EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 5 August 2010  
on implementing rules regarding compensation sy stems at institutions and insurance companies  
(CON/2010/63) 
 
Introduction and legal basis  
On 5 July 2010 the European Central Bank (ECB) r eceived a request from the German Federal Ministry 
of Finance for an opinion on the draft regulation on the prudential supervision requirements for the 
remuneration systems at institutions (hereinafter th e ‘draft regulation on institutions’) and the draft 
regulation on the prudential supervision requireme nts for the remuneration systems at insurance 
companies (hereinafter the ‘draft re gulation on insurance companies’). 
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 regulation on institutions re lates to rules applicable to financial 
institutions insofar as they materially influence th e stability of financial institutions 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 regulations 
1.1 The draft regulations aim at implementing the Law on the prudential supervision requirements for 
the compensation systems at institutions and insura nce companies, which had been subject to ECB 
Opinion CON/2010/41
2. The draft regulations are the implementing legislation mentioned in 
paragraphs 1.2 and 2.3 of that opinion. With regard to their legislative background, reference is 
made to Section 1 of Opinion CON/2010/41. In s ubstance, the draft regulation on institutions 
largely corresponds to Circular 22/2009 (BA) of  the German Federal Financial Supervisory 
Authority (BaFin)3, which will be repealed on entry into force of the draft regulation on 
institutions.  
1.2 The draft regulation on institutions distingui shes between (1) requirements that apply to all 
institutions and the remuneration systems for all th eir managers and staff; and (2) more demanding 
special requirements that are only relevant to ma jor institutions and the remuneration systems for 
                                                 
1  OJ L 189, 3.7.1998, p. 42. 
2  ECB Opinion CON/2010/41. All ECB opinions are av ailable on the ECB’s website at www.europa.eu. 
3  See on its content footnote 3 in Opinion CON/2010/41. 
2 their managers and certain members of their staff4. According to the draft, an institution is regarded 
as major if its balance sheet total, on average,  has equalled or exceeded EUR 10 billion on the 
relevant key dates of the last three financial y ears and the institution determines, based on a risk 
analysis, that it is major. The BaFin monitors the implementation of proper risk analysis and 
compliance with the special require ments. Institutions whose balan ce sheet total, on average, has 
equalled or exceeded EUR 40 billion on the relevant ke y dates will generally be regarded as major. 
This assumption should serve as guidance for the inst itutions and may be refuted within the context 
of the risk analysis. Institutions whose balance sheet total has amounted to less than EUR 10 billion 
on the relevant key dates are deemed not to be major. 
1.3 Remuneration systems are deemed to be appr opriate if they avoid paying incentives to the 
managers or staff for accepting disproportionate ly high risks and if they do not contravene the 
controlling units’ monitoring function. Incentives to accept disproportionately high risks may arise, 
in particular, through a significant dependence of managers and staff on variable remuneration. At 
least once a year, the managers must inform the ad ministrative or supervisory body of the design of 
the company’s remuneration systems, so that this body may form its own opinion on their appropriateness.  
1.4 The requirements are imposed only on major instituti ons to reflect the principle of proportionality. 
Major institutions must determine by means of a risk  analysis whether they have staff who are able 
to create high risk positions. According to the draft,  guaranteed variable remuneration is generally 
not consistent with appropriate risk manage ment and the principle of performance-based 
remuneration. Consequently, guaranteed variable  remuneration of managers and staff who can 
create high risk positions is only permitted in the context of a new working relationship, and at 
most for one year.  
1.5 Besides the overall success of the institution and the profit contribution by the organisational unit, 
the individual profit contribution will also be ta ken into account for the variable remuneration of 
managers and staff who can create high risk pos itions, insofar as this is determinable with 
reasonable effort. At least 40% of the variable rem uneration is to be deferred for at least three years 
and to be paid out pro rata temporis . One half of the variable re muneration to be deferred must 
depend on the sustainable development of the institution
5. If the performance of a member of staff 
or of an organisational unit and/or the overall succ ess of the institution does not meet the specified 
target, or should previous positive profit contributi ons turn out not to be sustainable, this must 
result in the variable remuneration, including th e amounts deferred, being reduced or cancelled. 
The risk orientation of the remuneration may not be  restricted or equalised by coverage measures 
or other countermeasures by the managers or  staff concerned. A remuneration committee will 
monitor the appropriateness of the remuneration systems. According to the explanatory 
                                                 
4  This structure is mirrored in the draft regulation on insurance companies. 
5  The explanatory memorandum to the draft regulation on ins titutions assumes that the Financial Stability Board (FSB) 
Implementation Standards are ambiguous on this point; therefore the possibility cannot be ruled out that the FSB may, in 
future, clarify that at least 50% of the variable remuneration is  to be paid entirely in the form of shares or instruments 
similar to shares. In this case, it will be necessary to amend the Regulation accordingly. 
3 memorandum to the draft regulation on instituti ons, the members of the committee must hold a 
managerial position within their respective organisational units.  
 2. General observations  2.1 The ECB welcomes the draft regulations as part of a legislative framework aiming at 
implementing, within the financial services sector , the Financial Stability Board (FSB) principles 
and standards endorsed by the G20 leaders and in tended to enhance the stability and robustness of 
the financial system
6. The ECB supports also the relatively broad scope of application of this 
legislation, which covers not only credit institutio ns and investment firms, but also insurance 
companies, encompassing therefore the bulk of the regulated financial services sector. 
2.2 In its opinion on the law on the prudential s upervision requirements for compensation systems at 
institutions and insurance companies, the ECB emphasised the importance of fully aligning 
requirements relating to compensation policies and practices with the international standards on 
compensation, and with the envisaged revision of Directive 2006/48/EC7, introducing provisions 
aimed at ending practices that lead to excessive risk taking. The ECB is of the view that such 
consistency is essential to ensure the efficiency of the measures taken by Member States to avoid 
regulatory arbitrage across major financial centres  and therefore contribute to the limitation of 
excessive risk-taking behaviours at the European and global level. In this respect, and as far as 
credit institutions and investment firms are con cerned, the German authorities should ensure an 
appropriate degree of coherence of their legisl ative framework with the Union legislation under 
finalisation, which the Committee of European Banking Supervisors (CEBS) may specify further 
by elaborating guidelines on sound remuneration policies in the banking sector.  
 3. Specific observations 3.1 Proportionality principle 
 The ECB takes note of the approach to proportionality adopted by the draft regulation on 
institutions. In this respect, the ECB is of th e view that the special requirements for major 
institutions should, at least, target all systemically  relevant institutions, and that the draft regulation 
should define this by the size of these ins titutions, and also by factors such as their 
interconnectedness or substitutability. Furthermore,  and with a view to ensuring a consistent 
application of the Union legislative framework for the supervisory review of remuneration policies, 
the ECB stresses the importance for the German authorities of updating their approach to 
proportionality, if need be, in light notably of  the future CEBS guidelines on sound remuneration 
policies, should these guidelines address proportionalit y. Overall, the ECB considers of paramount 
                                                 
6  Principles for Sound Compensation Practices of 2 Apri l 2009; Principles for Sound Compensation Practices -
Implementation Standards of 25 Sept ember 2009. See also Commission Reco mmendation 2009/384/EC of 30 April 2009 
on remuneration policies in the financial services sector (O J L 120, 15.5.2009, p. 22). 
7  Directive 2006/48/EC of the European Parliament and of  the Council of 14 June 2006 relating to the taking up and 
pursuit of business of credit institu tions, (OJ L 177. 30.6.2006, p. 1). 
4 importance that national jurisdictions maintain a consistent treatment acro ss institutions in the 
application of the international framework as re flected by the Union legislative provisions on 
compensation systems at institutions. 
3.2 Aligning the draft implementing legislation with the international framework  
3.2.1 To ensure that the institutions’ remunerati on policies and schemes are designed in a way that 
avoids and reduces excessive risk-taking behaviour, the ECB suggests that in consistencies with the 
international framework, reflected by the Union le gislative provisions currently under finalisation, 
should be addressed in a timely manner by the Ge rman authorities. In this regard, the ECB has 
identified three key areas for possible improvement.  
3.2.2 First, with respect to governance of the remune ration policies, the ECB considers that the general 
requirements need to be enhanced to ensure e ffective oversight of the remuneration policies and 
schemes of the institutions by the administrativ e or supervisory board, in line with the FSB 
principles on effective governance of compensation. In the same vein, the requirements relating to 
the establishment of remuneration committees in ma jor institutions should be strengthened in line 
with FSB implementation standard 1 and th e Union legislation under finalisation.  
3.2.3 Second, in the framework of the remuneration systems for major institutions, the provisions on the 
guaranteed variable remuneration need to be cl arified to ensure that guaranteed variable 
remuneration only occurs in the context of hiring new staff, as highlighted by FSB implementation 
standard 11.  
3.2.4 Third, the legislative requirements in Section 5( 5) should be amended with a view to ensuring that 
at least 50% of any variable rem uneration consists of shares or sh are-linked instruments (or, where 
appropriate, other non-cash instruments), as l ong as these instruments create incentives aligned 
with long term value creation and the time horizon of risk, as highlighted by FSB principle 8 and 
the Union legislative provisions under finalisation. 
 This opinion will be published on the ECB’s website.    Done at Frankfurt am Main, 5 August 2010. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET