Financial services remuneration: New year, new rules

New international banking standards (Basel III / CRD IV) came into effect in Germany and across Europe on January 1, 2014. Whilst most of the new rules relate to banking supervision, there are some important employment law implications, in particular a new Remuneration Ordinance relating to the remuneration of employees and managers of financial institutions (Institutsvergütungsverordnung, InstitutsVergV).

In addition to the bonus cap set in section 25a of the Banking Act (Kreditwesengesetz, KWG) referred to in our previous blog posting, section 5 of the Remuneration Ordinance requires institutions to put in place “appropriate” remuneration systems. According to guidance published by the Federal Financial Supervisory Authority (BaFin), a remuneration system is not appropriate if it provides for disproportionate risk incentives, for example, where variable compensation forms a significant proportion of the remuneration package. Guaranteed variable compensation should only be offered to new hires and for a maximum of one year.

Major financial institutions are subject to the most stringent rules: under the Remuneration Ordinance, institutions with an average balance sheet total of EUR 15 billion during the past three financial years are now regarded as major institutions. All major institutions are required to appoint a remuneration officer (Vergütungsbeauftragter) to supervise the remuneration system, and those appointed will enjoy special dismissal protection during their period of office and for one year afterwards.

All German financial institutions must ensure that their remuneration systems comply with the extensive new requirements.