Germany gets tough on executive pay

The toughest crackdown in Europe against excessive boardroom pay was launched by German legislators on Friday when they backed a bill that will cap executive compensation.

The stricter-than-expected rules, almost certain to be enacted before the summer, would also allow supervisory boards to give shareholders a non-binding vote on executive pay packages at general meetings.

The provisions are part of measures that legislators on Friday said would add much-needed transparency to the opaque and secretive procedures that have long governed boardroom pay at large German companies.

The agreement is a slap in the face for the 12 supervisory board members of large German companies who had protested in a letter to Angela Merkel, German chancellor, about the proposed legislation this week. “Corporate decisions such as the shaping of board members’ contracts should not be set by law in the tiniest of details,” they warned.

One parliamentarian told the Financial Times on Friday: “Not only did we make no concession to these people but the letter was in fact a great example of the kind of mentality we want to eradicate.”

Government insiders said both the Social Democrats and Ms Merkel’s Christian Democrats had been appalled by the letter and that the intervention had persuaded many legislators to sign up to a tougher list of measures than originally envisaged.

The CDU, which had pushed for supervisory boards to be allowed to poll shareholders on executive compensation, was pleasantly surprised on Friday when the SPD dropped its opposition to the idea. The SPD initially feared that giving AGMs a vote would dilute the role of supervisory boards, which include both shareholder and employee representatives.

One measure agreed at the last minute will force supervisory boards to cap an individual executive’s yearly compensation if the package includes a variable element. One of the negotiators on the bill said the provision was to avoid “exorbitant bonuses linked to freak movements in share prices, for instance”.

Other provisions will increase the transparency of the decision-making process, for example preventing a supervisory board from delegating pay decisions to compensation committees.

The new law will also make it easier for shareholders to sue, and obtain damages from, non-executive directors who had approved unreasonably high packages. Meanwhile, executives will have to contribute to the cost of their D&O insurance contracts to the tune of 1.5 per cent of their annual pay.

Although a recurrent issue, executive compensation has moved back to the centre of the political debate under the combined influence of the economic crisis and the approaching election.

A ranking published by Manage-Magazin this week showed Wendelin Wiedeking, the embattled chief executive of debt-ridden Porsche, had pocketed €77m last year, making it Europe’s best paid top manager in 2008 by a €63m margin.

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