Since the outbreak of the financial crisis, remuneration structures in the worldwide financial sector have come under increasingly closer scrutiny. This is due to the fact that remuneration provisions are widely considered to have incentivised managers and employees to take irresponsibly high risks on behalf of their employers.
In Germany, Parliament passed a bill in August 2009 reforming the remuneration provisions in the Act on Stock Corporations (Aktiengesetz) with the aim of avoiding short-term incentives and promoting remuneration structures oriented towards the long-term development of the company.
Shortly before Christmas 2009, the German financial sector regulator BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) published a circular specifying new regulatory requirements with respect to the remuneration structures of insurance companies. The circular primarily implements the standards drawn up by the Financial Stability Board following the G-20 resolutions during the Pittsburgh summit. The circular is not legally binding to the same extent as a parliamentary bill, but has significant effects on the insurers as it sets the standards the BaFin requires upon the regulation of the insurers within its jurisdiction.
The circular applies to insurance companies within the BaFin’s jurisdiction. These are primarily insurers with their seat in Germany, but also branches of non-EU insurers undertaking insurance business in Germany. The BaFin will, however, only scrutinise the remuneration of the German branch’s staff and not look into the compensation of the foreign insurer’s staff elsewhere. Insurers from EU/ EEA states other than Germany are only subject to the circular if they are not subject to at least one of the EU insurance directives.
The circular is subdivided into general requirements which all insurers need to take into account and special requirements to be observed only by “important financial institutions”. Whether an insurer is “important” depends, in particular, on its size and the complexity and internationality of its business activities. The BaFin will regularly consider insurers important if their balance sheet total amounts to EUR 90 billion (approx. GBP 80.85 billion) or more.
Under the general requirements, all insurance companies need to align their compensation systems with their general strategic aims and structure them in a way to avoid “negative incentives”. This particularly includes remuneration provisions that promote taking high risk positions. In addition, variable compensation components have to be oriented towards the company’s long-term success.
The special requirements for important financial institutions also provide that an “essential” part of the variable components (at least 40 per cent) of directors and employees able to take considerable risks may only be paid out after an “appropriate” retention period. The BaFin will usually consider three years the minimum for this period. Furthermore, “important” insurers need to implement a variable remuneration system under which bad performance leads to a lower amount of variable components being paid out to directors and employees able to take considerable risks. Finally, “important” insurers need to install a remuneration committee which has to continuously scrutinise and develop the remuneration system as well as report on the remuneration system at least once a year.
Digging into the details, the circular raises various questions on how remuneration systems have to be structured to comply with the new regulatory requirements. It remains to be seen which solutions insurers and BaFin will develop in the course of time.
For further information, please contact:
Wolfgang Krauel (wolfgang.krauel@linklaters.com, (+49) 89 4180 8199).
