Seminar report: How employees set executive pay in Germany

By 27.03.12BlogSeptember 2nd, 2020No Comments

Deborah Hargreaves, Director of the High Pay Centre reports on the recent HPC seminar

Since 2009, employees and trade unions have had a key role in setting the pay of their bosses in Germany. While the German two-tier board system came in for heavy criticism in the run-up to the financial crisis, it has been strengthened since then.

The supervisory board which consists of elected employee, trade union and shareholder representatives has been given the mandate to determine executive pay. Before new rules were passed in 2009, pay decisions were delegated to a separate remuneration committee. That committee still does the preparation for the decision-making, but the pay levels must be set by the board itself.

The new rules were the outcome of a government review that looked into the operation of the supervisory board. According to Sebastian Sick, an expert in corporate governance from the Hans-Boeckler institute in Dusseldorf, the inquiry found that the involvement of employees on the supervisory board: “had a positive impact on motivation and important social effects, contributing to social harmony and productivity.”

The chief executives of large German companies such as Peter Loescher at Siemens, have come out in support of the two-tier system.

The 2009 legislation was aimed at breaking up the “closed shop” system of remuneration committees and opening up pay to a wider debate on the supervisory board. The board must decide the appropriate level of executive pay, although the chairman who is elected by the shareholders, has a casting vote.

This means the supervisory board must look at comparisons with pay levels in other companies as well as the ratio of top pay to the workforce at that particular company and incentives that encourage long-term decision-making by the executives. A provision for clawback of bonuses must be included in case the management board gets its decisions wrong.

The supervisory board must also set the maximum amount of variable pay that can be awarded to the executive in any year. This can lead to some controversial discussions and many boards have set very high maximum levels – such as Euros20 million that are unlikely to be reached.

The new rules have so far not led to any reduction in executive pay which has risen swiftly in Germany in recent years as in other countries. However, it has not yet reached the heights of pay in the UK and US. According to Mr Sick, chief executive pay at Germany’s top 30 companies has risen from 14 times average wages in 1987 to 90 times while in the UK it has increased to 145 times average salary. This puts German chief executives’ pay at around Euros5 million for last year – not far off the British average of £4.2 million.

Top pay is the subject of heated debate in Germany as in Britain and other countries. The decision by VW recently almost to double the pay of its boss, Martin Winterkorn, to Euros17.5 million, provoked an outcry even though it had been approved by the chairman of the works council.

VW was, however, one of seven companies on the Dax 30 to introduce more sustainable measures of company performance last year. This means that as well as being assessed on the basis of purely financial targets, decisions must take into account employee satisfaction, customer feedback and environmental objectives. These have often been put on the agenda by the employee representatives on the supervisory board.

“In the last five years, employees have driven the debate on remuneration,” said Mr Sick. “It takes time to prepare, training and outside advice, but the employee side knows the company best and knows its internal structures so can contribute significantly.” There is some evidence to show that those companies with strong supervisory boards have lower executive pay and fewer short-term incentives.”