• Proportionality principle  remains in effect - new requirements for smaller banks and asset managers in a group context
  • Amended version of the Remuneration Ordinance for Institutions (“Institiutsvergütungsverordnung”) (IVV 4.0) published

Frankfurt September 27, 2021. On September 24, 2021, just ahead of the German federal election, the amended version of the Remuneration Ordinance for Institutions (German: Institutsvergütungsverordnung, IVV 4.0), which had been expected since the beginning of the year, was published in the German Federal Law Gazette. It’s finalization was long overdue. As the main regulations for the implementation of the so-called EU banking package entered into force in January 2021 with amendments to the German Banking Act (KWG), it was expected that the implementation of the amended ordinance would follow shortly after. 

The newly published regulations have their origins in the Capital Requirements Regulation (CRR II) and Capital Requirements Directive (CRD V), whose stated aim is to reduce financial sector risks and strengthen the resilience and stability of the financial sector, including in regard to future crises. It was in particular the provisions of the CRD V that required implementation into national law through amendments to the German Banking Act (KWG) and, in terms of compensation-relevant provisions, through amendments to the Remuneration Ordinance for Institutions.
“As expected, the published changes are not as radical for large credit institutions as they were in the previous version of the Remuneration Ordinance for Institutions,” explains Petra Knab-Hägele, senior partner at consultancy firm hkp/// group. The financial service sector compensation expert is particularly concerned with the effect of the amendments on smaller, non-significant institutions and capital management companies, the consequences of which should not be underestimated.
Focus on non-significant institutions and capital management companies

The principle of proportionality is not affected by the changes. Under the german requirements, non-significant institutions, in general those with total assets of less than EUR 15 billion, are still not required to apply the strict compensation design requirements for risk takers that are stipulated for significant institutions. 

In addition to the major CRR institutions, two other groups are affected; namely smaller, non-significant CRR institutions with total assets of over EUR 5 billion and non-marginal trading activities or high derivative positions, as well as superordinate companies, which are not considered CRR institutions but have total assets of more than EUR 30 billion. These have to regulate aspects such as target definition and performance appraisal, compensation deferral, and payment in so-called instruments (shares or similar) as well as clawbacks for reclaiming compensation. 
Capital management companies and securities service providers now also have to explicitly implement the provisions laid down in the ordinance for employees identified as group risk takers within a group context, i.e. where there is a significant parent institution.
“Non-significant institutions have already had to identify risk takers since the beginning of the year in accordance with the requirements of the German Banking Act (KWG). However, the additional requirements for variable compensation only apply to selected institutions. Although the German legislator has retained the principle of proportionality and has taken local circumstances into account, it has been necessary to adapt several regulations for harmonization at EU level”, explains hkp/// group partner Isabel Jahn.

The new requirements at a glance

The key requirements of the new ordinance compared to the currently valid version from April 2019 can be summarized as follows:

  • The distinction between significant and non-significant institutions remains in place.
  • The total assets threshold for classification as a significant institution remains unchanged at EUR 15 billion. However, the averaging period is now set at 4 years instead of 3. Significant institutions can no longer opt out of identification.
  • Under the new version of the German Banking Act(KWG), all institutions must identify risk takers.
  • All institutions must at least disclose the total amount of compensation, divided into fixed and variable compensation, as well as the number of variable compensation beneficiaries, unless further regulations apply. 
  • When designing a compensation system, all institutions must ensure that it is gender-neutral and that pay discrimination with respect to the same work or work of equal value is avoided.
  • Additional requirements for variable compensation are only to be met by risk takers in significant institutions, unless a company belongs to one of the exception categories:
  1. Smaller, non-significant CRR institutions with total assets of over EUR 5 billion and engaged in non-marginal trading activities or with high derivative positions
  2. Superordinate companies, which are not considered CRR institutions but have total assets of more than EUR 30 billion
  3. Capital management companies and securities service providers in a group context (with a significant institution as parent company) for group risk takers
  • Furthermore, additional requirements for variable compensation for risk takers only apply if the variable compensation exceeds EUR 50,000 – but only if this does not exceed one-third of the total annual compensation.
  • The deferral period for risk takers has been extended from a minimum of 3 years to a minimum of 4 years.
  • HR will no longer be considered a control function under the Remuneration Ordinance for Institutions.

Further changes don’t have a fundamental impact on content and are more of an editorial nature. 

Moderate changes but action required

The continued differentiation between significant and non-significant institutions in particular makes it easier for many smaller institutions to implement the new regulations, provided they do not fall under the exceptions. 
It is only the identification of risk-takers that has been required of all institutions since the beginning of 2021 that covers the vast majority of companies. However, the definition here is limited to the management board, the supervisory body and the level directly below the management board, as well as to managers with a supervisory role and those heading significant business areas. Capital management companies and securities service providers in an institutional context are also likely to adapt quite quickly, as risk takers have tended to be identified in a group context in the past. 
“While the changes may not be groundbreaking, several smaller institutions and groups will still need to make adjustments. The extension of the deferral period of variable compensation elements for risk takers to a minimum of four years will also not please those affected – companies as well as individuals,” says hkp// group senior partner Petra Knab-Hägele with conviction. Her partner colleague Isabel Jahn sees the other proposed changes more as a fine-tuning, with adaption only needed in certain areas. “However, a review of compensation systems for regulatory compliance is still advisable in order to be prepared for future supervisory audits,” says the hkp/// group financial services expert. The industry now eagerly awaits the revised guidance for interpreting the Renumeration Ordinance for Institutions, which is expected to provide further clarification on the interpretation of the new regulations.

About the hkp/// group 

The hkp/// group is a partner-led, international consulting firm. Being accomplished transformation consultants, hkp/// group partners are respected leaders of innovation in HR and advise large and medium-sized international companies and start-ups that they develop customized and practical solutions with. The hkp/// group’s partners have many years of international consulting and business experience. They are recognized on the market as being experts in executive compensation, board services, performance and talent management, HR strategy and transformation, and HR and compensation benchmarking. Our partners are appreciated as competent contacts by supervisory and executive boards, management boards and company management teams, as well as HR managers and specialists. With over 700,000 data records on compensation from over 60 countries and all industries, the hkp/// group is one of the leading providers of compensation comparisons. In the field of executive compensation alone, we offer access to compensation data for 20,000 people in over 3,000 European companies (boardpay.com).

Contact Thomas Müller, cell: +49 176 100 88 237, E-Mail: thomas.mueller@hkp.com

* Photo by Tingey Injury Law Firm on Unsplash
Author Petra Knab-Hägele

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