Finance Sector – Need for action to retain employees

Many German finance professionals willing to change jobs

A survey on the “2014 career trends” carried out among German finance professionals found that 86% were ultimately willing to change jobs. In fact, only 13% had never changed employers, with a third wishing to change jobs every two years and 21% every four to five years. It appears that the finance sector needs to take action if it is to retain its employees and avoid unnecessary severance, recruiting and training costs.

Classic way to retain employees: retention bonus

The classic means of retaining employees is the retention bonus, which is a loyalty bonus paid out if and when an employee remains in the company for a particular period. As a means of retaining employees, however, it is most effective when an “all or nothing” principle can be implemented: if the employee leaves the company before the deadline, he leaves with nothing.Yet, it is precisely the finance sector with its dependence upon effective incentives to retain employees that faces particular challenges in this regard.

Strict requirements for retention bonuses in the German Remuneration Ordinance for Institutions

Firstly, the current version of the German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung) which fundamentally applies to all credit and financial services institutions and has been in force since 1 January 2014, permits retention bonuses only subject to very strict conditions. Under section 5(6) of the Ordinance, a retention bonus may only be paid out to an employee within the first 12 months of starting employment. The institution must also meet strict requirements, for example regarding equity resources and liquidity funds.

In addition, a special payment under the Ordinance must – at least to a certain extent – be linked to the employee’s individual performance and thus to the success of the relevant institution. Only then can payment be made, subject to the proviso that the employee is still with the company at a particular point in the future. The underlying reason for this is the aim of ensuring the stability of both the relevant institution and the financial market in general by avoiding disincentives to the employees.

Tense relationship with the case law of the German Federal Employment Court

The performance-dependent component of retention bonuses, however, means that their aim of retaining employees fails in the light of the current case law of the German Federal Employment Court (BAG). As the Federal Employment Court recently made clear in its judgement of 13 November 2013 (10 AZR 848/12), a special payment, such as the retention bonus under the Remuneration Ordinance for Institutions, is ultimately a payment for previously performed work, which under general terms and conditions of business (which, pursuant to Section 310(3) German Civil Code (BGB), employment agreements usually are) cannot be made dependent on the fact that by a particular point in time that does not lie within the year in which the work was performed, the employment contract is still intact without notice to terminate. A clause of this kind represents an unreasonable disadvantage to the employee within the meaning of Section 307(1) BGB. Thus, a clause stipulating, for example, that an employment contract remain intact until 31 December of a given year is inadmissible.

Conclusion: 

Creative solutions requiredWhen the requirements of the Remuneration Ordinance for Institutions and the Federal Employment Court are considered, the use of retention bonuses for employees from financial institutions is possible only within very narrow limits so that here – unlike in other sectors – it is hardly feasible to make meaningful use of them. If companies are to retain financial professionals, this will require the development and implementation of alternative strategies. Incentives might be secondments or further training, promotion opportunities, flexible working hours and the like. Important incentives are typically those that boost identification with the company. What is crucial here is ultimately a comprehensive approach that might, for example, also include post-contractual prohibitions on competition to make it more difficult or even impossible for employees to move to competitors.