EBA Guidelines on Sound Remuneration Policies 2.0

1. Risk taker analysis for all

Following the revised regulations in CRD V, the EBA clarifies in GSR 2.0 that all (CRR) institutions must conduct an analysis of the employees who have a material influence on the institution's risk profile (risk takers). The German legislator has implemented the new requirements for the risk taker analysis in Section 25a (5b) and Section 1 (21) sentence 2 KWG (see our Client Alert).

2. Remuneration-related proportionality principle

The clarification on the risk taker analysis for all (CRR) institutions is linked to the modification of the remuneration-related proportionality principle in CRD V, which relates to the institution-related scope of application and to the possible use of the exemption limit for the individual risk taker (variable remuneration in the reference period maximum EUR 50,000 and maximum 1/3 of total remuneration; personal scope of application).

With regard to the scope of application of the CRD V, the EU member states have the possibility to limit the application of the regulatory requirements for the remuneration systems of risk takers to institutions with total assets of more than EUR 5 billion (with the authorization of the member states to raise the lower limit of total assets to up to EUR 15 billion; see our Client Alert on the CRD V). The German legislator has made use of this authorisation in IVV 4.0, according to which only significant institutions (Section 1 (3c) KWG) and other CRR institutions that meet the requirements of Section 1 (3) sentence 2 IVV 4.0 have to comply with the special requirements for the variable remuneration of risk takers.

For the application of the exemption limit for the individual risk taker (and the share of variable remuneration in total remuneration to be observed), the EBA announces its expectation for the concrete quantitative assessment of the individual remuneration components. The amount of variable remuneration is to be determined on the basis of an accrual-based allocation. For variable remuneration components with a multi-year assessment basis, the EBA specifies - unchanged in substance - that the variable remuneration component is recognised in the reference year in which the assessment basis ends (Paragraph 95 GSR 2.0). In contrast, when determining the general ratio between fixed and variable remuneration (in accordance with Article 94 (1) (g) CRD IV, implemented in Section 25a (5) KWG), the EBA allows in Paragraph 210 GSR 2.0 a pro rata consideration - either taking into account the actual granting or using the maximum amount achievable after the end of the reference period as a reference value. From a teleological point of view, there are - unchanged - weighty reasons for using the pro rata valuation approach also for the assessment of the exemption limit for the individual risk taker. The development of supervisory law in this regard remains to be seen.

3. Gender-neutral remuneration policy

The GSR 2.0 contains comprehensive pronouncements on the guiding principle of a gender-neutral remuneration policy (repeatedly) codified in the CRD V. The guiding principle of the gender-neutral remuneration policy contains three implementation dimensions for the institutions:

(1) Institutions shall ensure that all aspects of remuneration policy are gender-neutral, including the terms and conditions for awarding and paying out remuneration. This substantive requirement already exists for institutions domiciled in Germany under existing law (including the German General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz, AGG) and the German Remuneration Transparency Act (Entgelttransparenzgesetz, EntgTranspG)).

(2) From a formal point of view, institutions shall demonstrate that the remuneration policy is gender neutral. In the GSR 2.0-E, the EBA announced for the proof - as an expectation - the target image of the comprehensive documentation of a job evaluation with concrete ideas of the EBA (a) which criteria the institutions should (essentially) take into account for the concrete job evaluation, and (b) the obligation for the institutions to mark jobs to be evaluated equally accordingly. In the consultation process, these expectations were noted as being too far-reaching (see also our Client Alert on the GSR 2.0-E). The EBA has taken this comment into account for the final version of the GSR 2.0 - and allows that the institution documents the remuneration-related assessment of the individual job in an appropriate manner. According to this modified understanding, the implementation of a job evaluation and its documentation only (still) includes a standard example for a suitable formal proof (Paragraph 26 GSR 2.0). Alternatively, the evidence can be provided, for example, by (descriptive) documentation of the assessment criteria used for the determination of the remuneration - in a gender-neutral manner - (for which the EBA lists standard examples in Paragraph 26 et seq.) In addition, institutions can make use of the instruments already developed in practice for the statutory requirements of the non-discriminatory remuneration system in accordance with Section 4 (4) of the EntgTranspG.

(3) Institutions shall establish appropriate instruments in their remuneration governance to effectively monitor compliance with the gender-neutral remuneration policy. This includes, in addition to appropriate control processes in relation to the concrete remuneration decision (e.g. four eyes principle; in the case of significant institutions, the remuneration officer could take over the control), a consideration in the appropriateness test pursuant to Section 12 IVV, for which the EBA provides for a country-specific test that has to differentiate between the following (employee) groups (Paragraph 64 GSR 2.0): (1) members of senior management, (2) members of the supervisory body, (3) other risk takers, (4) other employees. If there are significant differences between the remuneration of male or female employees, the (material) reasons for this must be documented in the appropriateness test.

As part of the information on the remuneration system, the management must also inform the supervisory body of the specific manner in which compliance with the gender-neutral remuneration policy is ensured. The GSR 2.0 no longer require the imputed assessment of any gender pay gap as specified in the GSR 2.0-E. Against this background, institutions can establish need-based instruments to monitor compliance with the gender-neutral remuneration policy.

4. Extended requirements for group-wide remuneration schemes - with the exception for regulated group companies

The EBA announces its expanded understanding of the group concept - as a result of the updated requirements in CRD V - according to which a group-wide remuneration strategy must generally be established and applied to all group companies in the (sub)consolidation group if at least one group company is an institution (Paragraphs 8 et seq. GSR 2.0). Group companies whose remuneration systems are (also) subject to statutory requirements can be exempted from the statutory requirements applicable to institutions, with the exception of employees of group companies whose activities have a material influence on the risk profile or on the business activities of the institution. Capital management companies, for example, whose remuneration systems are subject to the requirements of Section 37 of the German Capital Investment Code (Kapitalanlagegesetzbuch, KAGB) are covered by this exemption. BaFin has implemented the new EU legal requirements in Section 27 IVV 4.0.

5. The end of the retention payments in its current form - or not?

With regard to the granting of retention payments, the EBA provides two clarifications and one new material provision in the GSR 2.0:

The first clarification is (merely) formal, requiring institutions to document for each individual beneficiary the legitimate retention interest in the granting of the retention payment (Paragraph 143 GSR 2.0).

From a German labour law perspective, the second clarification is problematic, according to which no advance granting or pro rata payment of the retention payment is to be made, but rather the retention payment is to be granted only after its requirements have been met (Paragraph 144 GSR 2.0). This pronouncement does not correspond to the practice in Germany - which is permissible under labour law - according to which an advance grant or pro rata payment can be considered from a supervisory perspective if, from a labour law point of view, a clawback of the remuneration component paid out is possible (see our Client Alert on retention payment). The EBA has not included the substantive suggestions made in the consultation procedure in the GSR 2.0.

As a new material provision, the EBA stipulates that the retention payment - with a view to its classification as variable remuneration under supervisory law - must fulfil a further so-called specific performance condition for the individual beneficiary in addition to the legitimate interest (Paragraph 147 GSR 2.0). The mere fulfilment of the retention condition (e.g. the expiry of the retention period without the employee having given notice) is therefore not sufficient. In the consultation process, the use of "real" performance-based parameters proposed by the EBA met with a critical response. The EBA has taken the critical feedback into account in the final version of the GSR 2.0 and allows such conditions to suffice for the specific performance conditions that are related to the legitimate retention interest and to the behaviour of the individual beneficiary. In practice, the concrete parameter for the specific performance condition can thus be derived directly from the individual retention interest. From a labour law perspective, this (new) regulatory understanding is problematic in view of the case law of the Federal Labour Court on cut-off date clauses in gratuity commitments.

6. Further conclusions from the GSR 2.0

Further conclusions from GSR 2.0 can be summarized as follows:

• Institutions shall also consider ESG criteria in the remuneration policy (Paragraph 16 GSR 2.0). With this pronouncement, the EBA also takes into account the standards of EU Regulation 2019/2088, which requires the consideration of sustainability risks in the remuneration policy and the demands of which institutions had to 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 payments for regulatory purposes (Paragraphs 162 et seq. GSR 2.0). The list of examples set out in the GSR 2.0 is now exhaustive and restricts some of the previous groups of cases, according to which severance payments in the context of a termination dispute are only to be regarded as privileged severance payments if they are agreed in the legal dispute (and not in the out-of-court preliminary phase in a termination or settlement agreement). Domestic practice - which is also reflected in the unchanged provisions of Section 5 (6) IVV 4.0 - does not share this narrow understanding of the content.
• 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 (Paragraphs 73f. GSR 2.0).
• (Only) In remuneration committees in global systemically important institutions (GSR-I) and in other systemically important institutions (OSR-I), the majority of the members and the chairperson must be independent; for all other institutions, the EBA allows it to be sufficient that an adequate number of members is independent (Paragraph 55 GSR 2.0).
  

7. Entry into force of the GSR 2.0

The GSR 2.0 will enter into force on 31 December 2021. It is expected that the BaFin will adopt a significant part of the EBA's pronouncements in the Interpretative Guidance on the IVV 4.0. Institutions should therefore take the GSR 2.0 into account in the current revision of their remuneration systems.