Germany: German Legislator Decides To Cap Bonuses For Bank Staff – CRD IV Implementation Act Adopted

Last Updated: 13 August 2013
Article by Nicolas Rößler, LLM and Guido Zeppenfeld, LLM

Keywords: German Legislator, Bonuses, Bank, Implementation Act, German Federal Council,

On July 5, 2013, the German Federal Council (Bundesrat) decided to raise no objection against the CRD IV Implementation Act passed by the German Federal Parliament (Bundestag) on June 27, 2013. The legislative procedure for this Act, which implements Directive 2013/36/EU (Capital Requirements Directive IV, "CRD IV") into German law, is thus completed.

Together with Regulation (EU) No. 575/2013 (Capital Requirements Regulation, "CRR"), the CRD IV is part of the so-called "Single Rule Book". The Single Rule Book enhances the capital adequacy of credit institutions and other institutions regulated by the German Banking Act ("Institutions"), provides for liquidity requirements harmonised throughout the EU, and harmonises the European banking supervisory legislation. Unlike the CRD IV, the CRR does not require implementation; it has a direct and immediate effect on the Institutions.

The Act implementing the requirements of CRD IV will enter into force on January 1, 2014. The German Banking Act (Kreditwesengesetz, "KWG") will be changed, and a revision of the German Remuneration Regulation for Institutions (Instituts-Vergütungsverordnung, "InstitutsVergV")) is expected. Under employment law aspects, the new regulations on bonus caps are of particular importance. This Legal Update outlines the main new regulations and their employment law implications.

New regulations

Cap on the variable remuneration

Principle: Maximum 100 per cent of the fixed remuneration

According to the revised Section 25a para. 5 KWG, the variable remuneration of employees or managers of Institutions must generally not exceed 100 per cent of the fixed remuneration.

Exceptions

In exceptional cases, a variable remuneration of up to 200 per cent of the fixed remuneration may be granted by resolution of the shareholders, the owners, the members or the governing bodies of the Institution. The resolution requires a majority of at least 66 per cent of the votes cast provided that at least 50 per cent of the voting rights are represented in the vote, or of at least 75 per cent of the votes cast. Compliance with these requirements has to be ascertained by the auditor in the audit of the financial statements and interim financial statements.

According to Section 25a para. 1 (1) KWG, each Institution must have a proper business organisation. This must in particular include an adequate and effective risk management which again shall ensure that Institutions have in place an appropriate, transparent and sustainable, development-oriented remuneration system for managers and employees, subject to the stipulated principles. This, however, shall according to the wording of the new law not apply "insofar as the remuneration has been agreed under a collective bargaining agreement or within its scope of application by agreement between the contracting parties on the application of the collectively agreed regulations, or in a works council agreement based on a collective bargaining agreement."

Comments: The wording of this regulation suggests the possibility of deviations from the statutory caps through or based on a collective bargaining agreement. In practice, this could give plenty of interesting scope for structural discretion. However, the systematic position of this exception in Sec. 25a para. 1 (3) no. 6 KWG rev., instead of in the following Sec. 25a para. 5 KWG rev. which exclusively deals with capping the variable remuneration, militates against the intention of the legislator to permit such scope of structural discretion. Hopefully, the revised version of the InstitutsVergV will provide further insights.

Whistleblowing

Proper business organisation furthermore requires a process enabling employees to report to suitable bodies any violations of the CRR or the KWG or any legal regulations adopted on the basis of the KWG and any criminal offences within the Institution while keeping their identity secret.

Comments: Thus, as from January 1, 2014 KWG-regulated Institutions will be obliged to set up whistleblower contacts or appoint internal ombudsmen. A whole range of employment law (especially co-determination) and data protection law requirements needs to be observed upon implementation of such obligation. Always another challenge is the question of the internal response to a corresponding report through the whistleblower system. A one-fits-all solution will not work in this respect.

Amendment of the InstitutsVergV

The revised version of Sec. 25a para. 6 KWG forms the statutory basis for the amendment of the InstitutsVergV by the Federal Ministry of Finance.

It is to be expected that at the same time as the CRD IV Implementation Act a substantially revised version of the InstitutsVergV will enter into force, which may well especially include more detailed provisions on the following:

  • cap on the variable remuneration, including the requirements and parameters for full loss or partial reduction of the variable remuneration; and
  • monitoring of adequacy and transparency of the Remuneration systems by the Institution, and
  • disclosure of the structure of remuneration systems and the composition of the remuneration.

Consequences of non-compliance

The Federal Financial Supervisory Authority ("BaFin") can issue orders that are suitable and necessary to ensure the proper business organisation of an Institution. This also includes adequate, transparent and sustainable, development-oriented remuneration systems for managers and employees (i.e. also a cap on the variable remuneration). When the Institution violates such orders, the BaFin can impose fines of up to EUR 5 million. Other conceivable orders might be to reduce risks or not to engage in certain types of business transactions at all or only to a limited extent.

For example, if the capital endowment of an Institution is inadequate, it could also be ordered that the total annual amount of the variable remuneration of all managers and employees of such Institution is to be capped at a particular portion of the annual results. Also, the payment of variable remuneration components could be entirely prohibited.

Likewise, the BaFin could under certain circumstances request the full or partial extinction of claims for variable remuneration in Institutions obtaining governmental support, unless the claims for variable remuneration arose before January 1, 2011, or before January 1, 2012 for members of corporate bodies and managers.

Comments: Institutions are obliged to consider the regulatory authority of the BaFin in corresponding contractual agreements with their members of corporate bodies, managers and employees. This is necessary because the orders of the BaFin are addressed to the Institution itself. Thus, a corresponding reservation of amendment needs to be included in the contractual agreements. As a result of the new regulations and extended powers of intervention, existing reservations should be reviewed and adjusted if necessary. Regarding the validity of such reservations, the Federal Labour Court developed a mandatory casuistry strongly depending on each individual case.

No rights may be derived from contractual agreements on the granting of a variable remuneration that conflict with any order issued by the BaFin.

Implementation of the new regulations under employment law

The CRD IV Implementation Act enters into force on January 1, 2014, i.e. the new regulations will apply as of that date and Institutions must from then on implement the contents set out above. Therefore, it should already now be considered in the future conclusion of employment contracts and service agreements that the required cap on special payments is correspondingly reflected.

However, the situation is problematic with regard to old contracts which of course fail to contractually implement the corresponding new regulations or even contain conflicting provisions. In our opinion, the following applies in this regard:

Consensual amendment

Employment contracts or service agreements may be amended at any time by common consent. The Institutions concerned can thus offer their employees to amend existing contracts to create compliance with the regulatory requirements.

Comments: In the given constellation we believe it is likely that in the individual case employees or members of management boards of Institutions are obliged to agree to an amendment of their working conditions due to their contractual fiduciary duty. This might especially be the case when the Institution offers a compensation equivalent to the loss of bonus chances.

Variable remuneration at the discretion of the Institutions

If the employment contract or service agreement or a works council agreement only generally provides for a variable remuneration which in terms of amount is at the discretion of the Institution, then the Institution must upon exercising its discretion consider the new requirements for the remuneration system, and must against this background determine a bonus not exceeding the threshold applicable as from 2014.

Comments: In its case law, the Federal Labour Court established very stringent requirements regarding a variable remuneration that is entirely at the discretion of the employer or principal. In particular in general terms and conditions, such regulations can easily be invalid and grant the employee an unintended claim.

Reservation of revocation and a voluntary status

If existing bonus agreements conflict with the new regulations, Institutions might be able to use reservations of revocation and a voluntary status for the adjustment of the agreements, insofar as such reservations were validly agreed in connection with the bonus agreements.

Comments: Such reservations frequently fail to comply with the stringent judicial requirements, and are consequently invalid. This needs to be examined on a case-to-case basis.

Dismissal with the option of continued employment on different terms

The traditional means for unilateral amendment of working conditions is a so-called ""Änderungskündigung",", i.e. a dismissal with the option of continued employment on different terms. However, for lack of a reason for dismissal recognised under the Protection against Unfair Dismissal Act, such dismissal for the amendment of existing bonus agreements should not be validly possible.

Frustration of contract (Strung der Geschftsgrundlage)

According to the principle of frustration of contract, a party may request the adjustment of a contract if the circumstances on which the contract was based materially changed after conclusion of the contract, and the party cannot be reasonably expected to continue the unchanged contract.

Comments: Frustration of contract can be a valuable tool in the given constellation. Due to numerous interpretation issues that need to be clarified for determining a frustration of contract, this also needs to be evaluated for each individual case.

Members of corporate bodies

Employment protection legislation does generally not apply to members of corporate bodies, i.e. in particular managing directors of a company with limited liability (GmbH-Geschäftsführer)) or members of the board of directors of German stock corporations (AGVorstnde), so that an adjustment of existing service agreements should be less problematic.

Comments: It would particularly be an option in respect of members of corporate bodies to invoke the general contractual fiduciary duty in connection with the new regulatory standards. Against this background, it should always be attempted to achieve an adjustment of the contract in mutual agreement with the member of the corporate body. For lack of applicability of the employment protection legislation, the service contract could be terminated with an option of continuation on different terms if a "negotiated solution" fails. As a rule, the agreed or statutory notice periods have to be observed. In individual cases, e.g. for lack of a possibility of ordinary termination or the agreement of a very long notice period, a termination with an option of continuation on different terms can also be possible as an extraordinary dismissal with such option, i.e. with immediate effect.

Employees of branches abroad

The KWG - and thus the strict remuneration provisions - also applies to branch offices of German Institutions in other European countries.

Comments: The remuneration regulations anchored in the KWG might in such cases have to be implemented according to the laws of the state in which the branch is seated. The law applicable to the respective employment depends on the content of the employment contract and the place of work performance.

Regulations of the directly applicable CRR

The CRR, which will also take immediate effect as of January 1, 2014, is less significant with a view to the regulation of remuneration. However, the comprehensive obligations to disclose the remuneration policy and practice as standardised in Art. 450 need to be mentioned, as they are more comprehensive than the disclosure obligations so far contained in the InstitutsVergV.

Sometimes, the Institutions will now also have to disclose the number of persons whose remuneration for the business year amounts to or exceeds EUR 1 million. These statements are to be broken down into remuneration levels of EUR 500,000 for remunerations between EUR 1 million and EUR 5 million, and into remuneration levels of EUR 1 million for remunerations of EUR 5 million and more.

Conclusion

The new regulations of the KWG entering into force on January 1, 2014, the regulations of the CRR and the expected amended version of the InstitutsVergV create challenges for Institutions and their employees. The clean legal implementation of the regulatory requirements against the competing interests of employment law and data protection law is a challenging task without ready-made solutions. However, for each individual case there is a suitable solution that will also in the future enable the relevant Institutions to offer their employees attractive remuneration packages in compliance with the regulatory conditions.

Based on the intervention possibilities provided to the BaFin and the announced additional staffing of the competent BaFin departments it can be expected that the compliance with the statutory requirements will be more strictly monitored as from 2014, and that non-compliance will be more immediately sanctioned. Not only can this tarnish the image of the Institutions concerned, there is also the threat of fines and not least the possible irritation of high potentials who will not receive the expected bonus payments. In view of an increasingly tough war for talent, this aspect should not be ignored.

Previously published in August 2013

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions