The basis of this compensation report of VP Bank is the implementation of the EU Regulation 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 Regulation in the Law on Banks and Securities Firms, in particular in Art. 7a Par. 6 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 related subject matter is clearly defined by Annex 1 and Annex 4.4 in the “Ordinance on Banks and Securities Firms” (BankO). This Ordinance took effect on 1 January 2012 and was amended as of 1 July 2017. 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 at the other locations as well as services for investment funds.
Principles of remuneration
Compensation plays a central role in the recruitment and retention of employees. VP Bank subscribes to fair, performance-oriented 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 performance differentiation are substantive components of the remuneration policy and ensure the interlinking of variable compensation with the achievement of the strategic goals of the company.
The remuneration policy is compatible with and helps foster robust and effective risk management. It makes sure that remuneration-based conflicts of interests of the functions or persons involved are avoided. The assumption of excessive risks by employees to increase remuneration in the short term should be best prevented by setting appropriate incentives.
The remuneration policy renders possible a fair and attractive remuneration in line with the market to attract, motivate and tie qualified and talented employees to VP Bank Group. Conformity with market conditions is reviewed regularly.
The remuneration system is not founded on a purely formula-based approach and therefore possesses sufficient flexibility to take account of the business performance of VP Bank Group or its subsidiary companies.
Remuneration practices follow the principle of equal treatment. The level of fixed remuneration depends on the function. The level of variable remuneration reflects Group performance, the performance of the segment or team and/or individual performance.
The remuneration policy is subject to regular review. Relevant legal provisions are applied and implemented in remuneration practices. Prescriptions specific to functions, in particular, those relating to identified employees, are taken into account.
With these principles, VP Bank achieves a remuneration which is in line with the market, with performance and with demands of the position. They set the right performance incentives for individual employees and management thus supporting 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.
Components of remuneration
The total remuneration of the employees of VP Bank Group comprises a fixed remuneration, an additional variable salary, equity-share participation models as well as additional perquisites (“fringe benefits”). In laying down the structure of remuneration, an appropriate relationship between the fixed components and variable remuneration as well as a function-specific compensation is taken into account. In particular, identified employees, which include the Group Executive Management, receive a maximum variable remuneration which complies with the legal relationship to the annual salary (maximum of 1:2).
The annual salary laid down in the individual employment contract and payable in cash in monthly instalments forms the basis of remuneration. The level thereof varies in accordance with the function exercised and the demands and responsibilities deriving therefrom which are assessed based on objective criteria. This enables internal comparability as well as the equal treatment in remuneration matters and also permits the comparison with market data. VP Bank considers the fixed remuneration to be compensation for the employee’s activities performed in an orderly manner. The fixed salary is reviewed annually for on-going appropriateness within the scope of the salary and wage round negotiations and, where necessary, adjusted.
Variable, performance and earnings-related salary
The variable remuneration can consist of a directly paid-out portion as well as of deferred remuneration instruments. In this respect, it constitutes an additional voluntary benefit payable by VP Bank Group to which no legal entitlement exists not even after repeated, unconditional payment thereof.
Funding of variable remuneration
The overall amount of variable remuneration is determined by the Board of Directors and is based upon performance indicators as well as qualitative performance criteria. The overall amount takes into consideration the multi-annual, risk-adjusted profitability of VP Bank Group, the sustainable level of profitability, capital costs and thus takes account of current and future risks.
The Board of Directors makes a facts-based assessment of the total amount of variable remuneration and can adapt the amount on a limited scale. In times of adverse operating conditions, the overall amount of variable remuneration is reduced accordingly and can even amount to zero. The level of provisions for variable remuneration must be affordable in the aggregate. Never should VP Bank Group nor any individual Group subsidiary fall into financial difficulties as a result. The impact on the Group’s equity situation is taken into consideration in this process.
Allocation of variable remuneration
The allocation of variable payments is made on a discretionary basis and in addition to the attainment of quantitative and/or qualitative goals, takes account also of the degree of compliance with the directives of the legislator, the guidelines set by the company including the Code of Conduct as well as any requirements defined by the client. Longer-term perspectives may also flow into the performance evaluation. The performance evaluation of identified employees is performed based upon the individual’s goals as well as the goals of the team, the business segment, the subsidiary as well as the overall result of VP Bank Group. Performance is evaluated using quantitative and qualitative criteria. The variable compensation of employees in controlling functions, internal audit or with legal and compliance tasks is determined based upon the achievement of the targets related to their tasks irrespective of the results of the business units being controlled. A participation in the results of the company or of VP Bank Group is admissible within normal limits and is sensible within the framework of equal treatment. Achievement of targets is evaluated after the end of the business year within the scope of the performance management process. The amount of the individual variable compensation is determined by the employee’s superior.
Payment of variable remuneration
Immediately payable variable remuneration (bonus): The bonus is that part of the variable remuneration settled annually in cash as compensation for the contribution made to earnings in the previous business year. Should the bonus be particularly high in relation to overall remuneration, a part of the payment thereof can be withheld. Where it appears sensible and appropriate, such withheld portion can also be settled in the form of deferred remuneration instruments or in the form of equity shares which may not be disposed of during a limited period.
Deferred remuneration instruments: Using deferred compensation instruments, the long-term alignment of the interests of shareholders and employees is to be achieved by a participation of the employees in the growth in the value of the Group. VP Bank deploys, in principle, equity-share schemes which are exposed to the risk as deferred remuneration instruments. Entitlement to deferred remuneration instruments is dependent on the function exercised and the individual. It is confirmed by a certificate of allocation. Through the deployment of deferred remuneration instruments, VP Bank Group complies with the legal regulations concerning payment schemes for risk takers i.e. a minimum of 40 per cent of the variable remuneration is granted in the form of deferred remuneration instruments which are linked to a possible malus and/or claw-back rule and accordingly can be forfeited. The regulations on deferred remuneration instruments are set out in separate plan rules.
Malus and claw-back rules: VP Bank, under certain conditions, may withhold, reduce or cancel variable remuneration components awarded to an employee (malus) or reclaim amounts which have already been paid (claw-back). This applies particularly in the case of the subsequently discovered fault of the employee or in the case of disproportionately high risks being entered into to increase revenues. On leaving VP Bank, entitlements to deferred, not yet disbursed variable salary components are forfeited as a rule.
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 registered shares A of VP Bank Ltd. The Restricted Share Plan (RSP) is settled in equal annual instalments in the form of registered shares A over the three-year plan period.
The table below gives an overview over the various instruments of variable remuneration for the members of the first and second management levels using a time axis (t).
The RSP programme may be also implemented in justified cases in order to settle a deferred variable salary portion or to implement particular retention measures.
Content and method of determining compensation and equity-participation programmes
The Compensation-Policy Rules as well as the Risk-Policy Rules of VP Bank stipulate that the Bank’s compensation systems and human resources management are to be designed in a manner that minimises personal conflicts of interest and behavioural risks.
The Nomination & Compensation Committee (see chapter on Corporate Governance under Point 3.5.2, page 86) 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.
Board of Directors
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 laid down annually by the Board of Directors in plenary session acting on 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 function 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 pay for members of the Board of Directors.
Nomination & Compensation Committee
The Nomination & Compensation Committee comprises the members Fredy Vogt (chairman), Markus Hilti and Dr. Gabriela Payer. As a rule, it convenes ten to twelve times per annum. In case of need, the CEO participates in the meetings of the Nomination & Compensation Committee in an advisory capacity.
During 2017, the Nomination & Compensation Committee convened on fourteen occasions.
In accordance with the model approved by the Board of Directors on 10 May 2017, the compensation payable to the Executive Board consists of the following four components:
- A fixed base salary that is contractually agreed between 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.
- A Performance Share Plan (PSP) which is a long-term variable management participation (in the form of registered shares A of VP Bank Ltd). The basis thereof is 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 equity shares. This vesting multiple is determined from the weighting of an average Group net income and the average net inflow of new client assets over a three-year 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 PSP makes up approximately half of the total variable performance-related remuneration.
- 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 amounts to approximately one quarter of the total variable remuneration.
- A cash compensation which also depends on the risk-adjusted profit weighted over three years. The share of this profit-related participation amounts to approximately one quarter of the total variable performance-related remuneration.
Each year, the Board of Directors lays down each year the planning parameters of the profit-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.
In 2017, 18,189 shares with a market value as of the date of allocation aggregating CHF 2,228,152.50 were transferred to the Executive Board as part of the 2014-2016 management equity-share participation plan, the RSP 2015-2017 as well as the RSP 2016-2018. The vested benefits from previous management equity-share participation plans (2015-2017, 2016-2018 as well as 2017-2019) continues to run unchanged until the end of the plan period.
VP Bank has concluded no agreements on severance pay 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 amount. 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 an individual’s own home;
further fringe benefits which are customary in the given location.
Individuals and functions subject to particular provisions
Employees having a particularly large impact on the risk profile of the bank are designated as “risk takers”. VP Bank identifies the members of the Board of Directors and 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 units “Group Internal Audit”, “Group Legal, Compliance & Tax”, “Group Finance”, “Group Risk”, “Group Investment, Product & Market Management”, “Group Operations”, “Intermediaries”, “Private Banking”, “Group Information Technology”, “Group Human Resources”, “Group Treasury & Executions“, “Group Communications & Marketing”, “Group Credit” and the members of the Credit Committee as well as the CEOs of Group subsidiaries.
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.
Compliance with remuneration provisions
The remuneration practices of VP Bank are in compliance with appendix 4.4 of the Banking Ordinance (BankO) as well as the EU Directive and are geared to long-term success. 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 given individual cases – as a rule, these relate to compensation for foregone benefits from the previous employer.
In application of Liechtenstein law, variable salary components, where applicable, 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.
Determination of remuneration (Governance)
With the budget, the Board of Directors approves the framework for the fixed remuneration and, at the end of the year, decides on the level of provisions for the variable portion of salary having regard 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 the observance of all relevant regulatory provisions.
Quantitative information on remuneration
Information on the remuneration of members of the Board of Directors as well as the members of the Executive Board are 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” (page 206).
The aggregate remuneration paid to all risk takers in 2017 amounted to:
Share of total