Remuneration of the Board of Management in the AG in Germany
Appropriateness and Structure of Management Board Compensation in Germany
The compensation of management board members in Germany, in particular of management board members of large listed german stock corporations, is the subject of ongoing discussions, most recently in the context of the implementation of ARUG II. In most cases, it is overlooked that the German Stock Corporation Act (AktG) and related regulations, such as the German Corporate Governance Code (DCGK), at least define the basic guidelines for - appropriate - management board compensation and thus make them manageable for companies and management boards.
Our Legal Expertise in the Area of Management Board Compensation in Germany
Our highly qualified and specialized team of lawyers and specialists in german corporate law will advise you quickly and competently on all issues relating to the remuneration of management board members. The range of advice provided by our stock corporation lawyers can be described as follows:
- Strategic advice on the basic structure of management board compensation, both on the part of the company and on the part of management board members
- Review of existing compensation agreements
- Tax advice on management board compensation
- Support in negotiations of management board contracts, in particular compensation negotiations
- Out-of-court and judicial enforcement / defense of compensation claims, in particular after termination
- Advice to shareholders on issues of management board compensation
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The legal regulatory framework for the compensation of the management board is determined by Art. 87 AktG and - for listed companies - by Art. 87a AktG and Item 4.2. of the German Corporate Governance Code. Accordingly, the following basic guidelines apply to the amount and structure of management board compensation:
Appropriateness of Remuneration in Germany
According to the specific statutory provision (Art.87 par. 1 AktG), the total remuneration of a member of the management board in Germany must be commensurate with his duties and performance and with the situation of the company, and may not exceed the customary remuneration without special justification. The total remuneration of the management board includes - in addition to salary - profit sharing, expense allowances, insurance compensation, commissions and incentive-based compensation commitments, such as stock subscription rights and fringe benefits of any kind.
The supervisory board in Germany is obliged to define the vague concept of appropriateness in relation to the specific individual case. In doing so, the supervisory board has entrepreneurial discretion (so-called business judgement rule). Within the scope of this discretion, the supervisory board must comply with the criteria of appropriateness specified by german law.
Criteria for Appropriateness of Remuneration in Germany
The criteria for appropriateness (Art. 87 par. 1 AktG, supplemented by Point 4.2. DCGK) are in detail:
- Situation of the company
- Duties of the management board member
- Performance of the management board member
- Customary nature of the compensation
- Situation of the company
The situation of the company is understood to relate to the current net assets, financial position and results of operations, but future expectations (budget figures) must also be taken into account. The decisive factor is the overall situation, not the situation of individual (affected) divisions or departments.
In german practice, it is usually not recognized that the economic situation of the company cannot be the sole decisive criterion. Thus, even in times of economic crisis, high remuneration may be appropriate if the recruitment of a restructuring expert or the rewarding of restructuring successes is a special basis for the remuneration.
Duties of the Management Board Member in Germany
The duties of the management board member are understood to be the scope of activities assigned to a management board member by employment contract, articles of association or rules of procedure. In addition to the type and scope of the respective tasks, the associated degree of responsibility of the management board member concerned is also important.
The equal treatment of members of the management board provided for by german law does not compel equal compensation. Differences in compensation may be justified depending on the nature and importance of the management board responsibilities in question.
Performance of the Management Board member
According to the wording of the german law ("of the management board member"), it is not the performance of the entire body but the personal performance of the individual management board member which is decisive for the compensation.
Naturally, when members of the management board are appointed for the first time, it is hardly possible to assess their performance for the specific position. In such cases, the performance of the management board member in question in other companies or in other functions should be taken as a basis. Any uncertainties can be offset by the proportion of variable compensation.
Customary Nature of the Remuneration in Germany
Furthermore, according to the wording of Art. 87 par. 1 AktG, the total remuneration of the management board member in Germany may not exceed the customary remuneration without special reasons. Customary thus forms an upper limit (unless there are "special reasons"). The general view is that customary is determined on the basis of a "horizontal and vertical" comparison. The horizontal comparison must take into account industry, size and national customary practice, which is difficult to determine in practice given the limited availability of sound statistics. For the vertical comparison, which is also set out in Section 4.2.2 par. 2 Sentence 2 GCGC, the wage and salary structure within the company must also be taken into account.
If a higher remuneration is granted than is customary in the german market, this does not automatically lead to this remuneration being inappropriate. The decisive factor is whether there are special, comprehensible reasons which justify the higher compensation in the specific individual case.
Sustainable Corporate Development in Germany
Art. 87 par. 1 sentence 2 of the AktG requires listed companies to base their entire remuneration structure on long-term, sustainable corporate development.
The reference to long-term corporate development is probably to be understood as meaning that the remuneration structure should be geared to long-term success. The long-term aspect is likely to be relevant in particular for the variable remuneration components and any one-off payments in Germany. For the former, a multi-year assessment basis is probably just as appropriate as a possibility to limit the amount. However, the term "long-term" has yet to be clarified by the courts and the literature.
The linking of the remuneration structure with sustainable corporate development, as required by german law, has only become relevant in practice as a result of the latest amendments to the AktG. The legislative materials indicate that ecological and social aspects are also to be taken into account when determining the remuneration (structure).
The question of the appropriateness of remuneration is assessed on the basis of the total remuneration of the management board. The total remuneration includes, among other things
- fixed salary,
- variable salary,
- expense allowances,
- insurance compensation (especially D&O insurance),
- pension commitments,
- other fringe benefits (e.g. company car, cell phone, relocation expenses, etc.),
- "starting payments",
- severance pay.
The above-mentioned remuneration components and all other payments made to a member of the management board are to be "added together" when assessing appropriateness.
Special Features of Variable Remuneration in Germany
With regard to variable remuneration, which is often the subject of dispute in german practice, there is a wide range of arrangements. The following are considered variable salary components
- Profit sharing / bonuses,
- Monetary remuneration commitments linked to performance factors such as EBIT, etc,
- Value-based remuneration commitments (share subscription rights, stock options, virtual shares, etc.) linked to performance factors such as EBIT, EBITA, etc.
It should be noted that the German Stock Corporation Act does not require the agreement of variable remuneration components. The supervisory board is therefore at liberty to provide exclusively for fixed compensation for members of the management board.
However, it must be noted that a purely fixed salary runs counter to the recommendation in Section 4.2 of the GCGC, according to which monetary remuneration should comprise fixed and variable components.
Structure of variable Remuneration Components
Variable remuneration components should generally be based on a multi-year assessment period (see also Section 4.2.3. par. 2 GCGC). The assessment basis is only multi-year if it is at least two years long. This does not rule out the possibility that a one-year assessment basis is inadmissible in principle; it merely requires special justification.
In german practice, short-term variable remuneration components are usually combined with long-term variable remuneration components.
Also considered permissible in principle are so-called discretionary bonuses, which set the amount of variable remuneration at the reasonable discretion of the supervisory board, to be exercised e.g. annually. It is unclear to what extent "negotiation bonuses", in which the variable remuneration is negotiated annually between the management board and the supervisory board, are legally permissible.
Ratio of fixed and variable Remuneration Components in Germany
Neither the AktG nor the GCGC provide any specific guidance on the ratio between fixed and variable compensation components. There is a discernible tendency in specialist literature to place the sum of fixed remuneration and long-term variable remuneration at more than 50%. According to Section 4.2.3 par. 3 of the GCGC, the remuneration as a whole and with regard to its variable remuneration components should have maximum limits.
Special Features for Listed Companies
In listed stock corporations in Germany, a structured remuneration system must be installed (Art. 87a AktG). The legislator has laid down detailed requirements for this. For example, the remuneration system must contain at least the following information, with regard to remuneration components, however, only to the extent that these are actually provided for:
- Determination of a maximum remuneration for the members of the board of management;
- Contribution of the remuneration to the promotion of the business strategy and the long-term development of the company;
- All fixed and variable remuneration components and their respective relative share of remuneration;
- All financial and non-financial performance criteria for the granting of variable remuneration components, including a) an explanation of how these criteria contribute to the promotion of the objectives set out in point 2, and b) a description of the methods used to determine the achievement of the performance criteria;
- Deferral periods for the payment of remuneration components;
- The company's options for reclaiming variable remuneration components;
- In the case of share-based remuneration: a) time limits; b) the conditions for holding shares after acquisition; and c) an explanation of how such remuneration contributes to the promotion of the objectives set out in point 2;
- With regard to remuneration-related legal transactions: a) the terms and conditions of their termination, including the respective notice periods, b) any promises of redundancy compensation, and c) the main features of the pension and early retirement schemes;
- An explanation of how the remuneration and employment conditions of employees have been taken into account in determining the remuneration system, including an explanation of which group of employees has been included;
- A description of the procedure for setting, implementing and reviewing the remuneration system, including the role of any committees concerned and the measures taken to avoid and deal with conflicts of interest;
in the case of a remuneration system reviewed in accordance with Art. 120a par. 3 AktG: a) an explanation of any significant changes; and b) an overview of the extent to which shareholder votes and comments relating to the remuneration system and the remuneration reports have been taken into account.
It is true that the aforementioned structures for the remuneration of members of the management board only apply directly to listed stock corporations in Germany. However, it is to be expected that they will also become increasingly established as "good corporate governance" for management boards of non-listed AGs (and also managing directors of large GmbHs).
It is significant that the annual general meeting of listed companies in Germany decides on the approval of the remuneration system for the members of the management board (Section 120a AktG), including any significant change to the remuneration system, but at least every 4 years. Approval or non-approval has no legal consequences; the corresponding resolution by the annual general meeting is also not subject to appeal. However, a resolution of the annual general meeting to reduce the maximum remuneration of the management board is binding and subject to appeal.
Responsibility of the Supervisory Board in Germany
In addition, it should be noted that the supervisory board as a whole - and, if applicable, also a remuneration committee formed by the supervisory board - is responsible for the conclusion of management board contracts and thus for the remuneration of the management board members in Germany. In this context, the supervisory board must also comply with the statutory provisions on compensation; otherwise it will be liable for damages.