Compensation report

The basis for this compensation report is EU Directive 2010/76/EU, which amongst other things addresses the risks associated with a company’s compensation policy and practices.

Liechtenstein has transposed this directive domestically by amending the Law on Banks and Finance Companies, in particular Art. 7a Par. 6, which now reads: “Banks and finance companies are to introduce a compensation policy and practice and to ensure continuously that they are consistent with solid and effective risk management within the spirit of this Article. The government shall regulate the details of the compensation policy and practice in a corresponding ordinance.”

Also, the content of Annex 4.4 of the “Ordinance on Banks and Finance Companies” (FL-BankV) has been supplemented accordingly. The revised Ordinance entered into force on 1 January 2012.

The total compensation of VP Bank Group employees consists of a fixed salary, and additional variable compensation component, stock-ownership models, as well as additional perquisites (fringe benefits).

The amount of an employee’s fixed salary is based on the function performed and the related requirements. Also taken into account are local labour market conditions. The fixed salary is a contractually agreed compensation component and is paid monthly in cash. With the amount of the given fixed salary, it can be ensured that employees of VP Bank do not become financially dependent on variable compensation components.

Variable compensation may, but need not, be granted. On the one hand, it is dependent on the success of the Bank in general or in individual transactions and, on the other, on the employee’s personal performance. After the end of a given financial year, the latter is assessed by their supervisor on the basis of previously agreed tasks and targets. The actual amount is determined in accordance with quantitative and qualitative criteria and is in a reasonable relationship to the fixed salary of the employee. The targeted proportion of this component of overall compensation depends on the function performed and general market customs, but in all cases it is less than 50 per cent of the total. Even after repeated payouts, the employee has no claim to further variable compensation in future years. As a general rule, the amount is a lump sum paid in cash during the first quarter of the subsequent financial year. However, in the case of especially high proportions, VP Bank can spread the payments over several years and/or issue some of the amount in the form of stock. The individual locations of VP Bank are responsible for determining the variable compensation in keeping with Group-wide standards.

The employees of VP Bank are offered the opportunity each year to purchase the Bank’s shares at a preferred price. The amount depends on the employee’s years of service and specific function. Instead of an outright purchase, it is also possible to obtain them at no charge by merely taking into account the monetary benefit. The shares are restricted as to sale for four years.

For members of senior management as well as certain specialists, VP Bank has established a stock-ownership plan aimed at the long term (Long-Term Incentive Plan, LTI). The determining principles on which the plan is based are the economic profit (i.e. consolidated income less cost of capital) of VP Bank Group over three years, “pay for performance” and the long-term commitment of management to a variable compensation component in the form of shares. The participants must in advance invest a portion of their “target bonus” in the LTI programme. As a “means of payment”, shares reflect the objective assessment of the market. For participants, the long-term targets serve to reward success that is not just based on a single year’s performance.

Details on the LTI programme can be found in the “Corporate governance” section under “Compensation, shareholdings and loans”.

VP Bank affords fringe benefits to its employees on a voluntary and frequently location-/industry-specific basis. In principle, these benefits are minor in nature. They are accounted for and disclosed in accordance with local regulations.

They mainly include the following:

• insurance benefits that extend beyond the legal requirements;
• contributions to retirement plans, especially voluntary payments by the employer;
• preferred conditions for employees’ banking transactions, e.g. reduced mortgage rates for acquiring/financing their own home;
• other benefits customary for the specific location.

At the proposal of Group Executive Management, the Board of Directors decides on the Group budget. That in turn specifies the annual compensation framework for each subsidiary company.

At the end of each year – while taking into account the success of the specific subsidiary and the Group as a whole – provisions are taken for the sums associated with variable compensation (profit participation) per subsidiary, approved by Group Ex- ecutive Management and then submitted, together with the annual financial statements, to the Board of Directors for approval. Executive Management at each location bears responsibility for establishing more detailed rules and allocating the profit participation accordingly.

Fundamental issues of personnel policy (such as salary and profit-participation systems) are addressed by the Nomination & Compensation Committee, which defines who the “risk takers” are (see below) and determines their salary and profit participation. 

Details on the Nomination & Compensation Committee can be found in the “Corporate governance” section under Point 3.5.2.

Employees who have a particularly large influence on the risk profile of the Bank are deemed to be “risk takers”. VP Bank views members of Group Executive Management and Executive Management at the subsidiary companies as “risk takers”. Details on their compensation can be found in the “Corporate governance” section.

The compensation practice at VP Bank is consistent with the provisions of Annex 4.4 to the Banking Ordinance (FL-BankV) as well as those of the EU Directive. It is oriented towards long-term success: fundamentally, there are no automatisms that compel the payment of variable compensation components. The decision to allocate any such total amount ultimately lies in the hands of the Board of Directors.

VP Bank arranges no “golden parachutes”. Special payments made upon the entrance of a given individual can occur in certain instances – as a general rule, it is way of compensating forgone benefits from a previous employer.

Individual agreements with client advisors for their acquisition successes are limited to individual cases and only possible if such is common locally or in the marketplace. 

In keeping with Liechtenstein law, VP Bank must withhold or reclaim benefits in the event of an employee’s legal culpability. This applies in particular to the variable compensation.

The variable compensation components may never put VP Bank in a difficult financial situation; if its course of business is poor, the Bank will waive the payment of variable compensation components.

Details on the emoluments taken by members of the Board of Directors and Group Executive Management of VP Bank Group can be found in the “Annual report of Verwaltungs- und Privat-Bank Aktiengesellschaft, Vaduz” section under note “Remuneration paid to members of governing bodies”.

Information on personnel expense is provided in the “Financial report 2012” section under note 6, “Personnel expense”.