Remuneration policies that focus on short-term parameters and simply reward success 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 Remuneration Regulation for Institutions (Institutsvergütungsverordnung) fleshes out the provisions of section 25a(1) sentence 3 number 6 of the German Banking Act (Kreditwesengesetz), which requires institutions to have appropriate and transparent remuneration systems aligned with the aim of sustainable business development.

The Regulation, which entered into force in December 2013, was last amended with effect from 18 February 2023 by the Fourth Regulation amending the Remuneration Regulation for Institutions of 14 February 2023. This amended version contains the final implementation of the 2019 amendments to the European Capital Requirements Directive (CRD V).

The Regulation fundamentally differentiates between general requirements for staff remuneration systems at all institutions and special requirements for those institutions classified as significant pursuant to Section 1(3c) of the Banking Act and their risk takers. Some of the special requirements are additionally applicable to certain credit institutions that are not significant. BaFin’s interpretation guide on the Remuneration Regulation for Institutions has not yet been updated.

With effect from 12 January 2024, a separate legal regulation governs medium-sized investment institutions, namely the Remuneration Regulation for Investment Institutions (Wertpapierinstituts-Vergütungsverordnung), which is based on Section 46 of the Investment Institutions Act (Wertpapierinstitutsgesetz). Large investment institutions apply the rules of the Banking Act and the Remuneration Regulation for Institutions. By contrast, there are no specific remuneration system requirements for small investment institutions.