Opinion of the European Central Bank of 5 August 2010 on implementing rules regarding compensation systems at institutions and insurance companies (CON/2010/63)
Date: 2010-08-05
Institutions: European Central Bank
Subjects: Germany, financial institution, financial stability, financial supervision, insurance company, national law, remuneration of work

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 5 August 2010  

on implementing rules regarding compensation systems at institutions and insurance companies  

(CON/2010/63) 

Introduction and legal basis 

On 5 July 2010 the European Central Bank (ECB) received 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  the  ‘draft  regulation  on  institutions’)  and  the  draft 

regulation  on  the  prudential  supervision  requirements  for  the  remuneration  systems  at  insurance 

companies (hereinafter the ‘draft regulation 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  Central  Bank  by  national  authorities  regarding  draft 
legislative  provisions1,  as  the  draft  regulation  on  institutions  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 regulations 

1.1  The draft regulations aim at implementing the Law on the prudential supervision requirements for 

the compensation systems at institutions and insurance companies, which had been subject to ECB 
Opinion  CON/2010/412.  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  substance,  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  distinguishes  between  (1)  requirements  that  apply  to  all 

institutions and the remuneration systems for all their managers and staff; and (2) more demanding 

special requirements that are only relevant to major institutions and the remuneration systems for 

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3  

OJ L 189, 3.7.1998, p. 42. 
ECB Opinion CON/2010/41. All ECB opinions are available on the ECB’s website at www.europa.eu. 
See on its content footnote 3 in Opinion CON/2010/41. 

 
 
 
 
                                                 
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 years 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 requirements. Institutions whose balance sheet total, on average, has 

equalled or exceeded EUR 40 billion on the relevant key dates will generally be regarded as major. 

This assumption should serve as guidance for the institutions 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  appropriate  if  they  avoid  paying  incentives  to  the 

managers  or  staff  for  accepting  disproportionately  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 administrative 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 institutions 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  management  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 taken into account for the variable remuneration of 

managers  and  staff  who  can  create  high  risk  positions,  insofar  as  this  is  determinable  with 

reasonable effort. At least 40% of the variable remuneration is to be deferred for at least three years 

and  to  be  paid  out  pro  rata  temporis.  One  half  of  the  variable  remuneration  to  be  deferred  must 
depend on the sustainable development of the institution5. If the performance of a member of staff 

or of an organisational unit and/or the overall success of the institution does not meet the specified 

target,  or  should  previous  positive  profit  contributions  turn  out  not  to  be  sustainable,  this  must 

result  in  the  variable  remuneration,  including  the  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 

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5  

This structure is mirrored in the draft regulation on insurance companies. 
The  explanatory  memorandum  to  the  draft  regulation  on  institutions  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. 

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memorandum  to  the  draft  regulation  on  institutions,  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 intended to enhance the stability and robustness of 
the  financial  system6.  The  ECB  supports  also  the  relatively  broad  scope  of  application  of  this 

legislation,  which  covers  not  only  credit  institutions  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 supervision 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  concerned,  the  German  authorities  should  ensure  an 

appropriate  degree  of  coherence  of  their  legislative  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  the  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  institutions,  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 proportionality. Overall, the ECB considers of paramount 

6  

7  

Principles  for  Sound  Compensation  Practices  of  2  April  2009;  Principles  for  Sound  Compensation  Practices  -
Implementation Standards of 25 September 2009. See also Commission Recommendation 2009/384/EC of 30 April 2009 
on remuneration policies in the financial services sector (OJ L 120, 15.5.2009, p. 22). 
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 institutions, (OJ L 177. 30.6.2006, p. 1). 

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importance  that  national  jurisdictions  maintain  a  consistent  treatment  across  institutions  in  the 

application  of  the  international  framework  as  reflected  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’  remuneration  policies  and  schemes  are  designed  in  a  way  that 

avoids and reduces excessive risk-taking behaviour, the ECB suggests that inconsistencies with the 

international framework, reflected by the Union legislative provisions currently under finalisation, 

should  be  addressed  in  a  timely  manner  by  the  German  authorities.  In  this  regard,  the  ECB  has 

identified three key areas for possible improvement.  

3.2.2  First, with respect to governance of the remuneration policies, the ECB considers that the general 

requirements  need  to  be  enhanced  to  ensure  effective  oversight  of  the  remuneration  policies  and 

schemes  of  the  institutions  by  the  administrative  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 major institutions should be strengthened in line 

with FSB implementation standard 1 and the 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  clarified  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 remuneration consists of shares or share-linked instruments (or, where 

appropriate,  other  non-cash  instruments),  as  long  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 

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