Draft executive pay and governance proposals which would significantly impact German companies are being criticized by major EU advisory firms and Germany’s four largest fund managers as forcing a short-sided, “one size-fits-all” approach. The German proposals, announced in November of 2018 as a response to Volkswagen’s “Dieselgate”, include several major changes to the German corporate code which was implemented in 2002. Among the included changes are:
- Prohibition of “Change in Control” agreements with executives and management
- New Board clawback powers to reclaim pay if justified by “extraordinary developments”
- “Top-down” approach to executive pay where the board will determine an executive’s overall pay level first, then subsequently determine how that pay level is allocated to salary, bonus, and stock compensation. Notably pensions would also be regarded as part of that pre-defined, max pay level set initially.
- For bonuses, metrics should be set at medium-term goals to dissuade short-termism.
- For long-term incentive plans, includes a framework consisting all stock which must vest over four years.
German institutions, including proxy advisory firms, took specific issue with the compensation changes, according to the Financial Times, calling for a preservation of a Board’s ability to design compensation packages to meet the company’s specific circumstances, with one noting that the proposal was “too prescriptive and rigid”. More valuable, according to those same investors, would be a binding say on pay vote in contrast to an advisory vote.
The head of the German corporate governance commission told the Financial Times that all public feedback received during the public comment period ending on January 31 would be closely examined. Mirroring the UK, the new rules would be part of a “comply or explain” system where companies are not required to follow the new rules but must disclose and explain any decisions not to comply.
The proposals are due to go into effect in the summer of 2019.