Germany Bonus Cap for Bank Staff Introduced

4 minute read | October.31.2013

In Germany, remuneration of managers in general has increasingly come into public and political focus.

Over the last years, the German legislator enacted several law reforms concerning managers’ pay. Very recently, the German Banking Act (Kreditwesengesetz “KWG”) was amended effective January 2014, to provide for further restrictions on bonus payments for managers and employees in the banking industry. A reform of the German Stock Corporation Act (Aktiengesetz “AktG”) however, shifting the authority of determining the remuneration of board members to the shareholders’ meeting was stopped, but presumably only for the time being.

German Banking Industry: Amendment to the KWG

Recently, the legislature passed the “CRD IV Implementation Act”. This Act implements the EU Directive 2013/36/EU (Capital Requirements Directive IV) and will come into force on 1 January 2014. It will amend the KWG—the law regulating the banking industry, including the remuneration of banking staff.

According to the revised Sec. 25a para 5 KWG, the variable remuneration of managers of banking institutions must generally not exceed 100 percent of the fixed salary. In other words, the bonus must be capped by an amount equal to 100 percent of the fixed remuneration. With the consent of the bank’s shareholders, however, the cap could be up to 200 percent of the fixed remuneration. The consent of the shareholders’ is subject to strict formalities. There must a formal shareholders’ resolution requiring a majority of at least two-thirds of the votes cast, provided that at least half of the voting rights are represented at the shareholders’ meeting; alternatively, if the quorum is not met, at least 75 percent of the total votes cast are required for lifting up the cap from 100 percent to 200 percent. As far more than half of the shareholders’ votes must be in favor for allowing a bonus of up to 200 percent of the fixed remuneration, it would be a challenge in particular at companies with widely held stock, to get a positive vote. Further, the proper fulfillment of these strict formalities has to be certified by the auditor in the bank’s financial statements. However, the requirement for publication of the 200 percent cap in the financial statements could well create some reservation by the bank to adopt the higher cap since public discussion would likely commence over whether the higher cap is really justified.

The new cap on bonus payments will come into force on 1 January 2014. Hence, new contracts or bonus agreements with bank managers must reflect the new requirements regarding the maximum admissible bonus. With respect to contracts or bonus provisions already agreed on but not adhering to the new law, the situation is more complex: As regards members of the management board, these individuals should be under a fiduciary duty to accept a modification of the bonus provisions in their contract to bring them in line with the revised law. With respect to employees, the bank as employer must consider employee protection laws before unilaterally amending existing bonus agreements, in the event that there is no mutual agreement with the employees. The facts and circumstances for unilateral action by the bank regarding staff employees’ pay should be evaluated with care. One legal argument for taking action might be based on frustration of contract, as the employer is not allowed to make higher bonus payments as allowed by the new law.

Listed Stock Corporations: No Amendment of AktG

This summer, a divided legislature left pay reforms of listed stock corporations up in the air.

The German Parliament, with its majority of Christian democrats and liberals, voted in favor of an amendment of the AktG. According to the draft Sec. 120 para 4 AktG, the shareholders’ meeting of listed companies would be competent to vote annually and bindingly on the remuneration system applicable to members of the management board, and the maximum amount the board members could earn. The German Bundesrat—the second legislative chamber in Germany representing the German States—with its majority of social democrats and greens rejected the draft bill. The Bundesrat proposed alternative concepts on the remuneration of board members. In particular, it favored harmonizing board members’ pay with the remuneration of the workforce of the company, and contemplated reducing the tax deductibility of managers’ pay.

If the draft Sec. 120 passed the Bundesrat, this reform would have brought a fundamental change to the existing division of powers within a stock corporation. At present, it is solely up to the supervisory board to determine the remuneration of the management board. However, the reform could have lead to practical problems. Service contracts with management board members are generally agreed on for a defined term. If a subsequent shareholders’ meeting were to reject the remuneration structure approved by the preceding shareholders’ meeting, the remuneration regime could lose its legitimacy.

Following the last general elections, the Christian democrats and social democrats are in coalition negotiations in order to form the new federal government. Both parties want to discuss reforms on the remuneration of managers, and their conflicting views are on the agenda.