Amended Remuneration Ordinance for Institutions in force

The third ordinance amending the German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung – IVV) was finally published on 24 September 2021 and came into force on 25 September 2021.  This implements the requirements of CRD V. CRD V had already been partially implemented into national law through the reform of the German Banking Act (Kreditwesengesetz - KWG) by the Risk Reduction Act (Risikoreduzierungsgesetz - RiG) on 29 December 2020.

This is an overview of the amended German Remuneration Ordinance for Institutions (“IVV 4.0”) which, compared to its last draft version, also contains substantive changes regarding the control units and the determination of the bonus pool in addition to numerous editorial adjustments and clarifications.

HR department no longer a control function

The HR department, which was previously deemed to be one of the control functions pursuant to section 2 para. 11 (old version), is no longer a control function pursuant to IVV 4.0. As a consequence, the additional requirements for the remuneration of employees in control functions according to section 9 IVV are no longer to be considered for employees in the HR department. As regards the variable remuneration, they are therefore to be treated in the same way as other employees outside the control functions, i.e., the emphasis no longer has to be on the fixed remuneration component.

The exclusion of the HR department from the scope of control functions, however, does not trigger any change in relation to the remuneration governance. The HR department must continue to be involved in the designing and monitoring of the remuneration systems and, in significant institutions, in the identification of risk takers (section 3 para. 3 IVV 4.0); it must also be considered in the organisational guidelines pursuant to section 11 para. 1 sent. 2 IVV 4.0 and must be included in the framework concept for the determination and approval of severance payments (section 11 para. 1 sent. 2 no. 3 IVV 4.0).

No further requirements regarding the determination of the bonus pool

The draft version of the amendment to the IVV provided that extended requirements for globally systemically relevant institutions should apply to the determination of the total amount of variable remuneration within the meaning of section 45 para. 2 no. 10 KWG. The legislator, however, has refrained from including such extended requirements for globally systemically relevant institutions.

Application of the special remuneration requirements

Previously, the special remuneration requirements of chapter 3 of the IVV only applied to significant institutions. These are essentially the requirements of deferral, malus, and clawback. Pursuant to section 1 para. 3 sent. 2 IVV 4.0., the special remuneration requirements are now in principle also to be applied to risk takers in so-called qualified non-significant CRR institutions within the meaning of section 1 para. 3 sent. 2 IVV 4.0. However, they do not have to fully comply with the requirements of chapter 3 IVV 4.0. They are exempt from the specific regulations for managing directors pursuant to section 19 para. 1 sent. 3 and 4, as well as section 20 para. 2 IVV 4.0. In addition, no remuneration officer (cf. sections 23 to 26 IVV 4.0) needs to be appointed.

Tighter de minimis exemption

The variable remuneration of risk takers will be exempt from the special remuneration requirements of sections 20 and 22 IVV 4.0 if the variable remuneration does not exceed EUR 50,000 and one third of the total annual remuneration (cf. section 18 para. 1 sent. 3 IVV 4.0). Under the previous legal situation, the exemption already applied if the variable remuneration did not exceed EUR 50,000 without further conditions having to be met.

Extension of the deferral period

Section 20 para. 1 IVV 4.0 provides for an extension of the deferral period over which the payment of a substantial portion (at least 40%) of a risk taker’s remuneration is to be deferred from currently at least three to at least four years. For members of the management body and the managing directors, the deferral period continues to be no less than five years.

Gender neutral remuneration (equal pay)

Like section 25d para. 5 sent. 1 KWG, section 5 para. 1 no. 6 IVV 4.0 (as well as section 27 para. 1 sent. 1 IVV 4.0 for the group wide remuneration strategy) now also stipulates that the remuneration systems of an institution must be gender neutral. This means that the principle of gender-neutral remuneration which already applies to employees under the German General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz – AGG) and the German Transparency in Wage Structures Act (Entgelttransparenzgesetz - EntgTranspG) now also applies to managing directors and board members of institutions.

Group requirements

Section 27 para. 3 IVV 4.0 contains new exemptions for subordinate companies abroad with regard to the group requirements pursuant to section 27 para. 1 and 2 IVV 4.0, so that they do not have to ensure compliance with the group-wide remuneration strategy. However, in addition to these exemptions, there are exemptions from these exemptions for risk takers, in particular in investment management companies.

No transitional provisions

Contrary to the IVV version from 2017, the IVV 4.0 does not provide any transitional provisions. Therefore, all amended regulations must be complied with from now.