29.01.2019 - Comments

Executive compensation: The fog lifts

by Philipp Immenkötter

There is every reason to hope that soon we will be better informed about what drives executives financially. Both the drafts of the second Shareholders' Rights Directive (ARUG II) and of the German Corporate Governance Code (DCGK) aim to ensure that there will be more transparent reporting on the origin of Executive Board salaries.

This is absolutely necessary, because there are currently only very weak requirements, so that the current laws and recommendations have to be described as foggy rather than clear. In their current version, the Aktiengesetz and the Handelsgesetzbuch only aim to make the level of salaries transparent. The DCGK also contains detailed recommendations on the presentation of the level of salaries, but the functioning of the remuneration system should only be reported in a generally understandable form. This way, one is in the best possible position to know exactly how much a manager earns, but the reasons for this remain nebulous.

Accordingly, it is hardly surprising that only Covestro and Wirecard of the DAX corporations fully disclose the origin of the salaries of their executives. The remaining 28 DAX companies, on the other hand, conceal a great deal of important information. Thus, a veil of mist remains over the financial incentives that are set for the board members.

Soon, at least parts of the fog will clear. ARUG II requires companies to disclose their remuneration policy in advance as of June 2019 and submit it to the shareholders' meeting for approval. It must be disclosed how performance criteria contribute to the promotion of the business strategy and the long-term development of the company.1 The methods by which achieving the criteria is determined must also be presented.  There will also be stricter regulations for the content of the remuneration report, which provides information on past salaries after a financial year. Among other things, the annual change in compensation is to be compared with the company's earnings performance. This will allow conclusions to be drawn about the so-called pay-for-performance: What has been achieved economically and by how much has the salary risen in return?2

Improved transparency can also be expected from the revision of the DCGK. One significant change in the latest draft of the code is that the relationship between the achievement of previously agreed targets and variable compensation must be determined. The achievement of targets should also be comprehensible in terms of reason and amount.3 This would be a significant novelty, because currently only four of the 30 DAX groups disclose all the concrete target values and only seven comment on how exceeding the targets translates into salary.

This will result in significant changes for Allianz, Bayer and Munich Re, among others. In our transparency rating, they are among the companies with the most opaque compensation reports. Currently, it is neither possible to understand all the performance criteria nor to gain a complete insight into the methodology used to determine target achievement. In the future, like many other DAX companies, they will have to provide significantly more information on the origin of salaries.

The new regulations will enter into force too late for the coming remuneration reports for the 2018 financial year. However, the reports for the 2019 financial year can be eagerly awaited. By then, at least part of the current veil of fog should disappear.

A detailed study on the transparency of executive compensation in the DAX can be found here.


1 AktG-E §87a Abs. 1

2 AktG-E §162

3 Draft on the DCGK from 06.11.2018, principle 25 and recommendation and suggestion D.11

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