BaFin publishes FAQs on the German Remuneration Ordinance for Institutions

The FAQs specify which benefits or emoluments are regarded as remuneration within the meaning of the German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung – IVV) and whether remuneration is to be categorised as fixed or variable. For example, bonuses from the operational suggestion scheme and from "employee referral programmes" are not considered remuneration. 

Group bonuses and recognition awards constitute variable remunerations and must therefore fulfil the requirements of the IVV. With regard to the latter, it is expressly clarified in comparison to the Draft FAQs that these may not be used as compensation for variable remuneration that has not been fully earned and was actually agreed. Furthermore, material risk takers (MRTs) are now excluded without restriction from the group of recipients of a recognition award.

Contributions to company pension schemes are deemed to be remuneration within the meaning of the IVV, whereby it is up to the institutions to check whether these are to be categorised as variable or fixed remuneration. According to the FAQs, the accounting standard used by the institution for accounting purposes must be applied when determining pension provisions. In the case of accounting in accordance with IFRS, the expected return from the plan assets can be taken into account in accordance with IFRS principles in the case of 100% funding of a direct commitment. 

With regard to the negative performance contribution, it was specified that it must always be examined on a case-by-case basis whether the breach actually constitutes a conduct contrary to public morals or in breach of duty. The examples of conduct contrary to public morals that are listed in the Draft FAQs, namely breaches of a self-imposed code of honour or ethics of the institution for conduct towards customers and business partners of the institution as well as other written rules of conduct for internal dealings between employees, have been deleted. This emphasises that it is important to weigh up individual cases rather than applying them schematically. 

In this sense, the obligation provided for in the Draft FAQs that institutions must commit themselves in advance to exercising their discretion as far as possible by defining the cases of negative performance contributions has also been slightly softened. According to the FAQs, the institutions "only" have to provide transparent guidance as to which misconduct (not conclusively) always constitutes a negative performance contribution of a certain severity.

The FAQs stipulate that ESG risks must be taken into account in remuneration systems in accordance with section 4 IVV. In order to align the remuneration parameters with the business and risk strategies as well as the strategic goals set, material sustainability risks in the sense of ESG risks should also be taken into account in the remuneration systems, for example by defining certain sustainability targets as remuneration parameters. There are no changes here compared to the Draft FAQs. 

The FAQs stipulate that, in the case of severance payments, the time of agreement, the trigger and the scope in terms of the duration and amount of the severance must be considered. In comparison to the Draft FAQs, it should be particularly emphasised that institutions will have to ensure, up until the employee's exit, that non-privileged severance payments consider (serious) negative performance contributions, and if present, severance entitlements are reduced or cancelled without replacement. In contrast, the Draft FAQs stipulated that negative performance contributions must also be taken into account in relation to severance payments of a privileged nature and that institutions must ensure by contractual agreement that severance entitlements can be reduced or cancelled without replacement with effect for the future. In comparison to the Draft FAQs, the recommendation that a complete cancellation should be made in the event of serious negative performance contributions by the compensation recipient that are attributable to the last twelve months before the first payment from the severance agreement falls due has also been deleted without replacement. 

It was also clarified that the severance payments listed in section 5 para. 6 sentence 5 no. 1 letters a) to d) IVV each form their own case groups. Otherwise, the FAQs only contain minor changes compared to the Draft FAQs. 

With regard to Section 7 IVV, it is not permissible, as in the Draft FAQs, to carry out the review of the criteria only before or at the beginning of a performance period. The review must be carried out on the basis of the figures certified in the annual financial statements at the end of the relevant financial year. 

However, in contrast to the Draft FAQs, the new version does not stipulate that the payment of variable remuneration must be subject to repayment if it is paid in advance. As with severance payments, it is therefore no longer stipulated that contractual reservations must be agreed with employees. 

The FAQs explain the specific requirements for remuneration for MRTs. For example, the criteria for a complete loss of variable remuneration pursuant to section 18 para. 5 sentence 3 IVV are specified. According to the FAQs, the prerequisite for the complete loss of variable remuneration is that the MRT has created or increased a danger through his behaviour or decisions, which has materialised in a failure that has occurred. The MRT must have acted with at least gross negligence (grob fahrlässig) or intent (Vorsatz), whereby in extreme exceptional cases the MRT need not have been at fault due to the materiality of the loss. A significant loss according to section 18 para. 5 sentence 3 no. 1 IVV is to be assumed if (i) the expectation of the loss triggers an ad hoc notification pursuant to Art. 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 even without fault, if the (expected and unexpected) loss amounts to at least 5.0 per cent of the equity capital actually held. The threshold for the materiality of a loss can be reached by several losses attributable to one performance period as well as by a single loss. 

In connection with section 18 para. 5 sentence 3 IVV, the FAQs clarify that for members of the management with a performance period of at least three years (see section 19 para. 1 sentence 3 IVV), that the variable remuneration for all three performance periods comprising the year in which the serious negative performance contribution occurred must be cancelled in the event of a serious negative performance contribution.

When classifying whether behaviour that is contrary to public morals or in breach of duty would justify at least a partial reduction or even a mandatory complete loss of variable remuneration and the reclaiming of components already paid out, it is now also waived that the institutions must commit themselves in advance to exercising their discretion as far as possible concerning the requirements for MRTs. Here too, in contrast to the Draft FAQs, it is considered sufficient if the institutions provide transparent guidance in their own organisational guidelines as to which misconduct (not conclusively) always constitutes a negative performance contribution of a certain severity.

A further change compared to the Draft FAQs was included with regard to section 19 para.1 sentence 1 IVV. The principle that all three levels of consideration (institution, group, organisational unit) should be weighted approximately equally remains unchanged. However, if there is a deviation from an equally weighted consideration, the underlying reasons must be documented. Such deviations are conceivable in particular depending on the organisational structure and position of the MRT in the institution or group. 

The role of the remuneration officer is specified in the FAQs. The Draft FAQs already stipulated what knowledge in the area of risk controlling the remuneration officer of a significant institution must have and what minimum requirements the remuneration control report required under section 12 IVV must fulfil. The Draft FAQs also already stated that if a remuneration officer is not employed exclusively for this activity, it must be stipulated that the proportion of work must be at least 50% of the planned working time. 

With regard to the last point, the FAQs now specify that this also includes arrangements in which the remuneration officer works exclusively but not full-time. It should also be noted that exceptions to the 50% requirement may be applied in particular to remuneration officers in institutions with remuneration systems in which only a moderate variable remuneration of no more than EUR 50,000 p.a. is provided for MRTs below management level.

Another significant change has been made with regard to the deputies of the remuneration officer. While the Draft FAQs still stated that simultaneous fulfilment by several responsible persons is not appropriate, the remuneration officer can now expressly delegate tasks to his deputy and also to other competent employees as long as the overall responsibility remains with him. 

In addition to the changes already mentioned compared to the Draft FAQs, the FAQs have essentially only undergone minor adjustments. In particular, definitions have been adjusted and examples clarified, e.g. the "bridging payments after completing a term of office" have been defined as an early transitional allowance before reaching the standard retirement age.