EBA Guidelines on Sound Remuneration 2.0
Draft of revised version
European Banking Authority (EBA) has published on 30 October 2020 a draft revised version of its Guidelines on Sound Remuneration Policies (GSR 2.0-E). In this Client Alert, we summarise the main updates and new features in the GSR 2.0-E.
The Guidelines on Sound Remuneration Policies (GSR) are part of the overall package of revised regulatory requirements for the remuneration systems of institutions. The European legislator has set the legal basis for this in Directive 2013/36/EU (CRD IV, as amended by Directive 2019/878/EU (CRD V)). In Article 75(2) CRD IV, the European legislator authorised EBA to adopt the GSR and added in CRD V a more detailed form of the scope of the GSR set out in Article 92(2)(aa) CRD IV on gender-neutral remuneration policy. The GSR - like CRD IV/V - are addressed to the EU Member States, which have to transpose the legal provisions of CRD IV/V on remuneration systems into national law. The purpose of the GSR is to ensure that the supervisory requirements in the national statutory regulations are applied consistently and as far as possible without contradiction. The German legislator will implement the CRD V specifications on remuneration systems in the Institute Remuneration Ordinance (Institutsvergütungsverordnung, IVV) and the German Banking Act (Kreditwesengesetz, KWG). The legislative procedures are pending. The individual institution has to observe the CRD IV/V and the GSR indirectly when implementing the supervisory requirements in the remuneration systems for employees, according to which the IVV is to be interpreted in the light of the legal requirements of the CRD IV/V (interpretation in conformity with the guidelines); with regard to the GSC, Art. 16(3) of EU Regulation 1093/2010 (EBA Regulation) provides that institutions shall make every effort to comply with the guidelines and recommendations of the GSC.
1. Principle of proportionality I: Risk taker analysis for all
In the GSR 2.0-E, EBA clarifies that all institutions must carry out an analysis of staff who have a significant influence on the risk profile of the institution (risk takers). The clarification is related to the proportionality principle laid down in CRD IV/V (Article 92(2)). So far, the European legislator had understood this as a material proportionality principle, according to which each institution must generally identify risk takers and the individual institution could make the application of the supervisory requirements to the remuneration systems of risk takers dependent on its size, its internal organisation and the nature, scope and complexity of its business. The German legislator had, up to now, taken a special path by requiring only significant institutions within the meaning of Section 25n KWG to perform a risk taker analysis using a quantitative approach, at the same time stipulating the application of the regulatory requirements for the remuneration system of these risk takers (with the exception of the requirements of Sections 20 and 22 IVV for risk takers with an annual variable remuneration of up to EUR 50,000 gross) and exempting non-significant institutions from the obligation to perform a risk taker analysis. The European legislator combines the two approaches in CRD V, according to which all (CRR-)institutions must carry out the risk taker analysis and the EU member states can restrict the supervisory requirements for the remuneration systems of risk takers to institutions with a balance sheet total of more than EUR 5 billion (with the authorisation to the member states to raise the lower limit of the balance sheet total to up to EUR 15 billion, Art. 94 (3) CRD V, see also our Client Alert on CRD V and our comments immediately under point 2). This clarification is also relevant to the current legislative process to implement the CRD V requirements on risk taker analysis in the KWG through the German Risk Reduction Act (RiG), as the Bundesrat proposed in its resolution of 18 September 2020 that only significant institutions should continue to be required to perform risk taker analysis under the RiG. The Bundestag did not take up this proposal and passed the RiG on 5 November 2020 in a version that includes an obligation for all CRR-institutions and all other significant institutions to perform risk taker analysis. At its meeting on 27 November 2020, the Bundesrat decided not to submit a request to convene the conciliation committee, so that the legislative procedure is now complete.
2. Principle of proportionality II: Structure of the (variable) remuneration for risk takers - concrete determination of the exemption limit
With regard to the remuneration-related exemption of the individual risk taker from the application of the general supervisory requirements to his variable remuneration (= variable remuneration in the reference period amounts to a maximum of EUR 50,000 gross and a maximum of 1/3 of the risk taker's total remuneration), the EBA states in GSR 2.0-E (paragraphs 93 et seq.) its expectation of a concrete assessment of the individual remuneration components. The valuation must be carried out in accordance with the - in practice already established - regulatory principle of allocation to the appropriate period; the work performance underlying the individual remuneration component is decisive in this respect.
3. Gender-neutral remuneration policy
The GSR 2.0-E contains comprehensive pronouncements on the principle of gender-neutral remuneration policy (repeatedly codified by the European legislator in CRD V). The guiding principle of gender-neutral remuneration policy has three implementation dimensions for institutions:
(1) From a material point of view, institutions shall ensure that all aspects of remuneration policy are gender neutral, including the conditions for the allocation and payment of remuneration. This substantive requirement already exists for institutions based in Germany under existing law (including the General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz, AGG)).
(2) From a formal point of view, institutions should be able to demonstrate that their remuneration policy is gender neutral. In order to provide such evidence, EBA announces in GSR 2.0-E (paragraphs 24 et seq.) the objective of comprehensive documentation of a job evaluation with concrete ideas of EBA on (a) which criteria the institutions should (essentially) take into account for the concrete job evaluation and (b) the obligation for the institutions to label similarly evaluated jobs accordingly. Such a requirement would be a novelty for the content of the remuneration systems - according to the current legal situation, institutes do not need to carry out and document a job evaluation for None tariff employees (including None tariff employees to be qualified as senior executives within the meaning of Article 5 (3) of the German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG). Nor does Section 4 of the German Transparency in Wage Structures Act (Entgelttransparenzgesetz, EntgTranspG), which contains the (transparency) requirements for gender-neutral remuneration in existing law, contain any corresponding requirements for proof. Against this background, from a market perspective, a material number of (non-significant) institutions have not yet established a job evaluation procedure. If a works council has been elected at the institute, the right of co-determination from Section 87 (1) no. 10 BetrVG might be questioned in the case of such a job evaluation procedure as announced in GSR 2.0-E, since the institute - in order to fulfil the aforementioned documentation requirements - has to establish a link between the evaluated job and the remuneration. In GSR 2.0-E, EBA has invited further input in the consultation procedure on suitable evidence for a gender-neutral remuneration policy.
(3) Institutions shall establish appropriate tools in remuneration governance for effective monitoring of compliance with the gender-neutral remuneration policy. When informing the supervisory body about the remuneration system, management shall also inform the supervisory body of the concrete ways in which compliance with the guiding principle of the gender-neutral remuneration policy is ensured (GSR 2.0-E, paragraph 46). The supervisory body should trace the specific status of gender-based remuneration by calculating the average remuneration of comparable male and female employees in terms of function and its development over time (GSR 2.0-E, paragraph 63). If the calculation results in different average remuneration of comparable male and female employees, the supervisory body shall work towards eliminating the difference in remuneration or, if there are non-gender-related factual reasons, towards documenting the factual reasons.
4. Expanding the requirements for group-wide remuneration regulations - with a simultaneous exception for regulated group companies (and an "exception from the exception")
The EBA states that - due to the new supervisory requirements of Art. 1 CRD V in relation to Art. 3 para. 1 no. 63, 109 CRD IV - it has a broader understanding of the concept of a group, according to which a group-wide remuneration strategy must be generally established and applied to all group companies in the (partial) scope of consolidation if at least one group company is an institution (paragraphs 8 et seq. GSR 2.0-E). At the same time, the EBA determines the possible exclusion of group companies from the supervisory requirements applicable to institutions, which themselves have to comply with mandatory supervisory requirements for the remuneration systems of their employees; with the exception of the employees of group companies whose activities have a significant influence on the risk profile or on the business activities of the institution. This divisional exception applies in particular to capital management companies whose remuneration systems must meet the requirements of Section 37 of the German Capital Investment Act (Kapitalanlagagesetzbuch, KAGB); with the exception of employees who qualify as risk takers of the institution within the group because they exercise a direct significant influence on the institution. BaFin has implemented the new EU legal requirements in Section 27 IVV 4.0-E. We discuss the concrete implementation in our current Client Alert on the BaFin draft of IVV 4.0.
5. Further findings from the GSR 2.0-E
Further findings from the GSR 2.0-E can be summarised as follows:
- Institutions must also take ESG criteria into account in their remuneration strategy (GSR 2.0-E, paragraph 16). With this statement, EBA also takes into account the requirements of EU Regulation 2019/2088, which requires that sustainability risks be taken into account in remuneration policy and which institutions must implement in their remuneration systems by 20 March 2021.
- The EBA narrows the understanding of the content of benefits that are to be understood as severance pay for supervisory purposes. The catalogue of examples of rules laid down in the current version of the GSR is now final (GSR 2.0-E, paragraph 165) and also restricts some of the previous groups of cases, according to which benefits within the meaning of GSR 2.0-E, letter e) are only to be regarded as severance pay in the context of a dispute over termination of employment if they are agreed in a legal dispute (and not out-of-court in a termination agreement or winding-up agreement). Domestic practice - which is also reflected in the unchanged provisions of Section 5 (6) IVV in the draft IVV 4.0 - does not share this narrow understanding of the content.
- When granting retention premiums, institutions must document for each individual beneficiary the legitimate interest in the granting of the retention premium (GSR 2.0-E, paragraph 142). The EBA announces the assessment parameters - already established in the market - which are to be taken into account in the concrete examination (GSR 2.0-E, paragraph 143). In general, no advance or pro-rata payment of the retention awards should be made; this announcement does not correspond to the practice permitted under domestic labour law (see our Client Alert on retention awards). Further substantive impulses are likely to be discussed in the consultation procedure.
- In addition to the content of the remuneration systems and the remuneration parameters, the information provided to employees must also include the process for determining the (variable) remuneration (GSR 2.0-E, paragraph 72).
- (Only) In remuneration committees in global systemically important institutions (GSR-I) and other systemically important institutions (OSR-I), the majority of members and the chairperson must be independent; for all other institutions, EBA leaves it sufficient that a sufficient number of members are independent (GSR 2.0-E, paragraph 55).
Outlook: Consultation process and (expected) finalisation in the first half of 2021
EBA will carry out the consultation procedure on the draft until 29 January 2021. A public hearing will be held on 13 January 2021 as part of the consultation. The revised version of the guidelines is due to enter into force on 26 June 2021. It is expected that BaFin will adopt a substantial part of the EBA's pronouncements in the interpretation of IVV 4.0.