Compensation report

The basis of this compensation report of VP Bank is the implementation of the EU Ordinance No. 575/2013 with reference to EU Directive 2013/36/EU CRD IV, which, amongst other things, regulates the risks associated with compensation policies and practices.

On the one hand, Liechtenstein has implemented this Directive in the Law on Banks and Securities Firms, in particular in Art. 7a Par. 6 (BankG) thereof: “Banks and securities firms shall introduce a compen­sation policy and practices and shall ensure continuously that they are consistent with robust and effective risk management within the spirit of this Article. The Government shall regulate the details of the compensation policy and practices in a related ordinance.”

On the other hand, the content of Annex 4.4 of the “Ordinance on Banks and Securities Firms” (FL-BankV) has been supplemented accordingly. This Ordinance entered into force on 1 January 2012. The remuneration policy of VP Bank Group corresponds to the size of VP Bank and its business model. This encompasses the offering of banking services for private clients and financial inter­mediaries in the disclosed target markets, in Liechtenstein and in the other locations as well as services for investment funds. 

Compensation plays a central role in the recruitment and retention of employees. It also has an influence on the future success of the company. VP Bank professes to pursue fair, performanceoriented and balanced practices in terms of compensation, one which is in keeping with the long-term interests of shareholders, employees and clients alike. 

The long-standing remuneration practices of VP Bank correspond to the business model of VP Bank as asset manager and private bank. The principles applied are laid down in the Remu­­neration Policy.

• Performance orientation and differentiation: VP Bank remunerates employees according to their performance.
• Gender- and age-neutral remuneration and equal treatment: the function determines the level of fixed annual salary.
• Fair and market-oriented pay: VP Bank is guided by market conditions and regularly reviews these.
• Focus of decision-makers on a stable, success-oriented and forward-looking management and the avoidance of excessive risk-taking: VP Bank rewards sustainable positive actions and does not maximise revenues on a short-term basis.

With these principles, VP Bank achieves a remuneration which is in line with the market, with performance and with requirements. They set the right performance incentives for individual employees and management thus fostering the achievement of the goals set out in VP Bank’s strategy. Remuneration-related conflicts of interest of the involved functions and/or individuals are avoided. 

The level of the fixed salary component as a base salary varies in principle according to the function performed and the related requirements. The local labour market is also taken into account. The fixed salary is a contractually agreed salary component which is paid out regularly in cash. 

Variable remuneration can, but need not, be granted. Even after repeated payouts, no entitlement to a variable salary arises in the subsequent year.

On the one hand, variable compensation is dependent on the success of the Bank or individual com­panies, on the other hand, on individual performance. The latter is evaluated by the employee’s supervisor at the end of a year on the basis of the agreed-upon tasks and goals. Taken into consideration is also the extent to which all relevant provisions of the legislator, the Bank and of the individual client are observed. The level of profit participation has to be in reasonable relationship to the fixed portion of income and varies according to function and market practices. 

Payment is made in principle in cash in the first quarter of the following year and, as a general rule, in the full amount. In the case of particularly high variable salary portions, VP Bank may spread a part of the payment thereof over several years and/or settle a part in the form of VP Bank shares or vested entitlements thereto. 

Each year, equity shares are offered to the employees of VP Bank on preferential terms. The number thereof depends on the level of the fixed salary as of the measurement date, 1 May. The shares may not be disposed of during a sales restriction period of three years.

The Board of Directors modified the participation in VP Bank Ltd by members of the first and second levels of management and laid down two new programmes from 2014 onwards. The Performance Share Plan (PSP) is a long-term variable management participation programme in the form of bearer shares of VP Bank Ltd. 

The Restricted Share Plan (RSP) is settled in equal annual instalments in the form of equity shares over the three-year plan period. The RSP programme may be also implemented in justified cases in order to remunerate a deferred variable salary portion or to implement particular retention measures.

The Compensation Policy Rules as well as the Risk Policy Framework Rules of VP Bank stipulate that the Bank’s compensation systems and human resources management are to be designed in a manner that minimises the potential for personal conflicts of interest and behavioural risks.

The Nomination & Compensation Committee (see chapter on Corporate Governance under Point 3.5.2) makes proposals to the Board of Directors on the principles underlying compen­sation as well as the level of compensation paid to the members of the Board of Directors and the Executive Board. The Board of Directors approves these principles and determines the amount of total compensation payable to itself and the members of the Executive Board in keeping with the applicable rules.

The Board of Directors receives compensation for the duties and responsibilities conferred on them by law and pursuant to Art. 20 of the Articles of Incorporation. This is determined annually by the full Board of Directors at the proposal of the Nomination & Compensation Committee. Compensation to the members of the Board of Directors is paid on a graduated basis according to their functions in the Board of Directors and its committees or in other bodies (e.g. the pension fund). Three-quarters of this compensation is paid in cash, and one-quarter in the form of freely disposable VP Bank bearer shares, the number of which is determined by the current market price at the time of receipt. 

At VP Bank, there are no agreements pertaining to severance compensation for members of the Board of Directors. 

On 27 March 2014, the Board of Directors adopted a new compensation model. In accordance with this model, compensation paid to management consists of four components:

1. A fixed base salary that is contractually agreed between the Nomination & Compensation Committee and the individual members. In addition to the base salary, VP Bank pays proportionate contributions to the management insurance scheme and the pension fund.
2. A Performance Share Plan (PSP), a long-term variable management participation (in the form of bearer shares of VP Bank Ltd). The basis thereof are the risk-adjusted profit (operating annual result adjusted for non-recurring items, less capital costs), weighted over three years as well as the long-term commitment of management to a variable compensation component in the form of equity shares. At the end of the plan period and depending upon performance, 0–200 per cent of the allocated vested benefits are transferred in the form of shares. This vesting multiple results from the weighting of an average return on equity (RoE) and the average cost-income ratio (CIR). Until the time of transfer of ownership, the Board of Directors reserves the right to reduce or suspend the allocated vested benefits in the case of defined occurrences or in extra­ordinary situations. The share of the PSP makes up approximately half of the total variable performance-related remuneration.
3. A Restricted Share Plan (RSP), which is based upon a risk-adjusted profit weighted over three years and is settled in equal annual instalments in the form of equity shares over a three-year plan period. Until the time of transfer of ownership, the Board of Directors reserves the right to reduce or suspend the allocated vested benefits in the case of defined occurrences or in extra­ordinary situations. The share of the RSP makes up approximately a quarter of the total variable performance-related remuneration. 
4. A cash compensation which also depends on the risk-adjusted profit weighted over three years. The share of this performance-related participation amounts to approximately one quarter of the total variable performance-related remuneration. 

The Board of Directors lays down each year the planning parameters of the performance-related remuneration (PSP, RSP and cash-based compensation) for the following three years. The target share of total compensation varies according to function and market customs. Within the 2015 to 2017 programme, the calculation basis for the target bonus (PSP, RSP and cash compensation) will lie between 56 and 100 per cent of the fixed annual salary if the annual and three-year targets have been achieved.

In 2015, 8,409 performance shares with a market value on the date of allocation of CHF 678,606.30 were transferred to management as part of the 2012–2014 management equity participation plan and the RSP 2014–2016. The vested benefits from previous management equity participation plans (2013–2015, 2014–2016 as well as 2015–2017) will continue to run unchanged until the end of the plan period. 

VP Bank has concluded no agreements on severance compensation with members of the Executive Board. 

An external advisor who has no other mandates from VP Bank Group was commissioned to structure the compensation model.

Fringe benefits are ancillary benefits which VP Bank offers its employees on a voluntary basis, often as a result of practices which are customary in the given location or business segment. In principle, the benefits are only of a minor nature. They are settled and reported in accordance with local regulations.

They relate principally to the following benefits:

• insurance benefits in excess of legal prescriptions
• retirement-benefit-related amounts, in particular voluntary employer contributions
• preferential conditions for employees in the case of banking transactions, such as reduced-rate mortgages for residential property
• further fringe benefits which are customary in the given location. 

Employees having a particularly large influence on the risk profile of the Bank are designated as “risk takers”. VP Bank identifies the members of the Executive Board as decision-makers and substantial “risk takers” as well as selected functions in the second management level. These are in particular the heads of the “Group Internal Audit”, “Group Legal, Compliance & Tax”, “Group Finance & Risk”, “Group Treasury & Execution”, “Group Information Technology” as well as “Group Human Resources Management”. Details of the remuneration of the Executive Board members are set out here. 

Individuals performing compliance and control functions are predominantly remunerated with fixed compensation components. Their variable compensation elements do not depend on the success of the business units which they verify or monitor.

The remuneration practices of VP Bank are in compliance with appendix 4.4 of the Banking Or­dinance (BankV) as well as the EU Directive. They are oriented towards long-term success. There are no events which trigger the automatic payment of variable salary components. The decision concerning the earmarking of a total amount for remuneration lies ultimately with the Board of Directors. 

VP Bank does not make guaranteed payments in addition to fixed salaries such as end-of-service indemnities agreed in advance. Special payments upon commencement of employment may occur in selected individual cases – as a general rule, these relate to compensation for foregone benefits from the previous employer. 

The Remuneration Policy allows for individual performance agreements in specific cases in order to compute the amount of a bonus depending on an objectively measurable success. Group Executive Management must consent to the related method of computation. The safeguarding of client interests and compliance with all regulatory directives must continue to exist in an unequivocal manner. 

In application of Liechtenstein law, variable salary components if necessary may be cancelled, those withheld be forfeited or those already paid out reclaimed. This applies in particular in the case of proven guilt of an employee or the acceptance of excessive risk to achieve goals.

The sum of variable-salary provisions must be tolerable in the aggregate. VP Bank Group or an individual subsidiary company should never fall into financial difficulty as a result thereof. In the case of adverse trading conditions, the Bank shall refrain from paying variable remuneration components. 

With the budget, the Board of Directors approves the total of fixed remuneration and, at the end of the year, decides on the level of provisions for the variable portion of salary having regard to the annual results. It lays down the fixed and variable portion of remuneration for the members of Group Executive Management and the Executive Board. The Nomination & Compensation Committee (NCC) supports the Board of Directors in all issues involving the setting of salaries, defines, together with the Group Executive Management, those individuals designated as “risk takers” and monitors their remuneration. Together with Internal Audit, the NCC reviews compliance with the Remuneration Policy. 

Group Executive Management is responsible for all aspects involving the implementation of compensation processes within the scope of the Policy and lays down the framework thereof for the individual companies. It specifies the fixed and variable remuneration of the second-management-level heads, including the managers in charge of subsidiary companies. Furthermore, it issues annual implementing regulations to the companies and/or supervisors for the fixing of individual variable salaries. 

The individual supervisors agree tasks and goals as part of the MbO process and evaluate the achievement of goals at the end of the period. In addition to performance, particular attention is paid to the observance of all relevant regulatory provisions. 

Information on the remuneration of members of the Board of Directors as well as the members of the Executive Board is to be found in the Financial Report, the stand-alone financial statements of VP Bank Ltd, Vaduz, under “Remuneration paid to Members of Governing Bodies”. 

Disclosures regarding personnel expenses are set out in the 2015 Financial Report of VP Bank Group under “6 Personnel Expenses”.

Aggregate compensation paid to all risk takers in 2015 amounted to: