In autumn 2010 the draft of the amended Austrian Banking Act (Bankwesengesetz; BWG) announced restrictions of the variable remuneration policy of credit institutions, irrespective of general rules of civil and employment law.
With publication in the Official Journal of the European Union, two directives 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 resecuritisations, and the supervisory review of remuneration policies, shall enter into force.
According to the European Parliament legislative resolution of 7 July 2010 on the proposal of the mentioned directives, member states shall adopt by 1 January 2011 those laws, regulations and administrative provisions necessary to comply with the EU-Directive concerning the remuneration policies. The Austrian ministerial proposal (Ministerialentwurf-194/ME XXIV. GP) of 3 September 2010 stipulates the amendment of the BWG to implement the imminent EU-directives in Austria. The amended BWG shall be in force by 1 January 2011.
New remuneration policies
According to the ministerial proposal, credit institutions shall stipulate and comply with remuneration policies and practices which are compatible with effective risk management, for all categories of staff whose professional activities have a material impact on the risk profile of the credit institution.
In accordance with the draft of the amended BWG in autumn 2010, the evaluation of the individual performance shall follow financial as well as non-financial criteria, eg:
- The assessment of performance should be set in a multi-year framework;
- There shall be no limitation of the credit institution’s ability to strengthen its base capital;
- A guaranteed variable remuneration shall only be granted in exceptional cases.
Furthermore, credit institutions using certain government support must take into consideration, among others, also the following criteria:
- Variable remuneration may be capped at a percentage of the net profit;
- If necessary for solid risk management and long term growth, upper limits for remuneration shall be implemented;
- Senior managers will not be granted a variable remuneration in case this is not adequate.
In accordance with the ministerial proposal, the variable remuneration shall comprise different components. At least 50% of it must be granted by specifically defined shares, as set out in the BWG.
Furthermore, 40% (60% in case higher variable remuneration – not yet further defined) of the variable remuneration must be deferred for at least five years and shall be, in accordance with the remuneration policy within the credit institution, in line with the kind of business performance, its risks as well as the performance of the affected staff.
According to the draft, the entitlement for variable pay is only acquired, and the payment of the variable pay (inclu-ding the deferred part) is only allowed when this is, in light of the financial situation of the credit institution, affordable and justified (ie, based on the performance of the affected business unit and person).
Who controls the remuneration policy?
Based on the ministerial proposal, the supervisory board (or other responsible supervisory body of the credit institution) is responsible for the implementation and verification of the principles of the remuneration policy. In particular cases a remuneration board (to be set up by certain credit institutions) verifies directly the application of the remuneration policy. The Financial Market Authority may impose restrictions with regard to the provisions, or even completely bar the use of certain instruments of provisions.
The related legal proceedings, in particular concerning the amendment of the BWG, are currently pending and may have changed somewhat by the time of publication of this article. Both newly agreed upon variable remunerations as well as existing ones are subject to the new remuneration policies. However, payments already rendered are not affected. Credit institutions are thus well advised to monitor the introduction of the new policy and implement the principles of the final new remuneration policy in due course.
According to the draft, the entitlement for variable pay is only acquired, and the payment of the variable pay (including the deferred part) is only allowed when this is, in light of the financial situation of the credit institution, affordable and justified.