Factsheet – The Regulation of Remuneration in Credit Institutions

Factsheet The Regulation of Remuneration in Credit Institutions

Credit institutions must have appropriate, transparent remuneration systems for management and staff that are oriented towards the sustainable development of the institution. The focus is on variable remuneration, the so-called bonuses. Following the principle of proportional regulation, a distinction is made between general requirements for all institutions and special requirements for larger or more complex institutions and their risk-takers.

Why is regulation necessary? – Arising from the financial crisis of 2007/2008, which revealed deficiencies in inadequate remuneration regulation. – Inappropriate remuneration systems can lead to undesirable risk behavior and thus contribute to the instability of individual companies as well as the entire financial system. The supervision of remuneration systems is carried out by the Bundesbank in conjunction with BaFin or the ECB. The focus is on – credit institutions with systemic relevance, and – higher remuneration or remuneration with high variable components. Photo: Simon Potter

Who is responsible for the remuneration systems in an institution? General requirements for all institutions and all employees The administrative or supervisory body is responsible for the remuneration systems of the management and supervises the remuneration systems of the employees. The management is responsible for the remuneration systems of the employees. Significant credit institutions must appoint a remuneration officer to support the remuneration control committee. Additionally, internal control units are included in decision-making processes. Credit institutions deemed significant under the German Banking Act (KWG) must mandatorily appoint a remuneration control committee from among the members of the administrative and supervisory body.

General requirements for all institutions and employees • A reduction of variable remuneration up to complete cancellation must be possible. • Remuneration must be determined based on previously defined parameters. • Definition of remuneration: "Remuneration" is not just the salary, but all benefits that employees receive for their work. • The remuneration strategy and systems must be aligned with the institution-specific business and risk strategy. • Special regulations exist for special forms of variable remuneration (signing bonuses, retention bonuses, severance payments). • The ratio between variable and fixed remuneration must be designed appropriately.

Institutional Remuneration Ordinance (InstitutsVergV) German Banking Act (KWG) • Bonus Cap: Variable remuneration may generally not exceed 100% of fixed remuneration. With the consent of the shareholders and adequate capitalization, variable remuneration may amount to up to 200% of fixed remuneration. • Variable remuneration for members of the administrative or supervisory body is prohibited.

Special requirements for risk-takers In the special requirements for risk-takers1 of credit institutions classified as significant under the KWG (and partially also certain other credit institutions), ex-ante and ex-post risk adjustment are in the foreground. 1 Risk-takers = employee categories whose activity significantly affects the risk profile of the institution.

Ex-ante risk adjustment • based on performance rendered including all current and future risks taken, • taking into account qualitative and quantitative remuneration parameters, and • based on a sufficiently long assessment period.

Ex-post risk adjustment Determination of the amount of variable remuneration • At least half of the variable remuneration must be paid out in an instrument that reflects the sustainable development of the credit institution, e.g., shares or contractual constructions. • In serious cases, the recovery of already paid-out variable remuneration must take place.

Deferral and Malus • A portion of the variable remuneration can only be claimed after the expiration of a deferral period. • Payout at most in linear installments. • A subsequent performance measurement takes place before payout, which may lead to a reduction of the still deferred portion (Malus).

Payout in Instruments Clawback

Special requirements for the remuneration of certain categories of employees • Variable share of remuneration generally ≤ 1/3 of total remuneration. • The remuneration parameters must not move in tandem with those of the controlled units.

Employees in control units • The remuneration systems must take consumer rights and interests into account. • Particularly strict requirements apply to advisory services for real estate consumer loan contracts.

Sales staff • The variable remuneration must be based on a multi-year assessment basis of ≥ 3 years. • The total remuneration must show an appropriate relationship to the tasks and performance of the member as well as to the situation of the credit institution.

Members of the management