A new, extensive revision of Germany’s corporate governance code would “put an end to excessive pay packages” by requiring a significant change to the way most companies approach executive pay. The new revisions call for a “top-down” approach in which the supervisory board determines total overall annual reported compensation first (a maximum cap) and then determines the amount of each component including fixed salary, variable bonus and pension contribution. In addition, the new policies would introduce a broad clawback on variable bonuses if justified by “extraordinary developments,” prohibit change-in-control policies that allow executives to resign after a takeover and still receive severance, recommend that the majority of performance bonuses be linked to medium-term rather than short-term financial goals, and recommend that long-term incentive plans be entirely paid out in stock with a minimum of four-year vesting schedule.
In addition, the changes would mandate that board members are not independent after serving for twelve years.
The new code would supplement Germany's historical approach to its corporate governance code of "comply or explain" with mandatory principles that must be applied and explained.
The changes come amid continued political turmoil over the Volkswagen “dieselgate” scandal in which former CEO Martin Winterkorn continued to receive bonuses and severance pay even after the diesel emissions scandal was made known to the public. Although German-listed companies are not legally required to comply with every detail of the governance code, the vast majority of large companies do so since they are required to disclose a rationale for any recommendation which they do not follow.
The new policy is open for public consultation until January 31, 2019 and will be effective in the summer of 2019.