Opinion of the European Central Bank of 14 May 2010 on compensation systems at institutions and insurance companies (CON/2010/41)
Date: 2010-05-14
Institutions: European Central Bank
Subjects: Germany, financial stability, indemnification, insurance, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 14 May 2010 

on compensation systems at institutions 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  law  on  the  prudential  supervision  requirements  for  the 

compensation systems at institutions and insurance 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  Central  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  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 law 

1.1  The  draft  law  aims  at  implementing  the  Financial  Stability  Board  (FSB)  Principles  for  Sound 

Compensation  Practices  of  2  April  2009  and  their  Implementation  Standards  released  in 
September 2009, together with the measures currently being finalised at Union level2. 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 parameters 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 policies can endanger not only individual companies 

but  also  financial  stability  in  general.  The  aim  of  the  FSB  principles  and  standards  and  the 

legislation implementing them is to establish compensation systems in the financial sector that are 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
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  requirements  for  the  trading  book  and  for  re-securitisations, 
and  the  supervisory  review  of  remuneration  policies  (COM(2009)  362  final).  The  Committee  of  European  Banking 
Supervisors  also  developed  guidelines  for  sound  compensation  policies  (‘High-level  principles  for  Remuneration 
Policies’ of 20 April 2009), which have also been taken into account in this draft law. 

 
 
 
 
                                                 
commensurate  with  effective  risk  management,  particularly  by  orienting  compensation  structures 

more strongly to the long-term success of the financial institution. 

1.2  To ensure swift implementation of the international standards, the Federal Government pursued a 

three-stage approach. As a first step, in December 2009 some large German credit institutions and 

insurance  companies  committed  themselves  on  a  voluntary  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 implementing 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  financial  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  detailed  requirements  for  compensation  systems,  in 

particular regarding structure; monitoring and further development, including the decision-making 

processes; the composition of the compensation, the 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  the  power  to  prohibit  the  payment  of  variable 

compensation  components  or  to  limit  them  to  a  specific  share  in  the  annual  result.  Variable 

compensation  components  are  concluded  within  the  framework  of  contractual  freedom,  which  is 

protected by the German Constitution. The draft law also covers agreements concluded before its 

entry  into  force  insofar  as  entitlement  to  specific  future  compensation  was  contained  in  such 

agreements.  In  that  regard,  Section  45(1),  first  sentence,  No  4,  of  the  Law  on  banking  prohibits 

payment  of  specific  compensation  components,  but  does  not  retrospectively  affect  compensation 

that has already been paid. 

3  

Circular 22/2009  (BA)  of  21  December  2009  –  Requirements  for  remuneration  systems  for  institutions,  and 
Circular 23/2009  (VA)  of  21  December  2009  –  Requirements  for  remuneration  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 requirements 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  internationality  of  the  business  pursued.  In  this  respect,  the 
institution  has  to  assess  itself  whether  it  falls  under  the  respective  requirements.  The  analysis  must  be  plausible, 
comprehensive and understandable for third parties.  
Under these specific requirements, the broad lines of the deferred payment of variable remuneration 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 variable remuneration must depend on the sustainable 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 annually 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.  

2 

 
                                                 
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  the  Federal  Government  which,  together  with  the 

implementing regulations to be issued subsequently, will implement the international standards on 

compensation  intended  to  enhance  the  stability  and  robustness  of  the  financial  system.  In  this 

respect the ECB emphasises the importance of fully aligning requirements relating to compensation 

practices  and  policies  with  the  international  standards  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  foreseen  implementing  regulations.  These  implementing 

regulations  have  not  yet  been  subject  to  consultation  of  the  ECB.  The  ECB  encourages  the 

consulting authority to consult it also on these implementing regulations in due time before their 

adoption. 

2.4  The ECB draws the consulting authority’s attention to the need, in addition to adopting measures 
such as the draft law, to strengthen coordination 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  
5  
6  

7  
8  

Finanzmarktstabilisierungsgesetz, Bundesgesetzblatt I, 17.10.2008, p. 1982.  
Gesetz zur Stärkung der Finanzmarkt- und der Versicherungsaufsicht, Bundesgesetzblatt I, 31.7.2009 p. 2305.  
See  Opinions  CON/2008/57  and  CON/2009/50.  Furthermore,  the  ECB  was  consulted  on  further  German  crisis-related 
legislation:  CON/2009/24  and  CON/2009/54.  All  ECB  opinions  are  available  on 
the  ECB’s  website  at 
www.ecb.europa.eu. 
OJ L 177, 30.6.2006, p. 1. 
See in particular paragraph 2.1 of Opinion CON/2008/57 and paragraph 2.2 of Opinion CON/2009/24. 

3