Circular 22/2009 (BA) - Supervisory Requirements for Remuneration Systems of Institutions

Circular 22/2009 (BA) dated 21.12.2009 - Page 1 of 6 Circular 22/2009 (BA) dated 21.12.2009 – Supervisory Requirements for Remuneration Systems of Institutions

1 Scope of Application ...................................................................... 2 2 Definitions .................................................................................... 2 3 General Requirements ................................................................. 3 4 Specific Requirements ................................................................. 3 4.1 Remuneration of Executive Management and Staff ...................... 3 4.2 Remuneration Committee .......................................................... 5 4.3 Disclosure ................................................................................ 5 5 Requirements at Group Level ....................................................... 6 6 Adjustment of Employment Agreements ...................................... 6

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1 Scope of Application 1 The requirements of this Circular are to be observed by all institutions within the meaning of Sections 1(1b) and 53(1) of the German Banking Act (KWG). They do not apply to branches of companies with their registered office in another state of the European Economic Area pursuant to Section 53b KWG. The requirements are also to be observed by parent undertakings or parent financial conglomerate undertakings of an institution group, a financial holding group, or a financial conglomerate at the group level. The Circular (BA) is to be applied in such a group or financial conglomerate only to institutions within the meaning of Section 1, Paragraph 1, Sentence 1 of the Circular (BA). Conversely, in a financial conglomerate under the KWG, only the Circular (VA) is to be applied to the undertakings mentioned in Paragraph 1, Sentence 1 of the Circular (VA). 2 The requirements of Section 3 of this Circular apply to all institutions and to the remuneration systems of all executive managers and staff (general requirements). Whether the specific requirements of Section 4 apply depends in particular on the size of the institution, its remuneration structure, as well as the nature, scope, complexity, and risk content or internationality of the business activities conducted. The institution must determine on its own responsibility, based on a risk analysis, whether the specific requirements are to be applied (self-assessment). The analysis must be plausible, comprehensive, and comprehensible to third parties.

2 Definitions 1 Remuneration refers to the monetary or monetarily assessable benefits that an executive manager or staff member receives from the institution in the course of their professional activities. Monetary or monetarily assessable ancillary benefits that do not generate incentives to take on risk positions, such as collective and company insurance and social benefits, discounts, etc., as well as benefits for staff regarding occupational pension provision, are not considered remuneration within the meaning of this Circular. 2 Remuneration systems include the internal regulations of the institution regarding remuneration as well as their actual implementation and application by the institution. 3 Variable remuneration is the part of the remuneration whose granting or amount is at the discretion of the institution or depends on the occurrence of agreed conditions. Fixed remuneration is the part of the remuneration that is not variable. 4 Staff refers to all natural persons who, from an economic or risk perspective, are considered to belong to the institution. Commercial agents within the meaning of Section 84(1) of the German Commercial Code (HGB) are not staff within the meaning of this Circular. 5 Performance factors are the quantitative and qualitative parameters used to determine the amount of variable remuneration. Performance factors can be positive or negative.

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6 Control units monitor the business-initiating organizational units (e.g., market follow-up, risk controlling, or compliance functions). The Internal Audit also counts as a control unit within the meaning of this Circular.

3 General Requirements 1 The Executive Management is responsible for designing appropriate remuneration systems for staff. The Administrative or Supervisory Body is responsible for designing the remuneration systems for the Executive Management. The design of the remuneration systems must be consistent with the objectives set out in the strategies; changes in strategies must be taken into account. 2 The remuneration systems must be designed such that negative incentives for executive managers and staff to take on disproportionately high risk positions are avoided. Negative incentives generally arise: a) through significant dependence on variable remuneration; b) through significant contractual severance claims that remain unchanged in amount despite individual negative performance factors; or c) when the amount of remuneration for control units and the organizational units they control is determined primarily by the same parameters, creating a risk of conflict of interest. 3 The remuneration of control units must be designed to ensure adequate qualitative and quantitative staffing. 4 Executive managers and staff must be informed about the design of the remuneration systems relevant to them. 5 The Administrative or Supervisory Body of an institution must be informed about the remuneration systems at least once a year, enabling it to form its own opinion on their appropriateness. The Chairman of the Administrative or Supervisory Body must also be granted corresponding rights to information from the Executive Management. 6 The institution must establish principles regarding remuneration systems in its organizational guidelines. The remuneration systems must be reviewed for their appropriateness at least once a year and adjusted if necessary.

4 Specific Requirements 4.1 Remuneration of Executive Management and Staff 1 The requirements of this section apply to executive managers and such staff members who can create high risk positions. The institution must determine on its own responsibility, based on a risk analysis, whether it has staff members who can create high risk positions (self-assessment). Criteria that may be considered include, among others, the size, the nature of the business activity (e.g., investment banking), the business volume, the level of risks and earnings of an organizational unit; the activity (e.g., as a trader), the position, the level of previous remuneration of a staff member, and a pronounced competitive situation in the labor market may also be criteria. The analysis must be plausible, comprehensive, and comprehensible to third parties. 2 The fixed and variable remuneration of executive managers and such staff members who can create high risk positions must be in an appropriate ratio to each other, so that on the one hand there is no significant dependence on variable remuneration, but on the other hand, the variable remuneration can set effective behavioral incentives. 3 Guaranteed bonus payments are generally inadmissible and are only permitted in the context of the commencement of an employment relationship and for a maximum period of one year. 3 In the variable remuneration of executive managers and such staff members who can create high risk positions, a) in addition to the overall success of the institution and the performance factor of the organizational unit to which the staff member belongs, the individual performance factor of the staff member must also be taken into account, insofar as it can be determined with reasonable effort; b) the individual performance factor must also be determined using non-financial parameters, such as acquired qualifications, customer satisfaction, and adherence to internal institutional rules and strategies; c) for the determination of the overall success of the institution, the performance factor of the respective organizational unit, and, insofar as it can be determined with reasonable effort, the individual performance factor, parameters must be used that take into account the goal of sustainable success; in particular, risks incurred, their durations, as well as capital and liquidity costs must be considered, whereby the durations of the risks do not necessarily have to be mirrored; d) depending on the position, tasks, amount of variable remuneration, and the risk positions a staff member can create, at least 40% of the variable remuneration must be deferred over a deferral period of at least three years, whereby da) this portion of remuneration must be adjusted depending on the sustainability of the performance factor, db) it may not be paid out faster than pro rata temporis, and dc) during the deferral period, there is only a claim to the error-free determination of the variable remuneration, but not to the variable remuneration itself;

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e) depending on the tasks and position in the institution, at least 50% of the variable remuneration retained under d) must depend on the sustainable value development of the institution; f) individual negative performance factors of the executive manager and staff member, their organizational unit, and a negative overall success of the institution must also be reflected in the amount of variable remuneration, including the retained amounts (Malus). 5 The risk orientation of the remuneration must not be counteracted or nullified by hedging or other countermeasures.

4.2 Remuneration Committee 1 The Executive Management must establish a committee to monitor the appropriateness of the remuneration systems (Remuneration Committee). The tasks and organizational integration of the Remuneration Committee must be described in the organizational guidelines. 2 In the Remuneration Committee, in addition to staff from the Human Resources department, staff from the business-initiating organizational units as well as the control units must be represented (e.g., Market, Trading, Market Follow-up, Risk Controlling, or Compliance Function). The Internal Audit must be involved within the scope of its tasks. 3 The Remuneration Committee must prepare a report on the appropriate design of the institution's remuneration systems at least once a year and submit it to the Executive Management and the Administrative or Supervisory Body (Remuneration Report). If necessary, the Remuneration Committee must also report on an ad-hoc basis. The Chairman of the Administrative or Supervisory Body must be granted direct rights to information from the Remuneration Committee.

4.3 Disclosure 1 The institution must publish the following information on its own website or another suitable medium, observing the principles of materiality, protection, and confidentiality under Section 26a of the Banking Act (KWG), and update them at least once a year. 2 The institution must publish the following information: a) A description of the design of the remuneration systems, particularly regarding the relevant remuneration parameters as well as the composition of remuneration and the manner of granting it. Reference must also be made to the possible involvement of external advisors and interest groups (e.g., owners). b) A description of the composition, tasks, and organizational integration of the Remuneration Committee.

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3 With regard to executive managers and such staff members who can create high risk positions, the following information must also be published: a) Total amount of remuneration divided into fixed and variable remuneration, as well as the number of beneficiaries; b) Total amount of variable remuneration according to Section 4.1 Paragraph 4d, divided into retained and paid total amounts, showing any Malus; c) With regard to total amounts, the composition of the variable remuneration, particularly regarding the part of the variable remuneration that depends on the value development of the institution (Section 4.1 Paragraph 4e); d) Total amount of granted remuneration in the context of the commencement of an employment relationship within the meaning of Section 4.1 Paragraph 3, as well as the number of respective beneficiaries per fiscal year; e) Total amount of significant contractual severance payments made, as well as the number of beneficiaries per fiscal year, showing the highest severance payment made.

5 Requirements at Group Level 1 The parent undertaking or parent financial conglomerate undertaking of an institution group, a financial holding group, or a financial conglomerate must, within the limits of what is legally possible, ensure that the requirements are also observed at the group level. To the extent appropriate, individual requirements of this Circular can be fulfilled centrally within the group. For this purpose, the parent undertaking or parent financial conglomerate undertaking must make determinations on its own responsibility based on a risk analysis (self-assessment). This also applies to the determination of which undertakings in the group or financial conglomerate, which are not directly subject to this Circular (VA) or Circular (BA), the requirements are to be applied. In doing so, the parent undertaking must in particular consider the importance of the respective undertakings for the risk situation of the group or financial conglomerate and its size. The analysis must be plausible, comprehensive, and comprehensible to third parties.

6 Adjustment of Employment Agreements 1 The institution must, in the case of existing employment agreements or company practices that are incompatible with the requirements of this Circular, strive for their adjustment based on a sound legal assessment of the legal situation and taking into account the concrete chances of success within the limits of civil and labor law.

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