New legislation on the amount and structure of pay (including options), new rights for the court to claw back monies paid, the passing of risk to executives, and new corporate governance on remuneration.
Due to the current economic crisis and in response to public pressure, new legislation has been introduced to amend the existing rules on remuneration of the management boards of public companies. The amendments focus compensation policies on long-term aims and seek to reward sustained development of the company. The following measures were enacted (sec. 87 German Stock Companies Act (“AktG”).
Limit on pay quantum is unclear
A compensation package must be appropriate. This will be the case where it is within a range of “common remuneration” and this common remuneration may not be exceeded “without special reasons”. Unfortunately, legislation was not enacted to detail what “special reasons” would be or to specify by how much the remuneration of the management is permitted to exceed the salary of a skilled worker. What is “common” must be measured by taking into account other payments made within the company, together with management compensation levels at other comparable companies. “Special reasons” (which are broadly long-term or special experience of the management board, difficult company situations, etc.) may justify increased remuneration.
Long term, not short term, focus
Furthermore, the remuneration structure has to focus on a “sustained development of the company”. Therefore, long-term sustained development and growth (and not short-term success) must be the fundamental basis of the compensation. Bonus structures must be assessed on the basis of several years, with the sustained development of the company in mind.
Court powers to reduce and claw back remuneration
Remuneration may be reduced by a court order if the position of the company worsens considerably. However, a retrospective reduction and a reclaim of any monies paid will not be possible merely on the basis that the actions of the management fell short of expected standards. It would be necessary for the economic situation to decline for the court to make such an order.
An excess must be agreed for directors and officers liability insurance for the management board members. Consequently, the management board members are, at least partly, personally liable for any poor management and therefore may be more cautious about taking excessive risks. However, it is also possible for the individual members of the management to purchase personal insurance to cover them against negligence and wrongdoing.
The vesting period for stock options has also been extended from two to four years to ensure that the longer term aims of the company are considered.
Corporate governance change
Finally, compensation packages are now determined by the plenum of the supervisory board ("Aufsichtsratsplenum") (the controlling body of the management board) and not by the personnel committee, as was the position before. Furthermore, the general meeting can render a non-binding vote on management remuneration to increase the public pressure on the management.
This article was produced by, and re-produced with kind permission of, our correspondent firm in Germany, Keller Menz Rechtsanwälte. www.keller-menz.de
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