The audits found shortcomings in three areas of emphasis, among other things: how risk takers are identified at the major institutions, how employee bonuses are determined and how payment restrictions are dealt with.

Areas of emphasis for the audits in 2013

• How risk takers are identified
• How employee bonuses are determined
• How total remuneration is determined
• Payment restrictions
• Trends of high earners figures reported by German institutions

Risk takers

Twelve of the institutions audited have been classified as major within the meaning of the InstitutsVergV. Shortcomings were found at all twelve in relation to how risk takers were identified. Frequently, this was not based on a comprehensive, regularly updated, and appropriately documented risk analysis. In several cases, BaFin also found fault with the criteria used in the risk analysis taken as the basis for identification.

Two other institutions had classified themselves as “not major”; however, the classifications were based on poor-quality risk analyses.

Employee bonuses

At several of the institutions audited, it was not ensured that the remuneration systems were aligned with the institutions’ strategies and the associated objectives. In addition, the assessment periods for determining the variable remuneration of senior managers and risk takers were unsatisfactory in many cases.

Only four institutions already complied at the time of the audit with the criteria for capping the ratio of the variable remuneration component to the fixed remuneration component that came into force when the amended version of the KWG took effect on 1 January 2014. At seven further institutions, the ratio of variable to fixed remuneration would have been in line with the KWG requirements under the new law only if the institutions’ shareholders had approved an increase in the maximum amount to 200% of the fixed remuneration.

Total remuneration and payment restrictions

The parameters that the institutions used to determine the variable remuneration were often insufficient. Significant deficits were also revealed in the institutions’ systematic examination of the extent to which the total variable remuneration could be reconciled with the need to ensure an adequate capital base.

The main problems in terms of payment restrictions were the lack of appropriate criteria for reducing the retained variable remuneration (“malus” triggers). For example, some institutions defined criteria or thresholds in such a way that an examination of whether a malus was applied would only take place in the event of extremely adverse developments or serious individual misconduct. In addition, the assessment periods for determining the variable remuneration components for risk takers and senior managers were frequently inadequate.

High earners at German institutions

In 2013, the European Banking Authority (EBA) carried out a data collection exercise on high earners at European institutions. The German institutions reported a total of 87 high earners employed in Germany, defined as employees with an annual income of €1 million or more. Of these, 40 were identified as risk takers. However, the majority of high earners are concentrated at a very small number of institutions. The vast majority of German banks reported that they employ very few or no high earners at all.