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German companies to offer say-on-pay

The German Bundestag has adopted the Gesetz zur Angemessenheit der Vorstandsvergütung (Act on the Appropriateness of Management Board Remuneration or VorstAG). The objectives of the new Act are to ensure a greater focus on incentives concerning the company’s long-term development, to make it easier to cut pay when a company’s situation deteriorates while creating clear rules on the determination of management board remuneration.

The Federal Ministry for Justice’s press release observes that, “One of the main reasons for the considerable rise in salaries was the extreme increase in variable remuneration components for top managers that were linked to developments in the company’s profit or share price. This established an incentive to orient day-to-day management decisions towards the short-term interest of shareholders in an increase in the share price (“shareholder value”) and not towards the long-term well-being of the company“.

This suggests a reigning in of aspects of the “Anglo-Saxon” governance model in favour of the traditional German approach based on co-operation (particularly co-determination) and long-term stability.

Governance & Disclosure

  • A decision concerning remuneration of a board member may – unlike at present – no longer be delegated to a committee of the supervisory board but must be made by the supervisory board in a plenary meeting.
  • The liability of the supervisory board has been increased. If the supervisory board determines a level of remuneration that is inappropriate, it thereby makes itself liable to compensation vis-à-vis the company.
  • The supervisory board’s right to subsequently make cuts in the level of remuneration in the event that the company’s situation worsens has been extended. Explicit statutory regulation is necessary in this respect since this constitutes an interference with existing contracts.
  • Companies are required to disclose more extensive information regarding remuneration and pension payments made to departing  management board members.
  • The general meeting of shareholders of a listed company will be able to give a non-binding vote on the system of management board remuneration.
  • Former management board members may not become a member of the supervisory board within a two-year period following their departure from the management board, in order to prevent any conflict of interest arising (Certain exceptions allowed).

Remuneration Policy

  • There must be an appropriate relationship between the remuneration of the management board of a public limited company and the management board’s performance.
  • The remuneration structure of listed companies must be oriented towards sustainable corporate development.
  • Share options may be exercised at the earliest four years after the option was granted.

Links

Federal Ministry for Justice Press Release >>

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