The IVV 3.0 in the light of the new BaFin interpretation guide

The wait is over: BaFin published the Interpretative Guidance on the Remuneration Ordinance for Institutions (IVV 3.0) on February 16, 2018. The interpretation guide answers many questions on the application of IVV 3.0. At the same time, it raises new questions – especially in terms of labor law.

Introduction

The interpretation guide completes the documentation on the IVV 3.0 published on August 3, 2017 (see. for this our
Client Alert). It does not have the legal quality of a substantive law. The practice has to take it into account when implementing IVV 3.0, as it shows BaFin’s understanding of the content of the provisions of IVV 3.0.

1. “Everything that is not fixed is variable” – clarifications for the classification as fixed or variable remuneration

According to the IVV 3.0, all compensation components include compensation according to the IVV and fixed is only the compensation that meets the requirements of § 2 para. 6 IVV is sufficient. Institutions have – on the basis of the criteria of § 2 para. 6 IVV – to document why the individual remuneration is of a fixed nature. According to the Interpretative Guidance, institutions shall establish clear, objective and transparent criteria for the classification in advance in their remuneration policy.

The individual compensation component must be assessed quantitatively. According to the interpretative guide, BaFin allows a lump-sum determination for non-cash remuneration that is difficult to determine in terms of amount or to allocate to individual employees, according to which their total amount is determined and set in relation to the other fixed remuneration of the employees receiving non-cash remuneration. This average proportional value of the non-cash remuneration can be used to determine the individual remuneration.
If it is not possible to prove that the compensation is classified as fixed compensation, the compensation component is variable compensation and must be taken into account, among other things, when determining the total amount of variable compensation (Section 7 IVV) and the upper limit in the ratio to fixed compensation (Section 6 (2) IVV, Section 25a (5) KWG); in the case of risk takers in significant institutions, it is also subject to the requirements of Sections 19 et seqq. IVV.

2. severance payments – concretization of documentation requirements

Severance payments shall be deemed to be variable compensation (Section 5 (6) sentence 1 IVV). Institutions shall establish a framework for the determination and approval of severance payments in procedural terms and document substantive principles for the content of severance payments (§§ 11 para. 1 No. 3, 5 par. 6 P. 3 IVV). The substantive principles shall also include a maximum amount or the criteria used to determine a severance payment. The written form of the severance payment formula is only to be documented as an internal framework condition; it is not to be published to the employees.

3. severance payments as fixed compensation – design options and limits of the canon of Sec. 5 para. 6 P. 5 IVV 3.0

Deviations from the first practice to implement the privileged case groups of § 5 para. 6 p. 5 IVV determines the interpretation guide for three groups of cases: (1) Social plan compensation pursuant to Sec. 5 para. 6 p. 5 no. 1b) IVV only include those from social plans concluded on the occasion of the concrete operational change; framework social plan claims do not fall under this. (2) In the case of waiting compensation for post-contractual non-competition clauses, only the fixed compensation components shall be taken into account; the compensation paid pursuant to Section 74 para. 2 HGB, which is also to be taken into account for the amount of the waiting allowance, is to be allocated to the variable remuneration of the last year of employment. (3) For the substantive presentation of severance payments pursuant to Sec. 5 para. 6 p. 5 no. 3 IVV, the Interpretative Guidance provides for comprehensive requirements which, in practice, cannot consistently be documented transparently in the manner desired by BaFin.

4 No variable compensation – privilege only for funding institutions?

BaFin provides detailed reasons for the privilege granted to development institutions to forego variable remuneration in the interpretative guide. The further explanations in the interpretative guide reveal BaFin’s expectation that all other institutions must provide for variable remuneration in the remuneration system in order to use it – in BaFin’s view – as a management tool for risk-compliant behavior by employees.

5. legally compliant implementation of clawback regulations for risk takers

The implementation of the regulatory requirements on clawback remains a challenge for major institutions, even according to BaFin’s explanations in the interpretative guide. BaFin clarifies on the facts side that in the clawback-relevant facts according to § 18 para. 5 IVV, there is no discretionary power in carrying out the ex post risk assessment. On the face of it, this pronouncement runs counter to the implementation of clawback already undertaken in practice through a discretionary decision by the Board. Such a discretionary model can nevertheless be implemented if it determines transparent parameters for the substantive clawback decision to which the board is bound in the ex post risk adjustment. From the perspective of labor law, this model appears more promising than a contractual implementation, which is subject to the strict legal control of general terms and conditions.

6. control units in the compensation system – holistic participation

BaFin sets out in detail in the Interpretative Guidance its understanding of the appropriate involvement of the control units in the design and implementation of the remuneration system. Institutions may generally establish an individualized, needs-based system for the participation of specific control units to the extent that it is ensured that the participation of control units includes an effective framework for performance and success measurement, risk orientation, and the link between performance and compensation.

7. and what else? – Further clarifications in the interpretative guide

Worth mentioning are:

• The determination of the total bonus pool is not a task of the control units with regard to their participation pursuant to Section 7 para. The multi-year assessment basis for the variable compensation of the Executive Board (Section 10 (2) IVV) is at least three years. During the assessment period, advance payments on the variable compensation are possible on an annual basis.
• The effect on the adjustment of employment contracts that are not IVV-compliant (Section 14 (1) IVV) is not fulfilled by a one-time effort; in case of refusal, the Institute shall repeatedly offer the employee the IVV-compliant employment contract.
• The documentation of the risk taker analysis in significant institutions (Section 18 (2) sentence 1 IVV) shall contain at least data on the basic assumptions of the risk analysis and the scope of its application, on the assessment of the risks emanating from the business strategy and the activities of the institution, and on the assessment of the employees.
• The variable compensation of managing directors in significant institutions shall include a minimum eight-year cumulative period for the measurement and for the retention of the variable compensation. In the case of newly appointed managing directors, a minimum seven-year period must be set for the compensation to be withheld.
• The provision set forth in sec. 20 para. 3 IVV for the minimum level of retention of 60% of variable compensation must be realistically close to the usual variable compensation in the institution.
• The Compensation Officer shall generally hold office on a full-time basis.

Outlook: After the IVV 3.0 is before the IVV 4.0 – and in between comes the design aid 3.1

By using the interpretation guide, institutions can implement the regulatory requirements of IVV 3.0 in their compensation systems in a robust manner. This with due haste, as IVV 3.0 will be the subject of the audit for the 2018 reporting year. At the same time, with due diligence, to create regulations that are consistent with supervisory law and satisfy the framework conditions of labor law. In this context, institutions should note that BaFin will update the interpretative guidance in the future if required by the regulatory framework.

The statutory compensation merry-go-round also continues to revolve: the compensation regulations in CRD IV are currently being revised at the European level with a view to the specific form that the proportionality principle will take. The European Council most recently introduced a revised draft law into the legislative process in this regard on September 26, 2017.

We’ll keep you up to date on further regulatory developments with our Client Alert. Feel free to contact us!