9.3.1 Severance pay

Investment firms’ remuneration policies should specify the possible use of severance payments, including the maximum amount or criteria for the determination of such amounts that can be awarded as severance pay to identified staff. When determining the maximum amounts of severance payments, investment firms should consider in particular the fixed components of the remuneration of staff. Investment firms should consider how they will apply the ratio set between the variable and fixed remuneration to severance payments.

Investment firms should have a framework in which severance pay is determined and approved in the context of the early termination of a contract by the investment firm, including a clear allocation of the responsibilities and decision-making powers and the procedural involvement of the control functions.

Severance payments should not provide for a disproportionate reward, but for an appropriate compensation of the staff member in cases of early termination of the contract. In accordance with Article 32(1)(f) of Directive (EU) 2019/2034 severance payments must reflect performance achieved over time and must not reward failure or misconduct.

Severance pay should not be awarded where there is an obvious failure which allows for the immediate cancellation of the contract or the dismissal of staff.

Severance pay should not be awarded where a staff member resigns voluntarily in order to take up a position in a different legal entity, unless a severance payment is required by national labour law.

Additional payments in the context of the regular end of a contractual period or appointment as member of the management body, e.g. awarded discretionary pension benefit, should not be treated as severance payments, but as normal variable remuneration that is for identified staff subject to all specific requirements for variable remuneration.

Severance payments include additional payments on top of the regular remuneration in the following specific situations:

• a. redundancy remuneration for loss of office in case of an early termination of the contract by the investment firm or its subsidiary;
• b. remuneration awarded for a limited time period that is agreed to introduce a cooling-off period after the termination of the contract and is subject to a non-competition clause in the contract;
• c. the investment firm terminates the contracts of staff because of a failure of the investment firm or early intervention measures;
• d. the investment firm wants to terminate the contract following a material reduction of the investment firm’s activities in which the staff member was active or where business areas are acquired by other investment firms without the option for staff to stay employed in the acquiring investment firm;
• e. the investment firm and a staff member agree on a settlement in case of an actual labour dispute that could otherwise realistically lead to an action in front of a court.

Where investment firms award severance pay, the investment firms should be able to demonstrate to the competent authority the reasons for the severance payment, the appropriateness of the amount awarded and the criteria used to determine the amount, including that it is linked to the performance achieved over time and that it does not reward failure or misconduct.

When determining the amount of severance payments to be made, the investment firm should take into account the performance achieved over time and assess where relevant the severity of any failure. Identified failures should be distinguished between failures of the investment firm and failures of the identified staff as follows:

• a. failures of the investment firm should be considered when the total amount of the severance payments for staff is determined, taking into account the capital base of the investment firm; such severance payments should not be higher than the reduction of costs achieved by the early termination of contracts;
• b. failures of identified staff should lead to a downward adjustment of the amount of severance pay which would otherwise be awarded when only the performance over time would be considered in the estimation of the severance pay, including the possibility for a reduction of the amount down to zero.

Failures of investment firms include the following situations:

• a. where the opening of normal insolvency proceedings of the investment firm, as defined in Article 2(1)(47) of Directive 2014/59/EU, has been filed;
• b. where significant losses lead to the situation that the investment firm no longer has a sound capital base and, following this, the business area is sold or the business activity is reduced.

Failures of identified staff should be assessed on a case-by-case basis, and include the following situations:

• a. where a member of the management body is no longer considered as meeting appropriate standards of fitness and propriety;
• b. where the identified staff member participated in or is responsible for conduct which resulted in significant losses for the investment firm, as defined in the investment firms’ remuneration policy;
• c. where an identified staff member acts contrary to internal rules, values or procedures based on intent or gross negligence.

Severance payments should be considered as variable remuneration and as a general principle therefore, if awarded to identified staff, all requirements under Article 32 of Directive (EU) 2019/2034 apply. However, severance payments should in the following circumstances not be taken into account for the purpose of the calculation of the ratio between variable and fixed remuneration set within the remuneration policy and for the application of deferral and the pay out in instruments:

• a. severance payments mandatory under national labour law or mandatory following a decision of a court;
• b. severance payments under (i) and (ii) where the investment firm is able to demonstrate the reasons and the appropriateness of the amount of the severance payment:
• (i) severance payments calculated through an appropriate predefined generic formula (e.g. gardening leave) set within the remuneration policy in the cases referred to in paragraph 161;
• (ii) severance payments corresponding to the additional amount due in application of a non-competition clause in the contract and paid out in future periods up to the amount of the fixed remuneration which would have been paid for the non-competition period, if staff were still employed.
• c. severance payments under paragraph 161, not fulfilling the condition in point (i) of paragraph 166, where the investment firm has demonstrated to the competent authority the reasons and the appropriateness of the amount of the severance payment.