BaFin publishes draft FAQs on the Remuneration Ordinance for Institutions

News on remuneration at financial institutions: BaFin published a draft of "Questions and Answers on the Remuneration Ordinance for Institutions (IVV)" on 21 June 2023. The much-discussed FAQs on the IVV are initially for consultation purposes and, according to BaFin's intention, are intended to replace the interpretative guidance on the IVV from February 2018 that is still in force. But BaFin will not abandon the administrative practice described in the interpretative guide from 2018 and the interpretative decisions made by introducing the FAQs, provided that nothing to the contrary is regulated in the FAQs. So the Interpretative Guidance and the FAQ will coexist in the future.

We will bring you up to date, evaluate the changes contained in the FAQ and support you in designing your remuneration systems in a legally secure and practical manner. We have summarised the most important changes in the FAQ below:

Severance payments: Especially question 10 of the FAQ addresses the issue of what needs to be considered with regard to severance payments under the IVV. BaFin clarifies that severance payments should not create false incentives for employees, but should not unlawfully interfere with the institution's decision on whether to continue working with the employee. The purpose of a severance payment, namely the compensation of disadvantages of the person concerned due to the premature termination of their employment, should not be lost sight of. To assess whether a severance payment sets false incentives, the trigger and the amount of the severance payment are decisive in addition to the time of the agreement:

• First of all, the time of agreement must be chosen correctly, because if the promise is not directly connected in time and causally with an early termination of the contract, the risk of a false incentive effect is obvious.
• Employees who leave voluntarily should not be entitled to severance pay. Otherwise, in the view of BaFin, there is a per se appearance of inappropriateness. Exceptions are permitted in the case of change-of-control clauses in management contracts.
• According to the FAQ, severance payments should always be appropriate if they compensate for the fixed remuneration contractually owed to permanent employees until the expiry of the applicable notice period. This is at least not new as the 2018 Interpretative Guidance already clarified that the payment of the contractually owed remuneration during the notice period is not to be considered severance pay. Finally, according to the FAQ, severance payments that compensate for claims to lost variable remuneration for the current assessment year can be considered privileged severance payments within the meaning of § 5 para. 6 sentence 5 IVV.

ESG: The ESG policy anchored by the EU in the Green Deal is playing an increasingly important role –now also in the context of remuneration policy. BaFin explains to what extent ESG risks are to be taken into account in the context of remuneration. It clarifies that the ESG goals are to be considered within the framework of § 4 IVV. We have to wait for further details about this. One possible example, according to BaFin, is the definition of certain sustainability goals as remuneration parameters.

Bonus pool: New points of reference are also found for the determination of the total amount of variable remuneration, especially with regard to the question at which point in time institutions have to check the criteria of § 7 para. 1. For this purpose, the figures of the annual financial statements of the relevant business year and not, for example, the point in time immediately before or at the beginning of the assessment period are decisive. This has consequences for the drafting of contracts, as variable remuneration is often granted before this point in time. So it’s recommended to have a contractual repayment provision that authorises the institution to repay if the criteria of § 7 IVV are not met.

Negative profit contributions: In question 6 of the FAQ, BaFin provides an answer to the question of what is to be understood by a "negative profit contribution." According to BaFin, this includes conduct that is immoral or contrary to duty as well as cases in which the conduct or decision of employees has led to objectively serious negative effects for the institution. If there is a negative contribution to performance, the variable remuneration should be reduced or cancelled completely. This line of thought is dogmatically anchored in § 5 para. 2 IVV. To ensure these requirements are met, we recommend organising internal processes in such a way that negative performance contributions can be recognised and consideration ensured.

Remuneration in instruments: Extensive explanations can also be found for non-listed institutions. To ensure legal conformity in relation to § 20 para. 5 IVV, the question of how non-listed institutions can fulfil these requirements (granting at least 50% of the variable remuneration in instruments) should primarily be thought of share-based instruments or other equivalent instruments.

Performance recognition bonuses: Last but not least, BaFin provides an assessment of the extent to which recognition or appreciation awards are compatible with the IVV. This is affirmed if certain factors are taken into account. These include the limitation of discretionary powers for the granting of awards, the consideration of negative performance contributions, the compatibility with § 7 of the IVV and the non-inclusion of risk takers. In any case, the instrument of performance recognition awards must be provided for in the remuneration policy.

Remuneration officers: Remuneration officers monitor the execution of the remuneration systems and support the remuneration control committee. For the first time, it is specified which requirements a remuneration officer must fulfil to meet the requirements of § 23 para. 1 sentence 3 IVV. In addition to knowledge and experience in the areas of risk-bearing capacity, limit systems, ICAAP and ILAAP, there should also be knowledge of current developments in the areas of risk controlling and personnel. In addition, there are also explanations about the work share of a remuneration officer who is not exclusively active in this position.