Regulation on Supervisory Requirements for Remuneration Systems of Institutions (InstitutsVergV)

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• Page 1 of 6 - Regulation on the Supervisory Requirements for Remuneration Systems of Institutions (Instituts-Vergütungsverordnung - InstitutsVergV) InstitutsVergV Date of enactment: 06.10.2010 Full citation: "Regulation on the Remuneration Systems of Institutions of 6 October 2010 (BGBl. I p. 1374)" Footnote (+++ Text reference from: 13.10.2010 +++) Preamble Pursuant to Section 25a Paragraph 5 Sentences 1 to 3 and 5 of the Banking Act (Kreditwesengesetz), which was inserted by Article 1 Number 1 Letter b of the Act of 21 July 2010 (BGBl. I p. 950), the Federal Ministry of Finance, in agreement with the Deutsche Bundesbank and after hearing the peak associations of institutions, ordains:

§ 1 Scope of Application (1) This Regulation applies, subject to Paragraph 2, to all institutions within the meaning of Section 1 Paragraph 1b and Section 53 Paragraph 1 of the Banking Act, and to the remuneration systems of all managing directors and employees of these institutions. It does not apply to branch offices of companies with their seat in another state of the European Economic Area pursuant to Section 53b of the Banking Act. (2) Sections 5, 6, and 8 of this Regulation apply only to significant institutions. An institution is significant if its total assets averaged on the respective balance sheet dates of the last three completed financial years reached or exceeded 10 billion Euros and it independently determines, based on a risk analysis, that it is significant. In the risk analysis, particular account shall be taken of the size of the institution, its remuneration structure, and the nature, scope, complexity, risk content, and internationality of the business activities conducted. The risk analysis must be documented in writing. The analysis must be plausible, comprehensive, and comprehensible to third parties. Institutions whose total assets averaged on the respective balance sheet dates of the last three completed financial years reached or exceeded 40 billion Euros are generally to be regarded as significant. (3) This Regulation is not applicable to remuneration agreed by collective agreement or, within its scope of application, by agreement of the parties to the employment contract regarding the application of collective agreement provisions or based on a collective agreement in a works or service agreement.

§ 2 Definitions For the purposes of this Regulation, the following terms are defined as:

1. "Remuneration" all financial payments and benefits in kind, regardless of their nature, as well as benefits from third parties, which a managing director or employee receives with regard to their professional activity at the institution; financial payments or benefits in kind granted by the institution pursuant to a general, non-discretionary, and institution-wide regulation that do not have an incentive effect for the assumption of risks, in particular discounts, occupational pension and social benefits, and for employees, contributions to statutory pension insurance within the meaning of Book Six of the Social Code and to occupational pension schemes within the meaning of the Occupational Pensions Act, are not considered remuneration;

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2. "Remuneration Systems" the institution-internal regulations regarding remuneration as well as their actual implementation and application by the institution;
3. "Variable Remuneration" the part of the remuneration whose payment or amount is at the discretion of the institution or depends on the occurrence of agreed conditions, including discretionary benefits for old-age provision;
4. "Discretionary Benefits for Old-Age Provision" the part of the variable remuneration agreed for the purpose of old-age provision with regard to a concrete impending termination of the employment relationship with the institution;
5. "Fixed Remuneration" the part of the remuneration that is not variable within the meaning of Number 3;
6. "Employees" all natural persons whom the institution employs in conducting banking business or providing financial services, in particular based on an employment, business agency, or service relationship, and all natural persons who, within the framework of an outsourcing agreement with an affiliated outsourcing company for which Section 64b of the Insurance Supervision Act in conjunction with the Insurance Remuneration Regulation does not apply, are directly involved in services for the institution for the purpose of conducting banking business or providing financial services, with the exception of managing directors and commercial agents within the meaning of Section 84 Paragraph 1 of the Commercial Code (Handelsgesetzbuch);
7. "Remuneration Parameters" the quantitative and qualitative determining factors by which the performance and success of a managing director, employee, or an institution-internal organizational unit are measured;
8. "Performance Contributions" the actual performance and success of managing directors, employees, or institution-internal organizational units determined on the basis of remuneration parameters, which flow into the determination of the amount of variable remuneration components. Performance contributions can be positive and negative;
9. "Control Units" those institution-internal organizational units that monitor the business-initiating organizational units, in particular the areas of Market and Trading. This includes in particular the areas of Post-Trade, Risk Controlling, and units with compliance functions. Internal Audit is considered a control unit within the meaning of this Regulation.

§ 3 General Requirements for Remuneration Systems (1) The management is responsible for the appropriate design of the remuneration systems for employees. For the design of the remuneration systems for the management, the management or supervisory body is responsible. The remuneration systems must be oriented towards achieving the goals set out in the strategies of the institution; in the event of strategy changes, the design of the remuneration systems must be reviewed and adapted if necessary. (2) The remuneration received by managing directors for their professional activity at the institution must be exhaustively stipulated in the employment contract. The employment contract and subsequent changes require written form. (3) Remuneration systems are appropriately designed if incentives for managing directors and employees to assume disproportionately high risks are avoided and the remuneration systems do not contradict the monitoring function of the control units. (4) Incentives to assume disproportionately high risks are present in particular

1. through a significant dependence of managing directors and employees on variable remuneration, or
2. through individually agreed claims to benefits in the event of termination of activity, to which a claim of unchanged amount exists despite individual negative performance contributions. The management or supervisory body must ensure when setting the remuneration of an individual managing director that it stands in an appropriate relationship to the tasks and performance of the managing director as well as to the situation of the institution and does not exceed the usual remuneration without special reasons. Variable remunerations should therefore have a multi-year basis for calculation; for extraordinary developments, the management or supervisory body should agree on a possibility for limitation. Other relevant federal or state statutory regulations regarding the remuneration of managing directors remain unaffected by Sentences 2 and 3.

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• Page 3 of 6 - (5) Fixed and variable remuneration must stand in an appropriate relationship to each other. The relationship is appropriate if, on the one hand, there is no significant dependence on variable remuneration, but on the other hand, the variable remuneration can set an effective behavioral incentive. The institution must establish an appropriate upper limit for the ratio between fixed and variable remuneration. (6) Remuneration systems contradict the monitoring function of the control units in particular if the amount of variable remuneration for employees of the control units and the employees of the organizational units controlled by them is determined significantly by congruent remuneration parameters and there is a risk of conflict of interest. The remuneration of employees of the control units must be designed in such a way that an appropriate qualitative and quantitative staffing is enabled. (7) Guaranteed variable remuneration is only permissible within the framework of the establishment of a service or employment relationship and for a maximum of one year. (8) The risk orientation of remuneration must not be restricted or abolished by hedging or other countermeasures. Institutions must implement appropriate compliance structures to prevent such measures. Appropriate compliance structures can consist in particular in an obligation for managing directors and employees not to take personal hedging or other countermeasures to restrict or abolish the risk orientation of their remuneration. (9) Managing directors and employees must be informed in writing about the design of the remuneration systems relevant to them. Written form is also preserved in the case of electronic transmission. (10) Managing directors must inform the management or supervisory body at least once a year about the design of the institution's remuneration systems. The chairman of the management or supervisory body must be granted a corresponding right to information against the management. (11) The institution must establish principles regarding remuneration systems in its organizational guidelines. The principles include in particular information on the design of the remuneration systems and the composition of remuneration. The remuneration systems must be reviewed by the institution for their appropriateness at least once a year and adapted if necessary.

§ 4 Securing Adequate Own Funds The total amount of variable remuneration for managing directors and employees must not restrict the institution's ability to permanently maintain or restore an adequate level of own funds.

§ 5 Remuneration Systems of Significant Institutions (1) Remuneration systems for managing directors of significant institutions within the meaning of Section 1 Paragraph 2 and remuneration systems of these institutions for such employees whose activities have a significant influence on the overall risk profile must additionally comply with the requirements of Paragraphs 2 to 5. The institution must independently determine, based on a risk analysis, whether it has employees whose activities have a significant influence on the overall risk profile. Criteria that can be taken into account include, among others, the size, the nature of business activity, the volume of business, the amount of risks, and the profits of an organizational unit; the activity, position, amount of previous remuneration of an employee, as well as a pronounced competitive situation in the labor market can also be criteria. The risk analysis must be documented in writing. The analysis must be plausible, comprehensive, and comprehensible to third parties. (2) Regarding variable remuneration

1. in addition to the overall success of the institution or group and the performance contribution of the organizational unit, the individual performance contribution must also be taken into account, insofar as this is not associated with disproportionate effort;

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2. the individual performance contribution must also be determined using non-financial parameters, such as adherence to institution-internal regulations and strategies, customer satisfaction, and acquired qualifications;
3. for the determination of the overall success of the institution, the performance contribution of the respective organizational unit, and, insofar as this is not associated with disproportionate effort, the individual performance contribution, remuneration parameters must be used in particular that take into account the goal of sustainable success; in doing so, in particular, assumed risks, their durations, as well as capital and liquidity costs must be taken into account, whereby the durations of the risks do not necessarily have to be mirrored;
4. depending on the position, tasks, amount of variable remuneration, and the risks that an employee can cause, at least 40 percent of the variable remuneration must be spread over a deferral period of at least three to five years, whereby a) the claim or entitlement to this portion of remuneration may not accrue faster than pro rata temporis, and b) during the deferral period, there is only a claim for error-free determination regarding the part of the variable remuneration that has not yet become an entitlement or claim, but not a claim to this part of the variable remuneration itself. For managing directors and employees of the subordinate management levels, at least 60 percent of the variable remuneration are generally to be spread correspondingly over a deferral period of at least three to five years. The duration of the deferral period must be oriented towards the business cycle, the nature and risk content of the business activities conducted, and the activities of the respective employees, managing directors;
5. depending on the tasks and position of a managing director, employee in the institution a) at least 50 percent of the variable remuneration to be deferred according to Number 4, and b) at least 50 percent of the variable remuneration not deferred according to Number 4 must depend on the sustainable value development of the institution and must each be provided with an appropriate period, after the expiration of which the respective part of the variable remuneration according to letters a and b may only be disposed of at the earliest;
6. negative performance contributions of the managing director, employee, their organizational unit, and a negative overall success of the institution or group must reduce the amount of variable remuneration, including the deferred amounts according to Number 4, also in conjunction with Number 5 letter a. (3) Discretionary benefits for old-age provision, paid upon the non-retirement-related termination of the employment, business agency, or service relationship of managing directors and employees, must
7. depend on the sustainable value development of the institution,
8. be spread over a deferral period of at least five years, whereby during the deferral period there is only a claim for error-free determination of these discretionary benefits for old-age provision, but not for the discretionary benefits for old-age provision themselves, and
9. be reduced in the event that the performance contributions of the managing director, employee, their organizational unit, or the overall success of the institution or group relevant for the discretionary benefits for old-age provision do not prove to be sustainable. (4) Discretionary benefits for old-age provision, paid upon the retirement-related termination of the employment, business agency, or service relationship of managing directors and employees, must
10. depend on the sustainable value development of the institution, and
11. be provided with a period of at least five years, after the expiration of which the discretionary benefits for old-age provision may only be disposed of at the earliest.

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• Page 5 of 6 - § 6 Remuneration Committee in Significant Institutions (1) Without prejudice to their responsibility, the management of a significant institution within the meaning of Section 1 Paragraph 2 must establish an advisory committee that monitors the appropriateness of the remuneration systems (Remuneration Committee). The management may assign further tasks to the Remuneration Committee, in particular regarding the design and further development of the remuneration systems. The tasks and the organizational integration of the Remuneration Committee must be presented in the institution's organizational guidelines. (2) In the Remuneration Committee, in addition to employees of the personnel department, employees from the business-initiating organizational units, in particular the areas of Market and Trading, as well as the control units, must be represented. Internal Audit must be included within the scope of its tasks. (3) The Remuneration Committee must prepare a report on the appropriateness of the design of the institution's remuneration systems at least once a year and submit it to the management and the management or supervisory body (Remuneration Report). If necessary, the Remuneration Committee must also report on an ad-hoc basis. The chairman of the management or supervisory body must be granted a direct right to information against the Remuneration Committee.

§ 7 Disclosure by Institutions (1) Each institution must publish the following information on its own website at least once a year and update it at least once a year, while observing the principles of materiality, protection, and confidentiality of Section 26a Paragraph 2 of the Banking Act. The degree of detail of the information depends on the size and remuneration structure of the institution as well as the nature, scope, risk content, and internationality of its business activities. (2) Divided by the respective business areas of the institution, the following must be published:

1. the design of the remuneration systems, in particular the relevant remuneration parameters as well as the composition of the remunerations and the manner of payment, and
2. the total amount of all remunerations divided into fixed and variable remuneration as well as the number of beneficiaries of the variable remuneration. While observing the principles mentioned in Paragraph 1, institutions must ensure a degree of detail in presenting the information mentioned in Sentence 1 Number 1 that allows the content to be comprehensible regarding the conformity of the remuneration systems with the requirements of this Regulation. Reference must be made to the possible involvement of external consultants and interest groups.

§ 8 Further Disclosure by Significant Institutions (1) Each significant institution within the meaning of Section 1 Paragraph 2 must additionally publish the following information on its own website at least once a year and update it at least once a year, while observing the principles of materiality, protection, and confidentiality of Section 26a Paragraph 2 of the Banking Act. (2) The institution must publish the composition, tasks, and organizational integration of the Remuneration Committee. (3) Divided by the respective business areas of the institution, the following information must also be published regarding the persons mentioned in Section 5 Paragraph 1 Sentence 1, whereby the information on managing directors must be separated from the information on relevant employees:

1. total amount of all remunerations divided into fixed and variable remuneration as well as the number of beneficiaries;
2. total amount of remunerations granted in the context of the establishment of an employment relationship within the meaning of Section 3 Paragraph 7 as well as the number of respective beneficiaries per financial year;
3. total amount of variable remunerations within the meaning of Section 5 Paragraph 2 Number 4 divided into deferred and paid total amounts, showing the total amount by which the variable remuneration is reduced according to Section 5 Paragraph 2 Number 6;

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4. with regard to the total amount of variable remunerations, their composition, in particular with regard to the parts of the variable remuneration that depend on the value development of the institution within the meaning of Section 5 Paragraph 2 Number 5;
5. total amount of individually agreed severance payments for the termination of activity as well as the number of beneficiaries per financial year, showing the highest severance payment made.

§ 9 Special Provisions for Groups The persons of the parent undertaking or the parent financial conglomerate undertaking of an institution group, a financial holding group, or a financial conglomerate as designated in Section 1 Paragraph 2 of the Banking Act are responsible for compliance with the requirements of this Regulation in the subordinate companies for which Section 64b of the Insurance Supervision Act in conjunction with the Insurance Remuneration Regulation does not apply. If this appears risk-appropriate taking into account the size and complexity of the business activity of the institution group, financial holding group, or financial conglomerate, individual requirements of this Regulation can be fulfilled centrally within the group or conglomerate. The parent undertaking or the parent financial conglomerate undertaking of an institution group, financial holding group, or financial conglomerate must document its assessment in writing.

§ 10 Adaptation of Existing Agreements The institution must ensure that contracts with managing directors and employees, as well as company practices, that are incompatible with this Regulation are, insofar as legally permissible, adapted on the basis of a legally sound assessment of the legal situation comprehensible to third parties and taking into account the c