EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 14 May 2010 
on compensation systems at inst itutions and insurance companies 
(CON/2010/41) 
 
Introduction and legal basis  
On 9 March 2010 the European Central Bank (ECB) received a request from the German Federal 
Ministry of Finance for an opinion on a draft la w on the prudential supervision requirements for the 
compensation systems at institutions and insuran ce companies (hereinafter  the ‘draft law’). 
The ECB’s competence to deliver an  opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the sixth indent  of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Ce ntral Bank by national authorities regarding draft 
legislative provisions1, as the draft law relates to rules applicable  to financial institutions insofar as they 
materially influence the stability of financial ins titutions and markets. In accordance with the first 
sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council 
has adopted this opinion. 
 1.  Purpose of the draft law 
1.1 The draft law aims at impl ementing the Financial Stability Board (FSB) Principles for Sound 
Compensation Practices of 2 April 2009 and th eir Implementation Standards released in 
September 2009, together with the measures currently being finalised at Union level
2. According to 
the explanatory memorandum to the draft law, one of the causes of the financial market crisis was 
compensation policies geared to short-term para meters and unilaterally rewarding success without 
having sufficient sanctions for failure, which can lead to sight being lost of long-term and 
sustainable corporate success and thus increase the employees’ risk propensity. As the financial 
market crisis has shown, such compensation po licies can endanger not only individual companies 
but also financial stability in general. The ai m of the FSB principles and standards and the 
legislation implementing them is to establish comp ensation systems in the financial sector that are 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2  For the banking sector, see the proposal for a Directive of  the European Parliament and of the Council amending 
Directives 2006/48/EC and 2006/49/EC as regards capital re quirements for the trading book and for re-securitisations, 
and the supervisory review of remuneration policies (C OM(2009) 362 final). The Committee of European Banking 
Supervisors also developed guidelines for sound compen sation policies (‘High-level principles for Remuneration 
Policies’ of 20 April 2009), which have also be en taken into account in this draft law. 
2 commensurate with effective risk management, par ticularly by orienting compensation structures 
more strongly to the long-term success of the financial institution. 
1.2 To ensure swift implementation of the interna tional standards, the Federal Government pursued a 
three-stage approach. As a first step, in Decem ber 2009 some large German credit institutions and 
insurance companies committed themselves on a vol untary basis to orient their compensation 
systems to long-term business success. Second, the Federal Financial Supervisory Authority 
implemented the international rules by two circulars3 in anticipation of the draft law. As a third 
step, the draft law and two forthcoming implemen ting regulations will establish the legal basis for 
compensation systems at credit and financial services institutions as well as of insurance companies.  
1.3 The draft law aims at establishing appropriate and transparent compensation systems that are 
oriented to the long-term development of the fi nancial institution or company in question; these 
compensation systems will form part of the statutory minimum requirements for appropriate and effective risk management by institutions and insurance companies. The two forthcoming 
implementing regulations will lay down the detaile d requirements for compensation systems, in 
particular regarding structure; monitoring and further development, including the decision-making 
processes; the composition of the compensation, th e compensation parameters  and the performance 
period; and disclosure.  
1.4 In case of failure or impending failure of the financial institution to meet specific supervisory 
requirements, the Supervisory Authority has th e power to prohibit the payment of variable 
compensation components or to limit them to a sp ecific share in the annu al result. Variable 
compensation components are concluded within th e framework of contractual freedom, which is 
protected by the German Constitution. The draft la w also covers agreements  concluded before its 
entry into force insofar as entitlement to speci fic future compensation was contained in such 
agreements. In that regard, Section 45(1), first sen tence, No 4, of the Law on banking prohibits 
payment of specific compensation components, bu t does not retrospectively affect compensation 
that has already been paid. 
 
                                                 
3  Circular 22/2009 (BA) of 21 December 2009 – Require ments for remuneration systems for institutions, and 
Circular 23/2009 (VA) of 21 December 2009 – Requirements for rem uneration systems in the insurance industry. The 
circulars entered into force on publication.  
According to these rules, all institutions are required to comply with a set of general requirements while the application 
of additional stricter requirement s relating, in particular, to the structure and form of the remuneration, the establishment 
of a remuneration committee and disclosure, is conditioned upon the size of the institution, its remuneration structure as 
well as the type, extent, complexity and scope of risk or in ternationality of the business pursued. In this respect, the 
institution has to assess itself whether it falls under the re spective requirements. The analysis must be plausible, 
comprehensive and understandable for third parties.  
Under these specific requirements, the broad lines of the deferre d payment of variable remunera tion for risk takers are as 
follows. At least 40% of variable remuneration is to be stretched over a withholding period of at least three years. 
Moreover, at least 50% of deferred va riable remuneration must depend on the su stainable growth of the institution. 
In accordance with the general requirements in the circular , the administrative or supervisory board of an institution 
needs to be informed at least annuall y about the remuneration systems so it can  form an independent judgment on their 
appropriateness. The institution must try everything legally possible to adapt existing labour law agreements which do 
not comply with an adequate remuneration system .  
3 2. General observations  
2.1 This draft law can be viewed as a logical step  following (i) the compensation restrictions adopted 
for institutions benefiting from rescue measures by the Federal Government in the Law on financial 
market stabilisation and the Financial Market Stabilisation Fund Regulation4, and (ii) the measures 
reforming financial supervision instruments in the Law on strengthening the supervision of the 
financial market and insurance sector5, on which the ECB was consulted6. The draft law will put in 
place measures with a view to limiting incentives for risk-taking behaviour and ensure efficient and 
effective supervision on a long-term basis. 
2.2 The ECB welcomes the draft legislation by th e Federal Government which, together with the 
implementing regulations to be issued subsequent ly, will implement the international standards on 
compensation intended to enhance the stability a nd robustness of the financial system. In this 
respect the ECB emphasises the importance of full y aligning requirements relating to compensation 
practices and policies with the international sta ndards on compensation, and with the envisaged 
revision of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 
relating to the taking up and pursuit of the business of credit institutions (recast)7, introducing 
provisions aimed at ending practices that lead to excessive risk-taking. 
2.3 The ECB understands that the draft law sets out the general terms of compensation, whereas the 
detailed rules are to be set out in the for eseen implementing regulations. These implementing 
regulations have not yet been subject to c onsultation of the ECB. The ECB encourages the 
consulting authority to consult it also on these im plementing regulations in due time before their 
adoption. 
2.4 The ECB draws the consulting authority’s attentio n to the need, in addition to adopting measures 
such as the draft law, to strengthen coordinati on of policy measures in response to the crisis8. 
 This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 14 May 2010. 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET 
                                                 
4  Finanzmarktstabilisierungsgesetz , Bundesgesetzblatt  I, 17.10.2008, p. 1982.  
5  Gesetz zur Stärkung der Finanzma rkt- und der Versicherungsaufsicht , Bundesgesetzblatt  I, 31.7.2009 p. 2305.  
6  See Opinions CON/2008/57 and CON/2009/50.  Furthermore, the ECB was consulte d on further German crisis-related 
legislation: CON/2009/24 and CON/2009/ 54. All ECB opinions are ava ilable on the ECB’s website at 
www.ecb.europa.eu. 
7  OJ L 177, 30.6.2006, p. 1. 
8  See in particular paragraph 2.1 of Opinion C ON/2008/57 and paragraph 2.2 of Opinion CON/2009/24.