) sentence 2 of the Remuneration Regulation for Institu￾tions. 14 An institution qualifies as significant, inter alia, if its total assets average at least €15 billion over the last four finan￾cial years (see Deutsche Bundesbank (2020), p. 52). 15 Deviating from this basic principle, the Third Regulation amending the Remuneration Regulation for Institutions amended Section 1(3) of the Remuneration Regulation for Institutions so that certain non-significant institutions are also subject to some of the special requirements pursuant to the Remuneration Regulation for Institutions. 16 Section 25a(5) of the Banking Act. 17 For example, certain severance payments are exempted by Section 5(6) sentence 5 of the Remuneration Regulation for Institutions, and sign-on bonuses and similar payments are exempted by Section 5(5) sentence 3 of the Remuner￾ation Regulation for Institutions. In the case of multi-year retention bonuses, institutions can choose how to take ac￾count of these payments with regard to the bonus cap (Section 5(7) sentence 3 of the Remuneration Regulation for Institutions). 18 For more information on the European Banking Author￾ity and its regulatory work, see Deutsche Bundesbank (2011), pp. 86 ff. 19 EBA guidelines on sound remuneration policies in accordance with Directive 2013/36/EU of 2  July 2021, Annex 1, p. 87. Deutsche Bundesbank Monthly Report October 2021 87

for banks in fact represents a significant in￾fringement on their remuneration practices when compared with other financial services sectors and other jurisdictions. For example, much higher ratios of variable to fixed remu￾neration can typically be seen in the area of asset management, in particular. Among the banks inspected by European supervisors on behalf of the EBA, this business area had the highest ratio of variable to fixed remuneration at more than 300% on average of all banks.20 For subordinated investment management companies, the only remuneration require￾ments that apply are those from the sector￾specific Directives,21,22 which do not contain any requirements equivalent to the bonus cap. Due to the special oversight functions of ad￾ministrative and supervisory boards, the Bank￾ing Act has completely forbidden variable com￾ponents of remuneration for members of these boards since the end of 2016.23 Even before that time, the remuneration of board members was not allowed to cause any conflicts of inter￾est with respect to their oversight functions. Furthermore, as members of administrative and supervisory boards are considered risk takers, they are subject to disclosure and reporting re￾quirements. However, the Remuneration Regu￾lation for Institutions is not applicable to these persons. As most of the provisions in that regu￾lation relate to variable remuneration, there would be almost no scope for application in any case. General requirements for the appropriate design of remuneration systems in the Remuneration Regulation for Institutions The general requirements of the Remuneration Regulation for Institutions contain a compre￾hensive list of definitions. This is intended to help ensure clarity and legal certainty, and thus also reduce the risk that the rules will be cir￾cumvented. First, the Remuneration Regulation for Institutions sets out which payments and benefits must be considered remuneration and are thus subject to its provisions.24 Remuner￾ation within the meaning of the Remuneration Regulation for Institutions is not only the salary paid out via payroll accounting, but also in￾cludes all financial and non-financial benefits received by a staff member or member of the management board in respect of their profes￾sional activities for the institution. This means that, fundamentally, all ancillary benefits – such as benefits in kind, including the use of a com￾pany car or pension benefits – also fall under the definition of remuneration.25 This also ap￾plies if the benefits are provided by a third party. In this context, all components of remu￾neration must be allocated to either fixed or variable remuneration; in cases of doubt, remu￾neration components must be allocated to vari￾able remuneration.26 Any remuneration estab￾lished in a collective agreement or on the basis of a collective agreement is exempt from the requirements of the Remuneration Regulation for Institutions. Only the disclosure require￾ments apply in these cases.27 Prohibition of variable remu￾neration for members of administrative and supervisory boards “Remuneration” is not only salar￾ies, but all bene￾fits received by staff in respect of their profes￾sional activities 20 See European Banking Authority (2021a). 21 These are Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and admin￾istrative provisions relating to undertakings for collective in￾vestment in transferable securities (UCITS Directive) and Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/ 65/EC and Regulations (EC) No  1060/2009 and (EU) No 1095/2010 (AIFM Directive). 22 Since 2019, a corresponding explicit exemption has been included in Article 109(4) of Directive 2013/36/EU. In￾dividual Member States – including Germany – had already provided for equivalent exemptions for subordinated in￾vestment management companies. 23 Section 25d(5) sentence 4 of the Banking Act; accord￾ing to the explanatory memorandum of the Financial Mar￾ket Stabilisation Agency New Regulation Act (FMSA-Neu￾ordnungsgesetz), attendance fees are to be allocated to fixed remuneration. 24 Section 2(1) of the Remuneration Regulation for Institu￾tions. 25 Exemptions have been granted only to a limited extent (see Section 2(1) sentence 2 of the Remuneration Regula￾tion for Institutions). 26 Section 2(2) and (6) of the Remuneration Regulation for Institutions. 27 Section 1(4) of the Remuneration Regulation for Institu￾tions. Deutsche Bundesbank Monthly Report October 2021 88

Risk takers Unlike the Financial Stability Board (FSB),1 whose principles and standards provide no more than general guidance on identifying what it calls “material risk takers”, the Euro￾pean Union has had uniform provisions for the identifi cation of these individuals in place since 2014. The European Commis￾sion has issued a Delegated Regulation to supplement the provisions set out in the Capital Requirements Directive (CRD).2 This Commission Delegated Regulation formu￾lates quantitative and qualitative criteria be￾yond those of the CRD that institutions should apply when identifying risk takers – that is, “categories of staff whose profes￾sional activities have an impact on the insti￾tution’s risk profi le”.3 In German law, the rules governing the identifi cation of risk takers have been im￾plemented in Section 25a(5b) in conjunc￾tion with Section 1(21) of the Banking Act (Kreditwesengesetz), taking into account considerations of proportionality. According to these provisions, only signifi cant institu￾tions within the meaning of Section 1(3c) of the Banking Act4 are required to perform a complete identifi cation of risk takers and thus apply the criteria laid down in Commis￾1 See Financial Stability Board (2009a, 2009b). 2 See Directive 2013/ 36/ EU. 3 The CRD does not use the term “risk taker”, describ￾ing these individuals instead as “categories of staff whose professional activities have a material impact on the institution’s risk profi le” (see Article 92(1) of the CRD). In the German legal context, “risk taker” is re￾garded as an equivalent term for this group of individ￾uals, while the European Banking Authority (EBA) calls them “identifi ed staff”. 4 An institution qualifi es as signifi cant, inter alia, if its total assets average at least €15 billion over the last four fi nancial years (see Section 1(3c) of the Banking Act). Criteria for identifying risk takers 1 Section 1(3d) of the Banking Act defines CRR credit institutions as all credit institutions within the meaning of Article 4(1) point (1) of the CRR. 2 These terms are defined in Commission Delegated Regulation (EU) 2021/923. Deutsche Bundesbank All CRR credit institutions1 and all significant non-CRR credit institutions pursuant to Section 1(3c) of the Banking Act are required to identify the following persons as risk takers: All significant institutions pursuant to Section 1(3c) of the Banking Act are furthermore required to perform a complete identification of their risk takers: Section 1(21) of the Banking Act: Section 25a(5b) sentence 1 of the Banking Act: Section 25a(5b) sentence 2 of the Banking Act: – Members of the management board within the meaning of Section 1(2) of the Banking Act – Members of the administrative or supervisory board within the meaning of Section 25d of the Banking Act Additional own risk analysis to identify risk takers based at least on the criteria of Commission Delegated Regulation (EU) 2021/923 – Staff members immediately below management board level (senior managers) – Staff members with managerial responsibility2 for the control functions2 or material business units2 of the institution – Staff members with remuneration in the previous year of at least €500,000, provided: a) said remuneration equals at least the average remuneration of the members of the management board and of the administrative or supervisory board as well as of the institution’s staff members immediately below management board level (senior managers), and; b) the staff members carry out professional activities in a material business unit and said activities have a material impact on the risk profile of that business unit2 . + Deutsche Bundesbank Monthly Report October 2021 89

sion Delegated Regulation (EU) 2021/ 923.5 By contrast, all other institutions are only expected to apply the criteria set out in the CRD, as implemented in the Banking Act. In addition, they are required to apply only the defi nitions contained in Commission Dele￾gated Regulation (EU) 2021/ 923. The identi￾fi cation criteria set out in the Banking Act thus already capture all major decision￾makers, including those at smaller institu￾tions. These individuals include not only the members of management boards and ad￾ministrative or supervisory boards, but also staff members immediately below manage￾ment board level (senior managers) as well as individuals with managerial responsibility for material business units and internal con￾trol functions, amongst others. For the vast majority of non- signifi cant credit institutions, the sole implication of identifying their risk takers is that they have to comply with the disclosure requirements set out under Article 450 of the Capital Re￾quirements Regulation (CRR).6 Only for the handful of non- signifi cant credit institutions that fall within the scope of the new Sec￾tion 1(3) of the Remuneration Regulation for Institutions (Institutsvergütungsverord￾nung) 7 are the consequences material in na￾ture. This proportionate implementation of the CRD requirements is appropriate, par￾ticularly since most of the remuneration re￾quirements in Germany, including the bonus cap, have to be applied explicitly to all staff members. Articles 5 and 6 of Commission Delegated Regulation (EU) 2021/ 923 formulate more extensive qualitative and quantitative cri￾teria that have to be applied by signifi cant institutions under Section 1(3c) of the Bank￾ing Act to identify additional staff members as risk takers. While Article 5 is based on the staff mem￾bers’ responsibilities, Article 6 focuses on individuals awarded particularly high amounts of annual remuneration. For these latter individuals, institutions must again examine whether their professional activ￾ities have a signifi cant impact on the risk profi le of a material business unit. If this is not the case, the members of staff con￾cerned do not need to be identifi ed as risk takers. For members of staff with annual re￾muneration above the threshold of €750,000, prior approval of the competent authority is required if the institution does not intend to identify these individuals as risk takers. For credit institutions with at least 1,000 staff members, this requirement also applies when the staff members in question earn less than €750,000 per year in absolute terms, but are within the 0.3% of staff members awarded the highest re￾muneration within the credit institution. 5 Commission Delegated Regulation (EU) 2021/ 923 of 25  March 2021 only entered into force on 14  June 2021. The previous Commission Delegated Regulation (EU) No  604/ 2014 ceased to be valid on the same date. The references in the Banking Act to this invalid piece of legislation still need to be updated accord￾ingly. 6 See Regulation (EU) No 575/ 2013. 7 These are either CRR institutions at the consolidated or sub- consolidated level with total assets of more than €30 billion or CRR institutions with total assets of more than €5 billion on a four- year average that do not satisfy the conditions of letters (c) to (e) under the defi nition of small and non- complex institutions pursuant to Article 4(1) point (145) of Regulation (EU) 575/ 2013. Based on the institutional data as at 31 De￾cember 2020, a dozen credit institutions are likely to fall within this category. Deutsche Bundesbank Monthly Report October 2021 90

Alongside the definition of remuneration, the definition of “staff members” is also key. The Remuneration Regulation for Institutions uses a broad definition of staff members.28 This means that staff members not only include persons directly employed by the credit institution, but also all natural persons the credit institution avails itself of in conducting banking business or providing financial services. This also covers intra-group secondments and outsourcing, for example. As a result, credit institutions must ensure in their outsourcing contracts that the external counterparties observe the prudential remuneration requirements. In practice, this re￾quirement sometimes makes it very challenging for banks and savings banks to find a suitable counterparty that is willing to accept such an obligation. All banks and savings banks must ensure that their remuneration strategy and remuneration systems are aligned with their institution￾specific business and risk strategies. Remuner￾ation systems also need to be geared towards the given credit institution’s corporate values and culture, including its risk culture, and be in line with its long-term interests. Amongst other things, this means that the remuneration par￾ameters29 have to support the achievement of strategic objectives. They also need to take in￾curred risks into account. Relying solely on metrics without appropriate risk adjustment for earnings, turnover figures or share values, for example, is not permitted. Given this orientation towards institution￾specific strategies, an “ideal” level of variable remuneration is not defined from a regulatory perspective. Rather, each credit institution is obliged to determine the maximum ratio be￾tween variable and fixed remuneration, i.e. the appropriate maximum level, for that institution specifically.30 This maximum level not only has to be in line with the aforementioned bonus cap pursuant to the Banking Act, it must also take account of the business activities and risks of the given credit institution or business area, and of the role of the given person and their in￾fluence on the risk profile. This means that there may well be different maximum levels within a single credit institution. In their remuneration practices, credit institu￾tions not only need to observe the previously defined maximum level, they also need to en￾sure that the amount of variable remuneration is determined on the basis of the previously de￾fined remuneration parameters. Furthermore, each credit institution must check how much of its “bonus pool”, i.e. the “total amount of variable remuneration within a financial year”, it can actually “afford”. While the FSB P&S and the CRD only contain rough guidelines on this, Section 7 of the Remuneration Regulation for Institutions stipulates various criteria that are to be checked when determining the bonus pool. First, the regulatory capital requirements must be adhered to. Second, the institution must also adopt a broadened economic perspective that takes internal capital adequacy, the profit situation and multi-year capital planning into consideration. Ultimately, adequate liquidity re￾sources need to be ensured. One of the lessons learned from the 2007-08 financial crisis was that variable remuneration did not always adequately respond to poor performance or conduct. Since the reform of the provisions governing remuneration, vari￾able remuneration has therefore had to be de￾signed to be completely flexible. This means that it must be possible to reduce the variable remuneration up to the point of cancelling it completely in order to respond to changes in the performance of staff members or members of the management board, the business unit and/or the credit institution. This not only ap￾plies if the aforementioned review pursuant to Remuneration Regulation for Institutions uses broad definition of staff members Alignment with strategies Appropriate maximum level and determining the bonus pool Negative per￾formance or misconduct must lead to a reduction in variable remuneration 28 Section 2(7) of the Remuneration Regulation for Institu￾tions. 29 Remuneration parameters are the parameters used to measure performance that are to be drawn on in determin￾ing the amount of variable remuneration. The remuner￾ation parameters are also referred to as key performance indicators (KPI). 30 Section 6 of the Remuneration Regulation for Institu￾tions. Deutsche Bundesbank Monthly Report October 2021 91

Section 7 of the Remuneration Regulation for Institutions is negative, but also in the case of misconduct on the part of staff members or members of the management board. For ex￾ample, unethical or non-compliant behaviour, in particular, must lead to a reduction in the variable remuneration, or to its complete can￾cellation, and this may not be otherwise offset through positive performance.31 In this respect, guaranteed variable remuneration is generally not permissible. The Remuneration Regulation for Institutions contains special provisions for certain forms of variable remuneration. For instance, guaran￾teed bonus payments within the first year of employment are excluded from the aforemen￾tioned ban on guarantees.32 These payments are typically a form of variable remuneration granted to staff members or members of the  management board on top of their performance-related variable remuneration as a sign-on bonus, or the guarantee of a min￾imum amount of variable remuneration for the first months of employment, irrespective of whether the agreed performance goals are ac￾tually achieved. Furthermore, the Remuner￾ation Regulation for Institutions permits reten￾tion bonuses in exceptional cases.33 These are a form of variable remuneration paid to staff members or members of the management board for the purpose of tying them to the credit institution for a specific period of time. This is conditional on the credit institution being able to justify its legitimate interest in awarding the bonus and to demonstrate that it is in line with its business strategy. Moreover, the retention bonuses need to be affordable for the credit institution and they must not be a vehicle for offsetting any cancellation of the ordinarily envisaged variable remuneration. Fi￾nally, the Remuneration Regulation for Institu￾tions also creates a framework for severance payments.34 Within the meaning of the Remu￾neration Regulation for Institutions, this refers to all remuneration payments that staff mem￾bers or members of the management board re￾ceive in connection with the early termination of the employment, agency or service contract. Credit institutions must therefore ensure, inter alia, that principles for severance payments are established that set out either a maximum amount or criteria for determining severance amounts, and that internal processes govern￾ing severance payments are put in place. Ultim￾ately, certain severance payments can be deemed appropriate a priori, meaning that they do not have to be counted towards the bonus cap and that other requirements under the Remuneration Regulation for Institutions can be waived. All other severance payments must be notified to the supervisory authority in advance, stating the reasons for awarding the payment and the appropriateness of the amount in order to claim this privilege. Requirements for the remuneration of certain categories of staff In addition to other general provisions, the Re￾muneration Regulation for Institutions also sets out additional provisions, applicable to all banks and savings banks, for certain categories of staff. For staff in control units, stricter rules apply, for example, regarding the maximum amount of variable remuneration. Because of their particular oversight functions and to en￾sure their independence, most of their remu￾neration must fall under the fixed component. In its interpretation guide on the Remuneration Regulation for Institutions, the Federal Financial Supervisory Authority (BaFin) explains that the variable component should typically not exceed one-third and under no circumstances should it exceed 50% of the total remuneration of the staff member concerned.35 Furthermore, con￾Requirements for certain payment types: sign-on bonuses, retention bonuses and severance payments Special provi￾sions for the remuneration of control units, sales staff and management board members 31 Section 5(2) of the Remuneration Regulation for Institu￾tions. 32 Section 5(5) of the Remuneration Regulation for Institu￾tions. 33 Section 5(7) of the Remuneration Regulation for Institu￾tions. 34 Section 5(6) in conjunction with Section 2(5) of the Remuneration Regulation for Institutions. 35 See Federal Financial Supervisory Authority (2018), p. 30. Deutsche Bundesbank Monthly Report October 2021 92

flicts of interest are also to be avoided by en￾suring that the remuneration parameters of the control units are not synchronised with those of the units they control. This also applies to the member of the management board respon￾sible for risk management. Conflicts of interest are also to be avoided in the remuneration of sales staff. Their remuneration systems are to be designed in such a way that consumer rights and interests are taken into account. In particu￾lar, the use of solely quantitative remuneration parameters – such as those geared exclusively towards sales – is not permissible. The require￾ments for staff members providing advisory services in connection with consumer credit agreements relating to immovable property are stricter still. In these cases, remuneration may not be linked in any way to sales targets for these agreements. The same also applies to staff members that perform the creditworthi￾ness assessment for consumer credit agree￾ments relating to immovable property.36 Special provisions are in place not least for the remuneration of members of management boards at all banks and savings banks.37 Their variable remuneration must be based on a multi-year assessment. According to BaFin’s in￾terpretation guide on the Remuneration Regu￾lation for Institutions, this means that the vari￾able remuneration participates in negative de￾velopments for a period of at least three years.38 This can be enabled through ex ante or ex post arrangements. Furthermore, two prin￾ciples in the Remuneration Regulation for Insti￾tutions have been taken from stock corpor￾ation legislation and thus apply to all credit in￾stitutions regardless of their legal form. First, the total remuneration must be commensurate with the corresponding tasks and performance of the respective members of the management board and with the credit institution’s situation. Second, the total remuneration may not ex￾ceed typical remuneration without special justi￾fication. It remains to be seen whether and to what extent the practical application of these principles in the supervision of institutions will have a restrictive effect. Special requirements for the appropriate design of remuneration systems in the Remuneration Regulation for Institutions Unlike the general requirements mentioned above, the special requirements of the Remu￾neration Regulation for Institutions are to be applied specifically to the risk takers of signifi￾cant credit institutions within the meaning of Section 1(3c) of the Banking Act, and in some cases to certain other credit institutions that are not significant. Among the material re￾quirements, the main focus is on the ex ante and ex post risk adjustment of variable remu￾neration. Ex ante risk adjustment refers to the determin￾ation of the amount of variable remuneration. This means that the risk taker’s performance at the time of the determination, including all cur￾rent and future risks incurred, needs to be taken into account. The performance measure￾ment includes both the risk taker’s perform￾ance contribution and that of the respective business unit, as well as the overall perform￾ance of the institution or group. The perform￾ance contribution is to be measured using spe￾cific, previously agreed targets. The perform￾ance measurement is to be based on quantita￾tive as well as qualitative, and financial as well as non-financial remuneration parameters. In general terms, the remuneration parameters used at all three levels should, in particular, be consistent with the objective of long-term suc￾cess. Above all, these parameters should take into account incurred risks and their associated time horizons, as well as capital and liquidity costs. Ultimately, as outlined above, the risk taker’s conduct should also be factored in, as Ex ante risk adjustment by way of perform￾ance measure￾ment using risk-adjusted remuneration parameters 36 Section 5(1) numbers 3 to 5 of the Remuneration Regu￾lation for Institutions. 37 Section 10 of the Remuneration Regulation for Institu￾tions. 38 See Federal Financial Supervisory Authority (2018), p. 31. Deutsche Bundesbank Monthly Report October 2021 93

improper conduct must at least lead to a re￾duction in the variable remuneration paid. A comprehensive performance measurement of this kind is only effective if it covers a suffi￾ciently long accrual period. For risk takers below the level of the management board, this period must be a minimum of one year, while for members of the management board, it must cover at least three years. The perform￾ance or risk adjustment of risk takers’ variable remuneration is not yet finalised after this period, however, as it is then followed by the ex post risk adjustment, subject to a waiver threshold depending on the variable remuner￾ation. Once variable remuneration has been deter￾mined, the period of ex post risk adjustment begins. This is based on three components: de￾ferral of variable remuneration in conjunction with malus arrangements, payment in the form of instruments and a clawback mechanism to reclaim any variable remuneration already paid out. Deferral primarily means that risk takers cannot claim a portion of the calculated variable remu￾neration immediately, but only after a deferral period. This period must last at least four or five years. The minimum proportion of variable re￾muneration to be deferred varies from 40% to 60% depending on the category of risk taker and the amount of variable remuneration.39 During the deferral period, this amount may be paid out in linear instalments at most. Backtest￾ing is to be conducted before an instalment is paid out. This means that credit institutions have to check whether the original perform￾ance measurement still holds. Furthermore, the payment of the instalment has to be compat￾ible with the credit institution’s current situ￾ation after reviewing the criteria under Section 7 of the Remuneration Regulation for Institu￾tions. If one of these criteria have not been met, a malus is applied, which means that the deferred component is reduced (explicit risk ad￾justment). For each instalment that is paid out, at least half of it must be paid out as an instrument that reflects the credit institution’s long-term growth (implicit risk adjustment). The choice of instrument depends largely on the credit insti￾tution’s legal form. As such, they are frequently not “financial instruments” in the traditional sense. Although listed credit institutions can make the payment in the form of shares or share-linked instruments (such as phantom stocks40), other credit institutions usually choose contractual arrangements. These are contracts which set the criteria for measuring long-term equity value and thus the “instru￾ment”, usually depending on the development of certain financial and regulatory ratios. Com￾mon to all instruments is that they are to be subject to a vesting period of at least one year upon being paid out. Although no malus is ap￾plied during the vesting period, the instrument is subject to fluctuations in value – in both di￾rections – during this period. Since 2017, these components have been sup￾plemented by a clawback mechanism.41 This means that, in certain cases, variable remuner￾ation already paid out must be recalled. This applies for a period of two years beyond the respective total deferral period of granted vari￾Ex post risk adjustment based on defer￾ral, payment in instruments, and malus and clawback Deferral extends the period of explicit risk adjustment Through pay￾ments in the form of instru￾ments, risk takers implicitly participate in the institution’s success or failure 39 Depending on the position, duties and activities of a risk taker as well as the amount of variable remuneration and the risks that a risk taker may establish, the minimum length of the deferral period increases to up to five years and the proportion of variable remuneration to be deferred rises to at least 60% (Section 20(1) sentence 2 of the Re￾muneration Regulation for Institutions). In the case of members of the management board and members of the next lower management level, at least 60% of variable re￾muneration must be spread over a deferral period of at least five years (Section 20(2) of the Remuneration Regula￾tion for Institutions). The institution also has to set a thresh￾old value for “high variable remuneration”, above which the proportion of variable remuneration to be deferred rises to at least 60% (Section 20(3) of the Remuneration Regulation for Institutions). 40 With phantom stocks, staff members or members of the management board do not receive real shares, but only fictitious ones. Their value is, however, geared to the ex￾change price of the underlying share, e.g. to its average price over a certain period prior to the variable remuner￾ation being granted. 41 Section 20(6) of the Remuneration Regulation for Insti￾tutions. Deutsche Bundesbank Monthly Report October 2021 94

Risk adjustment of variable remuneration for a risk taker The below chart shows the payment regime for a risk taker who is not a member of the management board or of the next lower man￾agement level. In such cases, the minimum deferral period is four years and the minimum proportion of variable remuneration to be de￾ferred is 40%. An example: The variable remuneration calcu￾lated for the year t0 is €100,000. Payment regime:

1. Of the €100,000, the risk taker is paid a maximum of €30,000 in cash at time t0+x, the date the variable remuneration is cal￾culated.
2. A further €30,000 is paid out in instru￾ments in accordance with Section 20(5) of the German Remuneration Regulation for Institutions (Institutsvergütungsverord￾nung), with a retention period of at least one year.
3. The remaining sum of €40,000 must then be deferred over a period of at least four years.
4. Should a linear pro rata payment structure be used, the risk taker receives €10,000 after the fi rst year, at time t1+x, so long as backtesting does not produce a malus. Of this amount, €5,000 is paid in cash and €5,000 is paid in the aforementioned in￾struments with a retention period of at least one year. This is repeated after two, three and four years.
5. For at least six years after the calculation of the variable remuneration at time t0+x, the institution must check whether the ac￾tions of the risk taker meet the criteria in Section 18(5) sentence 3 Nos 1 and 2 of the Remuneration Regulation and, where relevant, undertake to reclaim the entire amount of variable remuneration – includ￾ing any amounts already paid out  – through clawback and malus arrange￾ments. One possible alternative to the payment model described under point 4 is cliff vesting. In this model, the risk taker only receives the deferred variable remuneration once the en￾tire deferral period is over, after successful backtesting. Half of this sum must still be paid out in instruments with a one- year retention period. Of course, other payment models are permitted, as long as they fall somewhere be￾tween the linear pro rata and cliff vesting vari￾ants. Example payment regime for variable remuneration of risk takers Deutsche Bundesbank 0 20 40 60 80 100 t6 + x t5 + x t4 + x t3 + x t2 + x t1 + x t– 1 t0 t0 + x Retention period Retention period Retention period Retention period Retention period Upfront payment 50% each 50% 50% Backtesting Deferral Accrual period ... instruments (e.g. shares) ... cash Date the upfront payment is paid Calculated variable remuneration (%) Clawback of up to 100% possible Deferral period (malus, where applicable) Payment in ... Deutsche Bundesbank Monthly Report October 2021 95

able remuneration.42 This clawback arrange￾ment is only legally envisaged in cases of ser￾ious misconduct or in cases where conduct has resulted in material regulatory sanctions, ma￾terial supervisory measures or considerable losses.43 Clawbacks are still considered to be one of the most controversial requirements as they are difficult to implement under labour law. That said, regulators and supervisors are convinced of their usefulness because they act as a deterrent. Moreover, malus and clawback requirements force credit institutions to de￾velop specific concepts of what constitutes un￾acceptable behaviour. In terms of the impact that the ex ante and ex post risk adjustment has on risk management at credit institutions, it should be noted that the requirements are complex and place a con￾siderable administrative burden on credit insti￾tutions. In this regard, the restriction of these requirements to risk takers at significant institu￾tions pursuant to Section 1(3c) of the Banking Act takes into account the principle of propor￾tionality. Extending the application of these re￾quirements to all credit institutions would, on account of the associated administrative costs, lead to greater restructuring of remuneration systems in favour of fixed remuneration com￾ponents. Since ex post risk adjustment, in par￾ticular, entails high administrative costs and at the same time can probably only take effect above a certain amount, the Remuneration Regulation for Institutions provides an exemp￾tion threshold depending on the amount of variable remuneration. Corporate governance requirements The material requirements outlined above are augmented by rules relating to governance. In line with general corporate governance prin￾ciples, the management board is responsible for remuneration systems for staff members, while the administrative or supervisory board is responsible for remuneration systems for mem￾bers of the management board.44 The adminis￾trative or supervisory board also monitors the remuneration systems for staff members. In practice, this means that important decisions require the explicit support of the management board and administrative or supervisory board. These include not only radically redesigning a remuneration system, but also the annual deci￾sion on the bonus pool or the variable remu￾neration of senior managers directly below the management board level. To ensure that remuneration systems are ap￾propriately linked up with the other areas of risk management at a credit institution, the in￾ternal control units and the human resources function must be involved in decision-making processes, within the scope of their duties. For example, the risk control function should play a supporting role in defining appropriate risk￾based remuneration parameters and provide information relevant to this. As outlined above, the material and also governance-related requirements increase in line with the size and complexity of credit insti￾tutions. The administrative or supervisory board of a significant institution pursuant to Section 1(3c) of the Banking Act is required to appoint from among its members a remuneration con￾trol committee.45 This committee prepares de￾cisions of the administrative or supervisory board on the remuneration of members of the management board and monitors the appro￾priateness of remuneration systems for staff members and for the management board. The intention behind this is to enable these issues to be addressed more deeply and in more de￾tail than would normally be possible within the administrative or supervisory board. However, Responsibility for appropriateness lies with man￾agement board or administrative or supervisory board Involvement of control units in decision-making processes Remuneration control commit￾tee and remu￾neration officer at significant institutions 42 For example, if the agreed deferral period for members of the management board corresponds to the minimum re￾quirement of five years, the minimum period for a claw￾back arrangement is seven years. 43 Section 18(5) sentence 3 of the Remuneration Regula￾tion for Institutions. 44 Section 3 of the Remuneration Regulation for Institu￾tions in conjunction with Sections 25a and 25d of the Banking Act. 45 Section 25d(7) and (12) of the Banking Act. Deutsche Bundesbank Monthly Report October 2021 96

Third Regulation amending the Remuneration Regulation for Institutions of 20 September 2021 The Third Regulation amending the Remuner￾ation Regulation for Institutions (Institutsver￾gütungsverordnung) of 20  September 2021 served the primary purpose of implementing changes resulting from the amendment of the Capital Requirements Directive (CRD)1 in 2019.2 The amendments to the Remuneration Regu￾lation for Institutions supplement the amend￾ments to the Banking Act (Kreditwesengesetz) that entered into force at the end of 2020. These amendments largely concern the follow￾ing matters: – extending some of the special requirements regarding risk adjustment pursuant to Section 1(3) of the Remuneration Regulation for Insti￾tutions to cover those CRR institutions3 that do not qualify as signifi cant institutions under Section 1(3c) of the Banking Act but none￾theless fulfi l certain secondary conditions;4 – introducing the requirement to operate gen￾der neutral remuneration policies and prac￾tices for staff members and members of the management board in Section 5(1) number 6 of the Remuneration Regulation for Institu￾tions – the corresponding arrangement for members of the supervisory or administrative board is governed by Section 25d(5) sentence 3 of the Banking Act; – adjusting the disclosure requirements in Sec￾tion 16(2) of the Remuneration Regulation for Institutions for institutions that do not qualify as signifi cant institutions under Section 1(3c) of the Banking Act, in particular the abolition of additional disclosure requirements for un￾listed small and non- complex institutions; – adjusting the threshold stated in Section 18(1) of the Remuneration Regulation for In￾stitutions such that the annual variable remu￾neration of a risk taker is not only not permit￾ted to exceed the threshold of €50,000, but also does not represent more than one- third of the staff member’s total annual remuner￾ation so as to remain exempt from the re￾quirements of Sections 20 and 22 of the Re￾muneration Regulation for Institutions; – extending the minimum length of the defer￾ral period from three years to four years in Section 20(1) of the Remuneration Regulation for Institutions; – adjusting the group- wide remuneration rules in Section 27 of the Remuneration Regulation for Institutions, in particular as regards the predominant non- inclusion of subordinated undertakings that are subject to sectoral re￾muneration rules (e.g. investment manage￾ment companies and investment institutions). In amending the Remuneration Regulation for Institutions, BaFin – in its capacity as the author￾ity issuing this regulation – made full use of the available discretionary scope under the CRD to make allowances for the special features of the German banking market and proportionality considerations. Besides being amended to implement the CRD, the Remuneration Regulation for Institutions was also adjusted to modify the duties of remu￾neration offi cers in Section 24 of the Regulation. Furthermore, Section 1(1) sentence 2 of the Re￾muneration Regulation for Institutions exempts leasing and factoring undertakings from the re￾quirement to apply the Remuneration Regu￾lation for Institutions. 1 See Directive 2013/ 36/ EU. 2 See Directive (EU) 2019/ 878 amending Directive 2013/ 36/ EU. 3 The Remuneration Regulation for Institutions con￾tinues to use the term “CRR institutions” to refer to those entities that qualify as institutions as defi ned in Regulation (EU) No  575/ 2013 (Capital Requirements Regulation – CRR). With “CRR investment fi rms” now no longer falling within the scope of the Banking Act, the amendment of the Banking Act of 26 June 2021 replaced this term with “CRR credit institution” (see the Act implementing Directive (EU) 2019/ 2034 on the prudential supervision of investment institutions of 12 May 2021 – Gesetz zur Beaufsichtigung von Wert￾papierinstituten, WpIG). This necessitated an amend￾ment to Section 1(3) of the Remuneration Regulation for Institutions, which BaFin put out for public consult￾ation in a draft umbrella regulation on the WpIG on 4 May 2021 (see https://www.bafin.de/dok/15992230). Completion thereof is still pending. 4 See footnote 7 of the box on pp. 89 f. Deutsche Bundesbank Monthly Report October 2021 97

the decisions are still made by the administra￾tive or supervisory board. To assist the remu￾neration control committee and thus the ad￾ministrative or supervisory board, significant in￾stitutions are required to appoint a remuner￾ation officer.46 The remuneration officer’s main tasks are to monitor on an ongoing basis the appropriateness of remuneration systems for staff members and prepare an annual remuner￾ation control report. This kind of function is unique to German regulation of remuneration, and stems from the fact that the remuneration control committee, in line with German corpor￾ate governance principles, has no dedicated staff resources at the institution. Documentation and dis￾closure requirements There are explicit documentation requirements for credit institutions designed to ensure that decisions relating to remuneration can be bet￾ter tracked, but also to restrict the discretionary scope of decision-makers ex ante. Thus, the principles for the design of the remuneration systems and the composition of the remuner￾ation as well as the associated procedural rules along with the relevant responsibilities must be set out in organisational guidelines. In addition, actual decisions, such as performance meas￾urement/evaluation or determination of the total bonus pool in a specific case, have to be documented appropriately. Not least, the amount of remuneration and its subdivision into fixed and variable components also has to be documented and disclosed as an aggregate. To ensure that credit institutions disclose their remuneration practices consistently, the dis￾closure requirements were transposed from the CRD to the CRR in 2014. The latter contains ex￾tensive provisions on which quantitative and qualitative information relating to the remuner￾ation systems for risk takers has to be disclosed. The Remuneration Regulation for Institutions additionally requires the disclosure of certain information relating to the remuneration of all staff members depending on the size and com￾plexity of the credit institution. When the CRR was being revised in 2019, the issue of propor￾tionality was taken into account by stipulating that small and non-complex institutions, in par￾ticular, no longer need to disclose this informa￾tion if they are non-listed institutions within the meaning of the CRR.47 This approach is now also followed in Section 16(2) of the Remuner￾ation Regulation for Institutions, as last amended. In the interests of reducing bureau￾cracy, this is to be welcomed. Supervision of remuneration systems by the Bundesbank, BaFin and the European Central Bank To monitor compliance with the remuneration requirements, the Bundesbank’s Regional Of￾fices work together with BaFin or – for signifi￾cant institutions within the meaning of Article 6(4) subparagraph 2 of the SSM Regulation48 – with the European Central Bank (ECB). In add￾ition, on-site inspections are also carried out on a case-by-case basis at the request of BaFin or the ECB. Given that approximately 1,500 banks and savings banks currently fall within the scope of the Remuneration Regulation for Insti￾tutions, a risk-oriented supervisory approach is necessary. Thus, credit institutions considered to be potentially or actually systemically im￾portant receive particular attention. Equally, supervisors especially focus on higher levels of remuneration or high variable components, in￾cluding at smaller credit institutions. Since 2010, the Bundesbank has conducted annual surveys of remuneration practices among Ger￾man credit institutions. The information is pro￾vided to the EBA, which publishes it in reports Credit institu￾tions must docu￾ment and dis￾close certain remuneration￾related matters Bundesbank Regional Offices monitor remu￾neration systems jointly with BaFin or ECB 46 Sections 23 to 26 of the Remuneration Regulation for Institutions. 47 Article 433b(2) of the CRR. 48 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervi￾sion of credit institutions (SSM Regulation). Deutsche Bundesbank Monthly Report October 2021 98

“High earners” in the European Economic Area from 2010 to 2019 Since 2010, banking supervisors in the Euro￾pean Economic Area (EEA) have collected information from “CRR institutions”1 re￾garding the members of their management board, the members of their supervisory board and staff who are active in the EEA and received remuneration of €1 million or more for a given reporting year (“high earn￾ers”). This information is published by the European Banking Authority (EBA) for each Member State – since 2014, including pay￾ment brackets with intervals of €1 million. The fi gures published by the EBA for the years from 2010 to 20192 reveal that the United Kingdom had the highest absolute number of high earners, with Germany fol￾lowing some way behind in second place. Data on high earners with the highest re￾muneration per Member State have also been available since 2014; the United King￾dom tops this list as well. Where a high earner in Germany has reached a fi gure in the double- digit million euro range since 2014, this has always been attributable in part to severance payments. 1 The term “CRR institutions” refers to those entities that qualify as institutions as defi ned in Regulation (EU) No 575/ 2013 (Capital Requirements Regulation – CRR). Since 26 June 2021, “CRR investment fi rms” no longer fall within the scope of the Banking Act (Kreditwesen￾gesetz) and so the reporting requirements pursuant to Section 24(1a) number 6 of the Banking Act will apply to “CRR credit institutions” in future. 2 Although the information for 2020 has already been collected by the national competent authorities, it has not yet been published by the EBA. As the data are col￾lected from superordinated institutions for the entire EEA, a complete picture for individual Member States can be obtained only once the data have been aggre￾gated by the EBA. High earners in the EEA* Source: European Banking Authority (2016, 2017, 2018, 2019, 2020 and 2021a). * The United Kingdom was a member of the European Economic Area up to the end of 2020. Deutsche Bundesbank 2014 2015 2016 2017 2018 2019 0 1,000 2,000 3,000 4,000 5,000 6,000 0 10 20 30 40 50 60 70 € million Other Member States Germany United Kingdom Highest annual remuneration to a single person Germany Number of high earners United Kingdom Deutsche Bundesbank Monthly Report October 2021 99

prepared annually or every two years.49 It also feeds into the work of the supervisor respon￾sible for the respective credit institution. To￾gether with other information, particularly the audit reports compiled by the auditor of the annual accounts,50 the data are used to assess the appropriateness of remuneration systems as part of the supervisory review and evalu￾ation process (SREP).51 Any shortcomings of the remuneration systems feed into the assessment of the adequacy of in￾ternal governance. Based on a final score as part of an overall assessment, the SREP can re￾sult in a higher institution-specific capital add￾on in accordance with Section 10(3) of the Banking Act or, for credit institutions directly supervised by the ECB, in accordance with Art￾icle 16(2) of the SSM Regulation, or to qualita￾tive requirements for the institution. Outside the SREP, too, formal or informal requests can be made for the rectification of any irregular￾ities. If serious irregularities in risk management are identified, the relevant supervisory author￾ity can not only issue an administrative fine, but ultimately also demand that members of the credit institution’s management board be re￾moved. Furthermore, the competent supervis￾ory authority – be it BaFin or the ECB – has the right to reduce a credit institution’s total vari￾able remuneration or get rid of it entirely if the institution is not fulfilling its obligations to en￾sure adequacy of own funds and/or liquidity.52 Outlook Variable remuneration at credit institutions is one of the most regulated and monitored in￾centive systems in the private sector. It is prob￾ably undisputed that regulation has contrib￾uted to deeper integration of remuneration systems into risk management as well as im￾proved risk adjustment for remuneration. FSB analyses show that financial institutions, espe￾cially credit institutions, have made great strides when it comes to refining their remuneration systems.53 For example, approaches involving the holistic inclusion of ESG risks54 are increas￾ingly being used when designing remuneration parameters, through the integration of non￾financial criteria such as good conduct. It is not yet possible to draw a final conclusion on how efficient malus and clawback arrange￾ments are, especially as these instruments tend to be seldom used. However, this does not ne￾cessarily mean that the relevant supervisory re￾quirements have no effect. Rather, institutions’ internal rules on these matters already create a positive incentive to develop a risk-appropriate corporate culture. Credit institutions must en￾sure, though, that consistent action is taken when staff members or members of the man￾agement board engage in misconduct. Given the complexity of the issue and its im￾portance for corporate culture and risk man￾agement at financial institutions, an evaluation of the underlying FSB P&S would be a welcome move. This could examine the efficiency of the requirements and help optimise the regulation of remuneration. Supervisors have rich toolkit to address short￾comings Proportional regulation required for small and non-complex institutions 49 These are the annual report on employees with remu￾neration of at least €1 million per year (EBA Report on High Earners, last published in 2021 with data for 2019), and the report comparing remuneration trends and practices (EBA Report on the benchmarking of remuneration practices at the European Union level, last published in 2020 with data for 2017 and 2018). The reports are published on the EBA website at https://www.eba.europa.eu/risk-analysis-and￾data/remuneration-data 50 When auditing an institution’s annual accounts, audit￾ors also check compliance with certain regulatory require￾ments pursuant to Section 29 of the Banking Act. The sub￾ject of the audit is specified in the Regulation governing the auditing of the annual accounts of credit institutions and financial services institutions as well as the reports to be drawn up on these (Audit Report Regulation (Prüfungsbe￾richtsverordnung)). Section 12 of that Regulation contains the list of duties with regard to institutions’ remuneration. 51 More information on the SREP can be found in Deutsche Bundesbank (2017), pp. 44 ff. 52 Section 45(1) in conjunction with (2) sentence 1 num￾bers 10 and 11 of the Banking Act and Article 16(2) letter (g) of the SSM Regulation. 53 See Financial Stability Board (2019). 54 The EBA, for example, defines ESG (environmental, so￾cial and governance) risks as the risks of any negative finan￾cial impact on the institution stemming from the current or prospective impacts of ESG factors on its counterparties. See European Banking Authority (2021b), p. 6. Deutsche Bundesbank Monthly Report October 2021 100

Remuneration practices and trends at German credit institutions from 2014 to 2019 On the basis of Section 24(1a) number 5 of the German Banking Act (Kreditwesen￾gesetz), the Bundesbank collects informa￾tion annually on remuneration practices and trends at signifi cant institutions within the meaning of Section 1(3c) of the Banking Act. Since 2014, this data collection has been carried out in compliance with the current guidelines of the European Banking Authority (EBA),1 which require data to be collected at the consolidated level. When interpreting the following fi gures it should be noted that the number of surveyed credit institutions fl uctuates somewhat over time2 and that major institutions with large numbers of staff or high levels of remuner￾ation have a considerable impact on the ag￾gregate fi gures. On average, roughly 4% of the surveyed in￾stitutions’ total staff were risk takers in the fi nancial year 2019. This share has remained largely unchanged since the data were fi rst collected using the current format in 2014. Investment banking and retail banking each account for roughly one- quarter of all risk takers. Members of management boards and administrative or supervisory boards, who are automatically considered to be risk takers, account for around 15% of the total. The distribution of risk takers among the in￾dividual business areas fl uctuated only mar￾ginally over time. In 2019, the average remuneration for risk takers amounted to around four times the average of all staff members. The signifi - cance of variable remuneration is also con￾siderably higher for risk takers than for all staff on average. In 2019, the ratio of vari￾able to fi xed remuneration amounted to 45% on average for risk takers, compared to just 15% on average for all staff mem￾bers. However, from 2014 to 2019, a down￾ward trend can be observed in this regard for both risk takers and all staff members. 1 See European Banking Authority (2014). 2 The survey comprised 25 institutions in 2014 and 36 institutions in 2019. Remuneration by business area at significant German credit institutions Deutsche Bundesbank 0 5 10 15 20 25 30 35 40 45 2019 Management board Administrative or supervisory board Risk takers Asset management All staff Independent control functions Investment banking 0 5 10 15 20 25 30 35 40 45 Other Corporate functions Retail banking Share of risk takers Share of total staff % Remuneration Remuneration % Deutsche Bundesbank Monthly Report October 2021 101

The objective for the future should be regula￾tion of remuneration based on consistent prin￾ciples. Moreover, if any changes to the frame￾work are necessary, European legislators should ensure that the costs of the ensuing transition processes are as low as possible for credit insti￾tutions. This should help to boost understand￾ing of the meaning and purpose of the rules among the affected credit institutions and their staff members. Greater acceptance of the agreed rules may help minimise attempts to cir￾cumvent them. At the same time, some thought should be given to whether the EU’s current remuner￾ation regime is appropriate to the target group and objectives when it comes to small, non￾complex institutions or whether they need even more proportional regulation. The amend￾ment of the CRD to introduce greater propor￾tionality of remuneration rules should be re￾garded as just the first step. The forthcoming transposition of the Basel III reform package into European law provides an opportunity to further exempt small, non-complex institutions from the administrative burden of remuner￾ation rules, where they are not required by supervisors. List of references Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the Euro￾pean Central Bank concerning policies relating to the prudential supervision of credit institutions. Overall, in 2019, credit institutions paid out roughly 45% of risk takers’ variable remu￾neration in the form of instruments that are linked to the institution’s performance (such as shares in the institution). Instances where the 50% minimum requirement was not met at individual credit institutions were largely attributable to the €50,0003 waiver threshold for variable remuneration.4 In 2019, roughly 60% of risk takers’ variable remuneration was deferred on average. The current fi gures show that credit institutions sometimes perform an explicit ex post risk adjustment (malus)5 for deferred remuner￾ation. The amounts of the adjustments vary considerably between credit institutions and from year to year, depending on the circumstances. With a few exceptions, the amounts involved are only small. 3 Section 18(1) of the Remuneration Regulation for In￾stitutions (Institutsvergütungsverordnung). 4 When collecting the data, the item “variable remu￾neration” also encompasses privileged severance pay￾ments pursuant to Section 5(6) of the Remuneration Regulation for Institutions. These are not subject to the requirements of Sections 7 and 20 of the Remuner￾ation Regulation for Institutions and do not have to be taken into account when calculating the ratio of vari￾able to fi xed remuneration pursuant to Section 25a(5) of the Banking Act. 5 The reasons for ex post risk adjustments are not cap￾tured when collecting the data. Possible reasons may, for example, arise from Section 7(2) and Section 20(5) of the Remuneration Regulation for Institutions or from additional performance criteria in the case of long- term incentive plans. Deutsche Bundesbank Monthly Report October 2021 102

Deutsche Bundesbank (2020), Risk Reduction Act – the national implementation of the European banking package, Monthly Report, December 2020, pp. 49 ff. Deutsche Bundesbank (2019), The European banking package – revised rules in EU banking regu￾lation, Monthly Report, June 2019, pp. 31ff. Deutsche Bundesbank (2017), The supervisory review and evaluation process for smaller institu￾tions and proportionality considerations, Monthly Report, October 2017, pp. 43 ff. Deutsche Bundesbank (2011), International cooperation in banking regulation: past and present, Monthly Report, September 2011, pp. 79 ff. Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures. Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and invest￾ment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC. European Banking Authority (2021a), EBA Report on High Earners – Data as of end of 2019 (EBA/ REP/2021/23). European Banking Authority (2021b), Report on management and supervision of ESG risks for credit institutions and investment firms (EBA/REP/2021/18). European Banking Authority (2020), Benchmarking of remuneration practices at the European Union level (2017 and 2018 data) and data on high earners (2018 data) (EBA/REP/2020/20). European Banking Authority (2019), EBA Report on High Earners – Data as of end 2017. European Banking Authority (2018), Benchmarking of remuneration practices at the European Union level and data on high earners (data as of end 2016). European Banking Authority (2017), EBA Report on High Earners – Data as of end 2015. European Banking Authority (2016), Benchmarking of remuneration practices at the European Union level and data on high earners (data as of end 2014). European Banking Authority (2014), Guidelines on the remuneration benchmarking exercise dated 16 July 2014 (EBA/GL/2014/08). European Commission (2021), Commission Delegated Regulation (EU) 2021/923 of 25 March 2021 supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards setting out the criteria to define managerial responsibility, con￾trol functions, material business units and a significant impact on a material business unit’s risk profile, and setting out criteria for identifying staff members or categories of staff whose profes￾Deutsche Bundesbank Monthly Report October 2021 103

sional activities have an impact on the institution’s risk profile that is comparably as material as that of staff members or categories of staff referred to in Article 92(3) of that Directive. European Commission (2014), Commission Delegated Regulation (EU) No 527/2014 of 12 March 2014 supplementing Directive (EU) No 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the classes of instruments that adequately reflect the credit quality of an institution as a going concern and are appropriate to be used for the purposes of variable remuneration. Federal Financial Supervisory Authority (2018), Auslegungshilfe zur Institutsvergütungsverordnung, last updated: 15 February 2018. Financial Stability Board (2019), Implementing the FSB Principles for Sound Compensation Practices and their Implementation Standards – Sixth progress report. Financial Stability Board (2009a), FSB/FSF Principles for Sound Compensation Practices. Financial Stability Board (2009b), Implementation Standards for the FSB Principles for Sound Com￾pensation Practices. Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012. Deutsche Bundesbank Monthly Report October 2021 104