Sound Compensation under COVID-19

Recent questions and developments

COVID-19 is also relevant to the remuneration systems of institutions. From an operational point of view, with questions on the regulatory treatment of KUG or other state wage replacement benefits, on the modification of the performance parameters of variable remuneration and its assessment in the current reference period. From a liquidity protection perspective, with questions on any measures that may be taken to preserve liquidity (e.g. modification of the total bonus pool).

1. Introduction: COVID-19, employment and sound compensation

The COVID 19 pandemic is also relevant for institutions in terms of the implementation of their remuneration systems. From an operational point of view, questions arise, among other things, about the regulatory treatment of short-time work compensation (Kurzarbeitergeld, KUG) or other state wage replacement benefits in cases in which the employee cannot perform work - e.g. due to officially ordered quarantine or home care of the employee's own children due to officially ordered kindergarden/school closures - and therefore generally receives no remuneration, as well as about any modification of the performance parameters of variable compensation and its assessment in the current reference period. This applies to securing liquidity with questions on any measures that may be taken to conserve liquidity or reduce expenses (such as the modification of the total bonus pool) and to remuneration governance with questions on the virtual activity of individual stakeholders.

2. Short-time work and allowances for short-time work compensation, loss of earnings and compensation claims under the German Protection against Infection Act (IfSG) - and their treatment under supervisory law

Short-time work, home care of one's own children due to officially decreed kindergarden/school closures and officially ordered quarantine have in common that the employee cannot perform his work in relation to the contractually agreed place of work and/or the contractually agreed working hours.

Employees affected by short-time work will receive KUG - corresponding to the scope of short-time work - during the period of short-time work. As a state wage replacement benefit and statutory social security instrument for promoting employment, KUG does not include any supervisory remuneration within the meaning of Section 2 (1) InstitutsVergV. The employee receives KUG on the basis of his employment relationship with the institute, but not as a result of his operational activity for the institute. No supervisory remuneration within the meaning of Section 2 (1) InstitutsVergV also includes the compensation payment to be granted by the competent authority to employees in accordance with Section 56 (1/1a), 5 IfSG. However, regulatory compensation within the meaning of section 2(1) of the InstitutsVergV does include any allowance to KUG made by the institute, specifically as a fixed compensation pursuant to Section 2(6) s. 2 InstitutsVergV.

3. COVID-19- impact on operational business and variable remuneration: modification of performance parameters, target assessment

From a regulatory perspective, the parameters for performance-related components of the variable remuneration in accordance with Section 13 InstitutsVergV are to be determined at the beginning of the reference period (i.e., in the case of a calendar year as the reference period by 31 March at the latest) and may not be changed during the year. This principle generally also applies to COVID-19-related external influences on the operative business of the institute (e.g. COVID-19-related official general decree for temporary shutdown of the operative business due to insolvency of individual customers of the institute and a related loss of receivables affecting the result) and its effects on the performance parameters of the variable remuneration. Target agreements can therefore generally not be adjusted during the course of the year, for example with regard to possible COVID-19-related effects on the bank's operating business affecting profit or loss.

If COVID-19 will (among other facts) result in a loss for the institute in the reference period due to COVID-19 and if the variable remuneration is based on individual targets (e.g. due to an agreement on objectives with personal objectives), the institute has to take into account when assessing performance and determining the variable remuneration that according to the case law of the German Federal Labor Court (BAG, judgement dated 13 September 2014, 10 AZR 622/13), if the employee achieves his or her personal targets, the Institute must in principle grant the employee an appropriate variable remuneration even if the result is negative.

Institutions may also consider direct COVID-19 related impacts in the performance assessment prior to the determination of the variable remuneration. If the system of the performance-related variable remuneration is based on agreed targets and if the system provides for a discretionary so-called modifier for the target assessment, the COVID-19-related external influences on the achievement of targets can be taken into account materially in the concrete exercise of discretion. Institutions with an overall discretionary system of variable remuneration (with discretionary criteria) can take COVID-19-related external effects on the achievement of objectives into account in the exercise of discretion. If the remuneration system does not currently take such pandemic-related external effects into account, the institutions concerned could use COVID-19 as an opportunity to revise the remuneration system.

4. Liquidity and cost-saving measures: Determination of total bonus pool, waiver of remuneration and severance payment under company pension law

For many institutes, COVID-19-related external influences will affect the ancillary conditions under supervisory law to be observed in the determination of the total bonus pool in accordance with Section 7 (1) s. 3 InstitutsVergV. Required revaluations of payment default probabilities and actual defaults on customer receivables will have a direct impact on some of the regulatory parameters of risk-bearing capacity, capital planning, capital adequacy and liquidity. In individual cases, they will necessitate a reduction in the total bonus pool in order to meet the requirements of Section 7 InstitutsVergV. This guiding principle forms also the basis of the pronouncements of BaFin dated 24 March 2020 and of EBA dated 31 March 2020, in which BaFin and EBA recommend that instuttes shall carefully weigh up the distributions of bonuses.

There are no supervisory peculiarities in the treatment of possible salary waivers by individual employees or groups of employees of the institute. A possible waiver of fixed remuneration components (e.g. as a temporary reduction of the monthly fixed remuneration or suspension of a special payment) formally (only) affects the actual relationship between variable and fixed remuneration, but will de facto - in view of the lower variable remuneration due to COVID-19 to be expected for a large number of institutes for the current financial year - normally have no effect on compliance with the upper limit of variable remuneration determined by the institution.

If the employee waives future benefits (future service) under the company pension scheme as part of a pay waiver and the Institute grants a severance payment under company pension law to compensate for the occupational pension benefits covered by the waiver, which is effective under company pension law, this severance payment does not include variable remuneration within the meaning of Section 5 (6) s. 1 InstitutsVergV. From a regulatory point of view, such severance payments under company pension law include compensation for work performed by the employee during the qualifying period.

5. Compensation governance: (Virtual) Activity of the individual stakeholders (compensation control committee, compensation officer)

The COVID-19 pandemic also has a factual impact on the individual stakeholders through the shift of operational activities to remote work in the home office, which is also given for this group of people. This remains for compensation governance, usually without regulatory consequences. The supervisory board - and upstream also the remuneration control committee - of an institute in the legal form of a stock corporation can also make effective decisions on the remuneration system or on individual sections of the remuneration system (e.g. determination of the total bonus pool for the management and the individual variable remuneration of the individual member of the management board) virtually in accordance with Section 118 of the German Stock Corporation Act (Aktiengesetz) - subject to other provisions in the internal articles of association of the institute. The articles of association of institutes established in other legal forms also often permit virtual decision-making. The other control functions (e.g. the remuneration officer) or employees in control functions (e.g. HR department) can carry out the relevant controlling actions remotely if the Institute can grant them appropriate - data protection-compliant - access to the relevant data and information.

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