The coronavirus outbreak is an extraordinary burden on the global economy. The economic consequences of the Corona crisis affect not only the institutions, but also their employees and shareholders, particularly with regard to bonus and dividend payments. On March 27, 2020, the European Central Bank (ECB) published a recommendation that institutions should not pay dividends to shareholders until at least October 1, 2020, against the backdrop of the Corona crisis. In this Client Alert, we explain in general terms the impact of the Corona crisis on institutions and their compensation systems and highlight possible courses of action for institutions.
1. first impulses of supervision
On March 31, 2020, the ECB called on banks to show moderation in bonuses paid to employees. In addition, the European Banking Authority (EBA) has also indicated that variable compensation should be set at a conservative level. National regulators are currently calling for a review of compensation policies in light of the Corona crisis. It is true that neither the ECB nor the EBA have come out in favor of a ban on variable remuneration. However, taking into account the global economic consequences, some major banks have signaled that they will forego paying bonuses for the current year or also review bonuses for fiscal 2019.
2. corona crisis and total bonus pool
The current legal situation is that, despite the Corona crisis and the associated global economic consequences, bonuses for 2019 can still be paid to employees (and business managers) under certain conditions:
The overall view of the regulations on the total bonus pool shows that, before bonuses are determined and paid out, an examination must be carried out to determine whether and to what extent bonuses may be granted. The current Corona crisis may have an impact on risk-bearing capacity, multi-year capital planning, earnings position, and capital and liquidity resources. If the relevant indicators are particularly negatively affected, the bonus pool must be reduced or cut back completely in accordance with section 7 of the InstitutsVergV. To the extent that the regulatory conditions for payment set out in Section 7 of the InstitutsVergV (still) apply and Section 45 of the German Banking Act (KWG) has not been applied by the supervisory authorities or a corresponding application is not foreseeable, employees are generally entitled to the corresponding bonus – subject to the achievement of agreed targets. In this context, the institutions are already obliged in advance to take their own measures (e.g. bonus reductions, agreement of clawback reservations) if the development is likely to amount to a crisis scenario. Otherwise, institutions can (at most) work towards postponing payment of variable remuneration for the 2019 financial year until the end of 2020, insofar as this is compatible with the provisions of the employment contract and is necessary from an economic perspective. Alternatively, voluntary additional “deferrals” may be arranged with employees of significant institutions. Insofar as institutions wish to pay their employees the variable remuneration for 2019 in full, it may be advisable to inform the competent supervisory authorities in advance of the intended payment and to explain that the requirements of section 7 (7) of the German Stock Corporation Act (AktG) have been met. 1 sentence 3 InstitutsVergV must be complied with. We believe that appropriate documentation of the referral to the effects of the Corona crisis is required.
With regard to the variable compensation for the 2020 financial year, we will have to wait and see how things develop. However, the review of compensation systems for sufficient flexibility in crisis situations recommended by the national supervisory authorities should already be focused on now.
3. privileged variable remuneration
As a result of the Corona crisis, the Federal Ministry of Finance announced in its press release of April 3, 2020 that special payments between March 1, 2020 and December 31, 2020 will be exempt from tax and social security contributions for employees up to an amount of 1,500 euros if certain conditions are met. The special payment may be paid by any employer (including institutions) to its employees or granted as benefits in kind. The prerequisite for the privileged treatment of the special payment is that the benefit is paid in addition to the wages owed anyway and is recorded in the payroll account.
From a regulatory point of view, such a payment (if granted as an explicit special bonus) would generally be classified as variable compensation pursuant to Sec. 2 (2) of the German Stock Corporation Act (AktG). 3 InstitutsVergV to qualify. It should be noted that the upper limit set in each case for variable compensation in relation to fixed compensation must continue to be complied with. Compliance with the ancillary conditions pursuant to § 7 para. 1 sentence 3 InstititutsVergV remains unaffected. When paying out the special payment to risk takers from significant institutions, it should also be noted that the special payment requirements (insofar as the variable compensation cumulatively exceeds the exemption limit of EUR 50,000) are complied with.
4. adjustment of business strategy, target agreements and the compensation system.
The Corona crisis should be an occasion for many institutions to review the business strategy in force and the target agreements (already concluded). Institutions are currently faced with the challenge that the agreed targets can no longer be (fully) realized to a large extent due to the Corona crisis. Although an adjustment of compensation parameters and target agreements during the year is generally not provided for according to BaFin’s interpretation guide, the current Corona crisis should justify an exception to this principle. In our experience, there are various ways to develop efficient and practical solutions in this area. In addition, appropriate communications to employees must be set up. If target agreements were concluded or subsequently adjusted after the first quarter of the calendar year as a result of the Corona crisis, the relevant considerations must be documented in a transparent and comprehensible manner. In addition, target agreements can, if necessary. Be provided with an adjustment clause to the extent that further significant changes in targets become necessary due to the Corona crisis.
Insofar as institutions take the Corona crisis as an opportunity to review their business and risk strategy as well as their compensation system and realign them for the future, it is necessary to consider which aspects should be included in a modified conceptual design.
5 New occupational health and safety standards as a (new) goal for managers?
On April 16, 2020, the federal government recommended uniform, supplemental occupational health and safety standards nationwide to protect against coronavirus infection (SARS-CoV-2 occupational health and safety standards). Occupational health and safety standards may include regular review of hygiene measures, compliance with spacing regulations in open-plan offices, introduction and review of face-covering requirements, individual protective measures for at-risk employees, notifications to the health department, or identification of contacts with infected employees. The implementation and enforcement of these occupational health and safety standards may be delegated to managers as part of the employer’s duty of care. Consideration can be given to establishing compliance with occupational health and safety standards as a goal in the target agreement in order to achieve the desired control and steering effect.
The Corona crisis poses a particular challenge for both institutions and their employees. With regard to the aspects relevant to the InstitutsVergV, however, we see possible solutions to adequately address the challenges outlined. We will be happy to assist you with any questions you may have on this subject, especially the:
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