There was no need for adjustments to our performance- related compensation system based on our competence model in financial year 2007. The system offers sufficient scope for performance-related differentiation within the salary bands defined under the competence model.
The number of employees covered by the Long Term Incen- tive Programme (LTIP) increased by 5 to 55 as a result of growth. The aim of the programme is to further strengthen the loyalty towards the bank of employees in positions of particular responsibility and further embed the goal of max- imising value for shareholders. Each year, the beneficiar- ies are awarded a specific number of virtual, non-tradable shares (performance shares) according to their position within the company and their basic salary. These encom- pass the conditional right to a payment in cash upon ex- piry of a three-year waiting period. The amount of this cash payment depends on the extent to which the performance targets set at the beginning of the period are achieved and how high the share price is at the end of the waiting period. The performance targets defined at the outset of the plan are based on the total shareholder return (TSR), a key indi- cator, which takes into account the dividend paid over the waiting period as well as the movement in the share price.
How many performance shares are paid out depends in equal part on the performance targets TSR outperformance compared to the Prime Financial Services Performance In- dex (subset A) and the rise in TSR of comdirect shares in absolute terms (subset B).
The exercise hurdles for both performance targets are high. With regard to TSR outperformance, the performance shares are only valuable if comdirect bank shares perform at least as well as the reference index over the three-year waiting period. If comdirect bank’s share price, including dividends paid, increases over the same period by at least 25% in ab- solute terms against the share price on issue, this subset also becomes valuable. A cap has been defined for the payment. Should the performance targets set at the start of the plan not be met, the performance shares lapse at the end of the waiting period.
> Risk-oriented overall bank management
The general aim of comdirect bank is to generate a sustain- able attractive return on equity with a controllable level of risk at all times. Consequently, we do not assess risks on an isolated basis but as an integral part of overall bank man- agement. In the current phase of propelled growth, the aim again is to secure a balanced and at all times controllable risk/return ratio – taking account of comdirect bank’s risk- taking capability as well as regulatory requirements.The risk strategy is determined by the Board of Managing Directors of comdirect bank. This strategy specifies the ex- tent to which the bank is prepared to take on risk in order to leverage opportunities. Special risk strategies are drawn up for all material individual risks and these form an integral part of the bank’s overall strategy.
comdirect bank pursues a risk-aware business model which is based on generating net commission income and net in- terest income in brokerage, banking and advice. The bank’s own positions relate to the investment of customer deposits in the money and capital markets with an emphasis on in- vestment grade counterparties. In financial year 2007, only a comparatively small proportion of the disposable risk cov- er assets was utilised by group risk. Limits are set for risks which can be quantified and compliance with these limits is monitored on a continual basis.
> Risk management, controlling
and reporting
Our effective risk management and controlling system forms the basis for implementation of the risk strategies. The sys- tem enables us to identify risks at an early stage and to assess them under various assumptions and scenarios and carefully manage them. We are therefore in a position to take measures quickly to counter risks in the event of any unwanted developments. The procedure with which we measure, aggregate and manage risks is updated continually on a best practice basis and adapted to the management systems of the bank as a whole. Here we also take account
The Board of Managing Directors of comdirect bank AG is responsible for the risk management and controlling system within the group. The Board specifies the permissible total level of risk within the group and its allocation across the individual risk types and fields of competence. At comdirect bank, the CFO is responsible for implementing and monitor- ing the risk strategy.
The strategy is implemented through risk management on the one hand and risk controlling on the other.
The task of risk management at comdirect bank is to pro- actively and consciously manage all risks in the relevant business lines. For effective, value-oriented overall bank management, risk management is carried out on a decen- tralised basis in the individual divisions.
Risk controlling is carried out centrally by the Risk Monitor- ing department, which aggregates, evaluates and monitors risk for the bank as a whole and reports regularly to the Board of Managing Directors on the respective risk position. In addition, risk controlling implements statutory require- ments and monitors compliance with such regulations.
The continually updated risk management and controlling system also forms the basis for comprehensive and up-to- date risk reporting. Major risk indicators are included in the overall management of comdirect bank. In addition to detailed quarterly risk reports, monthly risk status reports provide information on the current development of major risk fields and are therefore integral to our early risk identifi- cation and monitoring system. With the aid of the risk radar included in the status reports, we identify developments re- quiring countermeasures at an early stage.
Internal Audit regularly checks the functionality and suit- ability of risk management activities pursuant to the mini- mum requirements for risk management.
Further development of risk management in the reporting year
In financial year 2007 we made the final preparations for the introduction of Basel II at the beginning of 2008.
The first pillar of Basel II relates to the approaches for meas- uring credit default, market and operational risks, which are used to calculate the minimum capital requirements of a bank. With regard to credit default risks, comdirect bank has applied for certification as an AIRB institution. The certifica- tion review took place in autumn 2007; as of the reporting date the review report was not yet available. As a result of the high level of bank loans in the risk weighted assets in lending operations, the first step in the certification proc- ess concentrated on the bank portfolio. The Advanced In- ternal Ratings Based Approach (AIRB) permits a more exact assessment of the risk position, which is better tailored to the specific situation of the bank, and hence the necessary capital requirement than the standard method. The latter method is used by comdirect bank for market risks as these play only a minor role overall. With regard to operational risks, comdirect bank will use the Advanced Measurement Approach (AMA).
The second pillar of Basel II is implemented through the minimum requirements for risk management (MaRisk). These relate to the implementation of internal procedures, which are to be checked by the regulatory authorities and are used to assess the equity and specify equity guidelines which are tailored to the respective risk profile of the bank. comdirect bank implemented MaRisk in financial year 2006 and introduced a value-at-risk based system to determine the risk-taking capability. For financial year 2007, we are reporting group risk as part of a risk-taking capability analysis for the first time.