Investment Firm Remuneration Ordinance

1. Personal scope of application of the WVV: MRT in MSIFs and Group MRT in corporate groups - with a broad definition of employees

Pursuant to Section 1 (1) WVV, the WVV applies exclusively to medium-sized securities institutions within the meaning of Section 2 (17) WpIG (MSIF) (see our Client Alert on the WVV-E 1.0 for the applicable legal framework for other securities institutions). In addition, it is also applicable within the scope of Section 1 (2) WVV to superordinate companies of an investment firm group (Section 3 (12) WVV), which must draw up a group-wide remuneration strategy irrespective of their status as a securities institution pursuant to Section 2 (17) WpIG.

The personal scope of application of the WVV only covers the remuneration systems of MRT (MRT, Section 1 (1) WVV). According to Section 2 (2) WVV, MRT include managers pursuant to Section 2 (36) WpIG and all employees of the MSIF whose professional activities have a material impact on the risk profile of the MSIF or the assets it manages. In accordance with Section 3 WVV, MSIFs must identify the MRT on the basis of a MRT analysis. This is based on the criteria of the Delegated Regulation (EU) 2021/2154 (RTS MRT, see our Client Alert). In addition to employees in an employment with MSIF, the aforementioned groups of persons also include external persons who fulfil the requirements of Section 2 (8) WVV (external employees). The distinction between external employees pursuant to Section 2 (8) WVV and other external persons working for the MSIF can be based on the demarcation criteria developed in practice for institutions under Section 2 (7) IVV.

2. General requirements for the content of the remuneration systems: principle of proportionality, updating of guidelines from the IVV

The regulator defines the principle of proportionality under supervisory law as the starting point for the content of the remuneration systems, according to which the individual MSIF must take its size, internal organisation and the complexity of its business into account when implementing the requirements of the WVV (Section 6 (6) WVV). This guiding principle opens up structuring options in individual cases, for example by allowing MSIFs with a less complex business strategy and/or a centralised internal organisation with comprehensive control mechanisms to set the specific remuneration parameters (e.g. to determine the ratio between fixed remuneration and variable remuneration) more flexibly.

The other general requirements for the remuneration systems set out in Sections 2 and 6 WVV essentially follow the remuneration system already familiar from the IVV, including, among other things

• the remuneration systems must contain a transparent classification of the individual remuneration components as fixed or variable remuneration, whereby all financial and material benefits of the institution and third parties that the individual MRT receives with regard to their professional activity for the MSIF must be taken into account as remuneration (Section 2 (1) WVV), and (only) those remuneration components that fulfil the requirements of Section 2 (4) WVV are to be qualified as fixed remuneration. These provisions are identical in content to the provisions of Sections 2 (1) and 6 IVV, so that MSIF can use the regulatory understanding of the IVV to verify the individual remuneration components, for example to deny the status of individual services as regulatory remuneration that have no substantive connection to the professional activity of the MRT for the MSIF. Pursuant to Section 2 (4) sentence 3 WVV, fixed-term functional allowances and foreign allowances are also to be regarded as fixed remuneration within the meaning of Section 2 (4) sentence 1 WVV.
  
• the remuneration systems of MRT in control units are subject to the additional requirements already known from Section 9 IVV, according to which the performance parameters for the variable remuneration must not run counter to the control function and the total remuneration must consist predominantly of fixed remuneration components (Section 6 (3) WVV). The legislator has not defined the relevant quantitative scope for the "predominant" share of fixed remuneration. MSIF will have to concretise the content of the term by referring to the "main focus" of the fixed remuneration components in the comparable provision of section 9 (2) IVV (in our opinion, the different choice of term does not prevent the application of the principles developed for section 9 (2) IVV in view of the identical teleological purpose of the two provisions). Consequently, a "predominant" share of the fixed remuneration should (already) exist if the fixed remuneration components account for more than 50% of the total remuneration.
  
• the remuneration systems must be gender-neutral (Section 6 (1) no. 2 WVV). The guiding principle of gender neutrality covers - comparable to the provision of Section 5 (1) no. 6 IVV for institutions - relevant requirements for the content and remuneration governance (see our Client Alert on IVV 4.0).
  
• severance payments and waiting allowances are generally considered variable remuneration (Section 6 (4) sentence 1 WVV) and are only not subject to the core supervisory regulations on variable remuneration if they are allocated to a case group under Section 6 (4) sentence 5 WVV. Pursuant to Section 6 (4) sentence 5 no. 3 WVV, the quantitative privilege already applies if the severance payment does not exceed EUR 200,000; the WVV has not included the additional requirement for institutions set out in Section 5 (6) sentence 5 no. 3b) IVV of a maximum amount of 200% of the last fixed remuneration received in Section 6 (4) sentence 5 no. 3 WVV. In addition, MSIF must also document the settlement principles (Sections 6 (4) sentence 2, 13 (1) sentence 2 no. 3 WVV).
  

3. General requirements for the variable remuneration of MRT: relationship between fixed and variable remuneration and proportionality principle

The general requirements for variable remuneration set out in Section 7 WVV focus on the framework conditions for the relationship between fixed and variable remuneration as well as requirements for the permissibility of guaranteed variable remuneration. As a key guiding principle, Section 7 (1) WVV stipulates that MSIFs must determine an "appropriate" value for the ratio between the variable and fixed remuneration of the MRT and must carry out the quantitative determination in application of the principle of proportionality under supervisory law and must take into account the business activities, the associated risks and the effects of the MRT on the risk profile of the MSIF or on the assets managed by the MSIF for the specific ratio. Section 7 (1) WVV does not set an absolute upper limit for the ratio between variable and fixed remuneration. In practice, upper limits of more than 200% are therefore likely to be permissible in individual cases. When finally setting the upper limit, MSIFs must observe the requirement of Section 7 (3) WVV, according to which there must be no significant dependency of the MRT on the variable remuneration; this requirement has both an absolute dimension (= quantitative amount of the fixed remuneration) and a relative dimension (= ratio of the fixed remuneration to the variable remuneration). From a practical perspective, MSIFs should document the reasons for the specific upper limit as required, taking into account the aforementioned regulatory requirements.

4. Special requirements for the variable remuneration of MRT: double proportionality principle

The special content requirements for the variable remuneration of MRT set out in Sections 8 to 11 WVV define a double principle of proportionality: 

• In general, MSIFs that fulfil the requirements of Section 44 (3) sentence 2 WpIG, i.e. whose balance sheet and off-balance sheet assets (in each case according to the average of the last four preceding financial years) do not exceed (i) EUR 100 million or (ii) EUR 300 million and who fulfil the further requirements of Section 44 (3) sentence 2 WpIG (Section 10 (1) WVV), are exempt from the requirements of Section 8 (3) to (6) WVV for the granting of variable remuneration. There are strong reasons in favour of determining the quantitative limits on the basis of a solo MSIF assessment (see also the further explanations in Section 5 below). The final version of the WVV no longer contains the authority of BaFin to order the application of Section 8 (3) to (6) WVV to MSIFs that fulfil the requirements of Section 44 (3) sentence 2 WpIG, which was still stipulated in the WVV-E 2.0, so that according to the final version, all investment firms that fulfil the requirements of Section 44 (3) sentence 2 WpIG are exempt from the requirements of Section 8 (3) to 5 WVV.
  
  
• All other MSIF do not have to comply with the requirements of Section 8 (3) to (6) WVV for the granting of variable remuneration for MRT whose variable remuneration does not exceed the annual (total) amount of EUR 50,000 and at the same time does not account for more than 25% of their individual total annual remuneration (Section 10 (2) WVV).
  

All MSIFs must observe the requirements of Section 8 (1), (2) and (6) WVV with regard to the performance parameters of variable remuneration and use performance parameters at the levels of the MSIF, the business division/organisational unit and the individual performance contributions of the MRT, whereby both financial and non-financial remuneration parameters must be used for the individual performance contributions (Section 8 (1) sentence 1, (2) sentence 1 WVV). The term "performance assessment" corresponds to the term "ex ante and ex post risk adjustment" used in the IVV. The performance assessment prior to determining the variable remuneration is based on an assessment period of at least one year. The legislator does not specify any further requirements for the quantitative weighting of the three performance parameter levels - and gives the remuneration practice greater freedom of design for the weighting than the statutory provision of Section 19 (1) sentence 1 IVV for the institutions, which (at least) determines an 'appropriate' consideration of the individual levels when determining the overall target achievement. In view of the statutory purpose of the mandatory consideration of the three levels, remuneration practice will also draw on practical experience in the implementation of Section 19 (1) sentence 1 IVV and take into account the individual levels with a weighting of at least 10% of the overall target achievement. In deviation from Section 8 (1) sentence 1 WVV, MSIF can only define non-financial performance parameters for MRT of control units (Section 8 (2) sentence 2 WVV). Section 8 (2) sentence 1 WVV also requires, in deviation from Section 19 (2) sentence 1 IVV, that the individual performance contributions are not necessarily defined in a target agreement, so that institutions can also specify these unilaterally to the MRT as an alternative to the target agreement, which is nevertheless generally recommended in practice.

For the performance assessment, Section 8 (6) sentence 2 WVV stipulates that the variable remuneration should be reduced appropriately in the event of a weak or negative financial result of the institution. From a labour law perspective, this requirement includes the challenge for remuneration practice of further specifying the "weak" financial result of the institution (= already in the event of a (material) shortfall of the relevant plan value? On the basis of an ab-solute consideration?) - the institution must do this in the remuneration policy.

For the granting of variable remuneration, Section 8 (3) to (6) WVV stipulates that (1) at least 40% of the variable remuneration must be withheld over a period of 3 to 5 years and, in the case of 'particularly high' variable remuneration, the proportion of the remuneration to be withheld must be at least 60%, whereby the institution must set a threshold value to specify the 'particularly high' variable remuneration, which may not be less than EUR 500.000 (Section 8 (5) WVV), and (2) at least 50% of the variable remuneration must consist of a remuneration component geared towards the sustainable performance of the institution (NWE component). The legislator does not set any specific requirements for the distribution of the NWE component to the retained/non-retained remuneration components, so that institutions can develop customised solutions. For MSIFs for which the value of the NWE share cannot be determined on the basis of a stock exchange price or other market value, the value of the NWE share must be determined at the time the variable remuneration is determined, at the time the respective retained remuneration component falls due and at the time the vesting period expires in accordance with Section 8 (5) sentence 2 IVV. 

Section 8 (6) WVV regulates the malus and clawback system to be established for variable remuneration. The hard malus/clawback circumstances defined in Section 8 (5) sentence 2 WVV go further than the provisions of Section 18 (5) sentence 3 IVV, according to which the relevant variable remuneration component is to be cancelled/repaid in full even if the MRT can no longer be regarded as competent and reliable for his activities (Section 8 (5) sentence 2 no. 3 WVV). However, its scope of application is limited to MRT who are not subject to the privileged treatment under Section 10 WVV.

6. Group-wide regulations on remuneration

The requirements for the Group-wide remuneration strategy are set out in Section 18 WVV, according to which the parent company must define the Group-wide remuneration strategy to implement the requirements of Section 46 WpIG and the WVV for the remuneration systems of the subordinated companies and monitor its implementation. In addition, the parent company must determine the group of Group MRT on the basis of the consolidated situation, which must be determined in accordance with the criteria of the RTS MRT.

5. Remuneration governance: scope of the principle of proportionality for the non-application of Section 8 (3) to (6) WVV ... and for the non-establishment of the remuneration control committee

Section 10 (1) WVV stipulates that the provisions of Section 8 (3) to 6 WVV do not apply to the granting of variable remuneration for MSIFs that fulfil the requirements of Section 44 (3) sentence 2 no. 1 or 2 WpIG. The issuer of the ordinance links the exemption to the scope of application of Section 44 (3) sentence 2 WpIG, which stipulates the possibility for the securities institutions covered to refrain from establishing, among other things, the Remuneration Control Committee if the requirements of Section 44 (3) sentence 2 WpIG are met. 

In remuneration practice, it has not yet been conclusively clarified whether the quantitative requirements set out in Section 44 (3) sentence 2 WPIG (maximum EUR 100 million (no. 1) or EUR 300 million (no. 2) in on-balance sheet and off-balance sheet assets) relate to the solo institution level or to the consolidated group level. The provisions of Section 38 (6) WpIG appear to speak in favour of the group level, according to which the provisions of Sections 38 et seq. WpIG are to be applied to MSIF both on an individual basis and on a consolidated basis, whereby the legislator has transposed the identical provisions of Art. 25 (4) IFD into the WpIG with Section 38 (6) WpIG. On the other hand, in Section 44 (3) sentence 3 WpIG, the legislator has obviously related the possibility of the so-called equal treatment order, according to which BaFin can order the establishment of a remuneration control committee for a MSIF in individual cases, even if the thresholds of Section 44 (3) sentence 2 WpIG are not met, if this is "necessary due to the [...] characteristics of the group to which the [MSIF] belongs", to the solo MSIF. If the threshold values related to the group, the group perspective would not have any substantive regulatory content at this point from a normative perspective. In contrast, the "characteristics of the group" criterion is fully applicable in the case of a solo institution perspective to the extent intended by the legislator (= exceptional establishment of the Remuneration Control Committee required due to a disproportionate impact of the risks arising from the business and risk strategy of the MSIF on the group). From a teleological perspective, there are also important reasons in favour of an assessment at solo institution level: The exemption of MSIFs from the establishment of a remuneration control committee pursuant to Section 44 (3) sentence 2 WpIG is based on the standardising assumption of the legislator to exempt the MSIF from the establishment of the remuneration control committee upon reaching the threshold value at the solo institution level, because with a total amount of off-balance sheet and balance sheet assets below the threshold value, the functions of the remuneration control committee defined in Section 44 (6) WpIG are not required for the implementation of the remuneration systems, as the MSIF in this case does not have the typified quantitative risks in its business and risk strategy that form the basis of the typified assumption of the legislator regarding the necessary bundling of remuneration expertise in the Remuneration Control Committee be established for this purpose. This teleological consideration is comparable to the similar statutory requirements of Section 25d (7) KWG for the non-establishment of a remuneration control committee, which also refers to the solo institution for the assessment of non-establishment for reasons of proportionality. Section 17 WVV defines the legal framework for the specific tasks of an established Remuneration Control Committee.

The further requirements of the WVV are known from the comparable regulations in the IVV:

• MSIF must implement the regulatory prohibition on hedging in accordance with Section 12 WVV in the remuneration systems of their MRT as required.
  
• MSIF must document the principles of the remuneration systems in organisational guidelines with the minimum content specified in Section 13 WVV, which must also include documentation of the responsibilities and decision-making powers of the individual stakeholders.
  
• The annual review of the appropriateness of the remuneration systems stipulated in Section 14 WVV is modelled on Section 12 IVV.
  
• The information of the MRT on the organisation of the remuneration systems specified in Section 15 WVV is modelled on Section 13 IVV, whereby the legislator (only) specifies the text form for the form of the information.
  

In the final version of the WVV, the legislator no longer pursued the separate disclosure requirements for remuneration systems still stipulated in Section 14 WVV-E 1.0. MSIFs must therefore disclose the remuneration systems exclusively in accordance with Art. 51 IFR.

7. Entry into force of the WVV ... and new Audit Report Ordinance

The WVV entered into force on 12 January 2024 (Section 20 WVV). With regard to its scope of application, Section 19 WVV defines a graduated regulation:

• The statutory provisions on (1) severance payments (Section 6 (4) WVV), (2) retention bonuses (Section 6 (5) WVV), (3) guaranteed variable remuneration (Section 7 (4) WVV), (4) compensation payments for lost variable remuneration at the previous employer (Section 7 (5) WVV), (5) the special requirements for the variable remuneration of the MRT (Sections 8 and 9 WVV), (6) the special requirements of Section 11 (2) sentences 1 and 2 WVV for the determination of the total amount of variable remuneration, (7) the annual review of the appropriateness of the remuneration system by the appropriate independent body (Section 14 WVV), (8) the annual review of the remuneration system by the Remuneration Control Committee for the purposes specified in Section 17 (3) sentence 2 no. 2 WVV and (9) the implementation of the Group-wide remuneration strategy in accordance with Section 18 (1) WVV must be applied by the institution for the first time in the financial year following 12 January 2024. MSIFs for which the financial year corresponds to the calendar year must therefore apply the aforementioned requirements for the first time in the 2025 financial year.
  
• All other provisions of the WVV have to be applied by MSIF since 12 January 2024. This primarily includes (1) MRT identification in accordance with Section 3 WVV, (2) alignment of the remuneration system with the business and risk strategy of the MSIF (Section 5 WVV), (3) general requirements for the appropriateness of the remuneration systems, including with regard to the verification of all remuneration components and their categorisation as fixed or variable remuneration in accordance with Sections 6 (1) and 2 (4) and (5) WVV, (4) determination of the appropriate ratio between fixed and variable remuneration in accordance with Section 6 (1) and (2) WVV. 4 and 5 WVV, (4) determination of the appropriate ratio between fixed and variable remuneration in accordance with Section 7 (1) WVV, (5) general requirements of Section 11 (1), (2) sentence 3 and para. 3 WVV for determining the total amount of variable remuneration, (6) the requirements for the prohibition of hedging (Section 12 WVV), (7) determining and documenting the remuneration principles in a remuneration policy (Section 13 WVV) and (8) informing the MRT about the remuneration systems (Section 14 WVV).
  

In addition, on 12 December 2023 the Ordinance on the Audit of the Annual Financial Statements of Securities Institutions (WpI-PrüfbV) came into force. Section 14 WpI-PrüfbV contains binding requirements for the audit catalogue with regard to the remuneration systems of the MSIF, according to which the auditor must assess the appropriateness and transparency of the investment firm’s remuneration systems and the orientation towards sustainable development of the securities institution and, in particular, assess and report on whether (1) the allocation of remuneration components to fixed remuneration is clear (2) the remuneration systems, including the remuneration strategy, conflict with the achievement of the objectives set out in the business and risk strategies of the investment firm, (3) the management has informed the administrative or supervisory body at least once a year about the structure of the investment firm's remuneration systems, (4) the investment firm has defined principles for the remuneration systems, checked compliance with them and documented the review, and (5) the employees are informed in writing about the structure of the remuneration systems and remuneration parameters relevant to them.

We will discuss individual challenges and design options for implementation in further Client Alerts.