Leading German Companies Implement Shareholder Advisory Vote on Management Compensation

Pursuant to federal legislation adopted last year, leading German companies are providing for a shareholder advisory vote on management compensation at the annual meeting of shareholders. For example, Siemens AG has proposed a resolution on shareholder say-on-pay, which refers to the company’s present compensation system that was used to determine the compensation of management board members in 2009. A similar proposal was made at ThyssenKrupp AG. At both companies, the supervisory board and the management board advised the shareholders to approve the compensation packages.

Germany companies operates under a two-tier system of corporate governance with a supervisory board with oversight power and a management board that daily runs the company. Generally, the compensation system for members of the management or executive board is presented in detail in the compensation report that forms part of the corporate governance report in the company’s annual report.

The Act on Appropriateness of Management Board Remuneration (Gesetz zur Angemessenheit der Vorstandsvergütung), which took effect last year, enables the annual shareholders meeting to resolve on the approval of the system of management board compensation. The German Federal Parliament, the Bundestag, adopted the legislation based primarily on the belief by the Federal Republic that a factor contributing to the financial crisis is that the incentives in management remuneration promoted the wrong kind of conduct. Many companies were too focused on the attainment of short-term parameters, such as turnover figures or stock market prices on certain dates. As a result, management lost sight of the long-term state of well-being of the company. Moreover, providing the wrong incentives created the temptation to take irresponsible risks.

However, the legislation does not establish a specific level of remuneration by law. This is not a matter for the State to decide, said Federal Justice Minister Brigitte Zypries, but should be up to the contracting parties.

The Federal Republic believes that allowing a general meeting of shareholders of a listed company to deliver a non-binding vote on management compensation will be an instrument for controlling the existing executive pay system and enable shareholders to express their approval or disapproval. In turn, pressure will be exerted on those responsible to act particularly conscientiously when determining management pay packages.

In other compensation reform, the Act provides that a decision concerning the compensation of a management board member may no longer be delegated to a committee of the supervisory board; but instead must be made by the supervisory board in a plenary meeting. Also, companies are required to disclose more extensive information regarding compensation and pension payments made to management board members when they discontinue their board activity, be it premature or under normal circumstances. This will enable shareholders to gain a better insight into the extent of agreements entered into with members of the management board.

The legislation also provides that, if the supervisory board determines a level of remuneration that is inappropriate, it thereby makes itself liable to compensation vis-à-vis the company. This provision clarifies that determining an appropriate level of remuneration is one of the most important duties of the supervisory board; and that the board is personally liable for any violations of its obligations.

Further, there must be an appropriate relationship between the remuneration of the company’s management board and the management board's performance. Management compensation may not exceed the usual sector or country-specific level of remuneration in the absence of special reasons.

.