Retention payments in institutions pursuant to IVV 3.0
Statutory provisions and design possibilities
Possibilities for demand-oriented and efficient design of retention bonuses that comply with regulatory and legal requirements
1. HR considerations as a starting point
Institutions have rediscovered retention bonuses as an instrument for retaining selected employees. The reasons for the intended commitment are manifold: They range from securing product or market-related know-how in the conception or further development of new products or in the establishment or expansion of new business fields, as well as in reorganization measures, to the long-term commitment of personal customer contacts to the institute.
There may also be a particular interest in a longer-term commitment, especially in transactions in which selected employees are responsible for key customer accounts and sales for the transaction-relevant business areas and the retention of these employees is of essential importance to the purchaser for the operational continuation of the business area and its sustained economic success.
The desired retention period and the content of the retention premium usually correlate with the reason for the retention: the intended retention period can range from a few months to several years. In terms of content, the incentive effects for continued activity for the institution are to be set by one-off payments or by continued - instalment - payments on account.
2. The regulatory framework
The regulatory dimension of retention bonuses is regulated by law in the newest version of Ordinance on the Regulatory Requirements for Remuneration Systems of Institutions, which came into force on 4 August 2017 (Institute Remuneration Ordinance, IVV) and regulates the minimum regulatory requirements for the remuneration systems of credit institutions and financial services institutions with registered office in Germany. On 16 February 2018, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) published an interpretation guide to this standard, which provides information on the implementation of the statutory requirements.
The compatibility of the structure of retention bonuses with the regulatory requirements is, among other things, the subject of the audit of the annual financial statements (Section 12 of the Audit Report Ordinance).
According to the IVV, retention bonuses include a variable remuneration component (§ 2 (3) IVV), since continued activity up to the relevant reporting date is a condition for their - final - granting. They must therefore be taken into account, among other things, when calculating and determining the total amount of variable remuneration (Section 7 IVV) and the ratio between fixed and variable remuneration (Section 6 IVV). Retention bonuses do not necessarily have to be provided with target parameters. It is both necessary and sufficient for the Institute to be able to substantiate and document a legitimate interest in the granting of the retention bonuses to the respective employee (§ 5 (7) sentence 1 IVV). The "legitimate interest" is not further defined in § 5 (7) IVV. In its interpretation guide on § 5 (7) IVV, BaFin limits itself to the disclosure of rule examples which are typically to be accompanied by a legitimate interest (restructuring, liquidation or change of control). It is necessary and at the same time sufficient for the legitimate interest that the loyalty of the employee incentivised by the retention bonus has a direct, positive, sustainable connection to the operating business of the institute.
Accordingly, a retention bonus may not only be granted to employees whose work for the institution is operationally necessary with regard to or for periods after the restructuring measure. Rather, it can also be considered for employees who have made essential value contributions with regard to a concrete restructuring measure and who have acquired knowledge specific to the institution (e.g. about the risk management system revised as a result of the reorganisation), in whose continued usability for periods after the end of the restructuring the institution can assert an objectively comprehensible interest.
In its interpretation guide, BaFin also demands that the retention bonus has to be granted generally only at the end of the commitment period and that the commitment period generally has to last at least one year. However, these requirements are not supported by law: The binding effect intended by the retention bonus can also be achieved in the case of a (pro rata) payment of the retention bonus before the end or during the retention period if the institution can enforce a repayment claim under employment law against the respective employee in the event of premature departure during the retention period. A commitment period shorter than one year may be considered if the purpose of the commitment can already be fulfilled with this shorter period; for example, if the selected employee is to ensure the fulfilment of certain closing conditions in a transaction and the purchase agreement provides for a period of six months from the signing of the agreement for this closing condition.
Major institutions according to § 17 IVV must also comply with the requirements of §§ 18 (5) and 20 IVV when granting retention bonuses to risk takers. The malus- and clawback-related subsequent risk adjustment can take into account the special character of the retention bonus. A reduction due to the economic situation of the institution can thus be focused on case groups in which the specific purpose of the retention payment can be considered to have been missed or not achieved in view of a possible poor economic situation ex post.
3. Employment law cornerstones
Retention bonuses are special bonuses under employment law. If the retention bonus is to be granted before or during the end of the retention period and if it is therefore subject to repayment for this reason, the Institute must comply with the principles laid down by the Federal Labor Court (BAG) for the repayment of gratuity payments due to early termination. Hedging by means of a repayment clause ag is therefore generally only possible in cases of terminations that are forced by the employee. The BAG has so far explicitly considered repayment obligations - and thus the binding period permitted under employment law - to be effective in the case of retention bonuses of at least one gross monthly salary of up to six months. In the case of retention bonuses of at least two gross monthly salaries, a retention period of more than six months - possibly up to nine months - may be permissible in individual cases. Beyond this, binding periods are only permitted under employment law if the retention bonus significantly exceeds an amount of two gross monthly salaries.
4. The principle of equal treatment inherent to employment law
Institutions must observe the principle of equal treatment under employment law when granting the retention bonus. In general, the legitimate interest can be used as a criterion for delimiting the objective justification for the unequal treatment of non-beneficiary employees in relation to the selected employees.
Institutions must therefore carefully and transparently determine the legitimate interest and the circle of selected employees. For example, it is permissible to determine the group of selected employees according to performance criteria.
The employment and supervisory framework conditions for the conception, design and implementation of retention bonuses are complex, but offer sufficient scope for needs-based models.
Since the current version of IVV 3.0 came into force, several institutions have been able to develop and implement efficient retention bonus concepts that comply with the legal framework and the requirements of the interpretation guide.
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