Prudential requirements for institutions' remuneration systems
Regulation Governing Remuneration at Institutions
(Instituts-Vergütungsverordnung – InstitutsVergV)
Remuneration policies that focus on shortterm parameters and only reward without properly punishing failure may tempt staff to lose sight of the factors that keep their company sustainably successful over the long term. Such remuneration policies are antithetical to adequate risk management. The financial market crisis has demonstrated that the “moral hazard” created by misguided remuneration policies may put at risk not only the stability of individual enterprises, but also financial stability in general.
The purpose of the German Ordinance on the Supervisory Requirements for Institutions' Remuneration Systems (Institutsvergütungsverordnung) is to realign remuneration more closely to companies’ long-term success. Moreover, inappropriately high bonus payments are to be prevented by giving Germany’s Federal Financial Supervisory Authority (BaFin) greater powers to intervene (by restricting or prohibiting altogether the payment of variable remuneration components).
On 27 June 2016, the European Banking Authority (EBA) published guidelines on sound remuneration policies. They will enter into force on 1 January 2017, superseding the current guidelines of 10 December 2012 prepared by the Committee of European Banking Supervisors (CEBS). As a result of clarifications contained in the EBA guidelines, the current version of the Remuneration Ordinance for Institutions and its accompanying interpretation guide now require revision. BaFin has prepared a draft regulation amending the Ordinance and its guide and has released this for consultation.
Comments on the proposed changes may be submitted to BaFin either by postal mail or e-mail by 12 September 2016. Further details can be found on BaFin's website.