Questions and answers on the German Remuneration Ordinance for Institutions

The new FAQs provide clarity in the assessment of certain remuneration components under remuneration law. 

So-called “group bonuses” – where, according to the definition of BaFin, part of the variable remuneration of a subsidiary institution’s employees is based on the performance of the parent company, which is neither an institution under the German Banking Act (Kreditwesengesetz – KWG) nor under the CRR – are, as variable remuneration, fully subject to the requirements of the IVV. These are specified, among other things, to the effect that the strategic business and risk objectives of the institution on which the remuneration parameters are based (cf. section 4 IVV) must consider the group’s performance and that, in the case of material risk takers (“MRTs”), the ex-post risk adjustment must be based on the levels “individual”, “organisational unit” and “institution/group”, but not on the group’s performance. 

What is new are the statements on the payment of recognition awards which qualify as variable remuneration within the meaning of the IVV. These awards are only permissible under limited conditions (e.g. there must be certain requirements or criteria regarding the possible reasons and events for granting such an award) and they may not be granted to MRTs as a general rule. 

Finally, the FAQs contain more specific rules on the valuation of contributions to company pension schemes and of bridging payments after completing a term of office (Ruhegehälter) as well as on the exemption of certain benefits in kind and bonuses as part of any operational suggestion system (betriebliches Vorschlagswesen) from the concept of remuneration.

For the first time, the FAQs contain statements – albeit few – on Environmental, Social & Governance (ESG) issues. The FAQs state that ESG risks in relation to remuneration are to be taken into account in line with section 4 IVV. In order to achieve an alignment of remuneration parameters with business and risk strategies as well as strategic goals set, material sustainability risks in the sense of ESG risks should also be considered in the remuneration systems. As a concrete example, the FAQs specify the setting of certain sustainability targets as remuneration parameters.

With regard to severance payments, the FAQs state for the first time that the time of severance, the trigger and the extent of the severance payment must be taken into account. A severance payment promise that is not made in a direct temporal and causal connection with a separation becoming concretely apparent can represent an incentive to take risks. So-called change-of-control clauses agreed with members of the management as a trigger for a severance payment are generally justified if the severance payment is linked to the existence of a change of control event and the termination of the appointment of the member of the management.

Furthermore, it is clarified that severance payments which compensate for existing remuneration claims and the loss of a job are generally reasonable in terms of their amount. In this respect, compensation for any loss of variable remuneration for the current performance year does not preclude the privileged treatment of severance pay under section 5 para. 6 sentence 5 IVV.

On the other hand, bridging payments and the like, which serve a post-contractual support, are generally regarded as critical and require a special justification, especially if they are to be granted for more than two years.

It should be noted that according to the FAQs, each institution must ensure by contractual arrangement that severance entitlements can be reduced or cancelled with effect for the future. This also applies to severance payments promised to non-MRTs, since according to BaFin such an obligation arises from section 5 para. 2 in conjunction with para. 3 no. 2 IVV.

If several criteria regarding the privileged nature of a severance payment according to section 5 para. 6 sent. 5 no. 1 IVV are met, it remains unclear whether a notification of the supervisory authority is required. In our opinion, however, the example chosen in the FAQs would tend to argue against this. It is also new that in the event of several criteria regarding the privileged nature of a severance payment being met - in deviation from the wording of the IVV - a notification is not necessary if the requirements of section 5 para. 6 sentence 5 no. 3 IVV are fulfilled. According to the FAQs, a collective notification can also be submitted if the severance payments relate to a large number of similar circumstances.

Whilst the FAQs repeat certain statements on the determination of the bonus pool made in the Interpretation Guide, new aspects are also highlighted. For example, the appropriate procedure for determining the bonus pool should include, in addition to the intended process, in particular a determination of the underlying criteria and threshold values on an institution-specific basis. A deviation from this requires the approval of the management or the supervisory body and must be justified and documented.

The review of the criteria pursuant to section 7 IVV must be carried out on the basis of the figures certified in the annual financial statements at the end of the relevant financial year. If, in exceptional cases, a variable remuneration is granted in advance, a repayment clause must be agreed upon according to which the payment is subject to a positive bonus pool determination.

The FAQs also contain more detailed specifications regarding the remuneration of MRTs. The criteria for a complete loss of variable remuneration pursuant to section 18 para. 5 sentence 3 IVV are specified in the FAQs. In this context, the statements on fault (Verschulden) and on the amount of damage are to be emphasised in particular: as a general rule, an MRT must have acted with intent (vorsätzlich) or gross negligence (grob fahrlässig) at least, except for “extreme exceptions” where no fault is required, and must have created a danger by his conduct which resulted in a failure. Significant losses according to section 18 para. 5 sentence 3 no. 1 IVV are given if, for example, (i) the expected loss triggers an ad hoc notification pursuant to Article 17 MAR, (ii) the unexpected loss corresponds to at least 1.0 per cent of the equity capital actually held by the institution and the MRT has significantly contributed to an exposure to which an unexpected loss of at least 1.0 per cent of the equity capital is attributable by acting with gross negligence at least, or (iii) always, i.e. even without fault, if the (expected and unexpected) loss amounts to at least 5.0 per cent of the equity capital actually held. In this context, several losses must be added, if applicable.

Like the currently applicable Interpretation Guide, the FAQs state that, according to section 19 para. 1 sentence 1 IVV, the two levels of consideration “personal performance contribution” and “departmental contribution” can be merged for hierarchically higher MRTs. What is new in this respect is that BaFin considers a weighting of 30% regarding the merged level and 70% regarding the overall performance of the institution/group to be appropriate. 

Furthermore, it has to be considered that specifics apply to the variable remuneration of the member of the management responsible for risk compared to other employees in control functions.

Section 20 para. 5 IVV sets forth the requirement to pay out at least 50% of the variable remuneration in instruments. In the case of listed stock corporations, shares and share-based instruments are to be used according to the FAQs. In all other cases, depending on the legal form, share-based instruments or other equivalent instruments sustainably reflecting the equity value should be used as well. The FAQs specify what qualifies as a share-based instrument or equivalent instrument. Other equivalent instruments include subordinated loans, bonds or promissory notes that link redemption to threshold values based on certain KPIs. According to the FAQs, contractual constructions must meet certain criteria, such as the corporate performance determined on the basis of key figures, in order to be considered an equivalent instrument.

The instruments must be valued at their market price or fair value on the date of grant, although it should also be sufficient to apply an average value (based on a period of up to one month close to the date of grant).

In addition to the key modifications mentioned above, the FAQs include further provisions, inter alia on the obligation to carry out spot checks as well as on specifics applicable to development institutions (Förderinstitute).