Issue Brief No. 04/2008

Restrictions on Managerial Salaries

The News

The Grand Coalition is currently working on a reform to regulate the salaries of managers. A common working group, initiated by the coalition committee, held a first-time meeting on the 26th of September 2008. The group is led by Joachim Poß, deputy chairman of the parliamentary fraction of the SPD at the Bundestag, as well as by Otto Bernhardt, the spokesman for financial policy issues of the CDU/CSU-fraction.

The Background

Due to a significant increase of managerial salaries in German companies, already in 2007, demands were being uttered that politics should moderate this development. The SPD – at that time still under the leadership of Kurt Beck – initiated a working group that was supposed to deal with this topic and to come up with proposals. The coalition committee was engaged in this issue in spring 2008. Since then, the coalition partners have been working respectively on their concepts. The common working group now focuses on the following issues:

• Consolidation and concretion of the responsibility of supervisory boards: Until today, the HR committee of a listed company’s board of advisors has been in authority to define the principles and details of managerial salary packages. For the future, this responsibility is supposed to be shared with the entire board of advisors. This would lead to a situation in which all representatives of the employees in the boards would be part of the decision-making process.
• Extension of holding periods: Henceforth, share options - as part of the salary - shall only be allowed to be cashed in after three years. The current time limit is two years. Additionally, these options should strictly refer to long-term, pre-set share price targets and earnings. With this measure, politicians want to do away with the - in their eyes - inappropriate alignment of management behaviour to short-term price-heights and subsequent sale of share options.
  
• Empowerment of annual shareholder's meeting: The company's shareholder meeting is supposed to receive the right to comment on the managerial salaries – which were set by the supervisory board – in a positive or negative manner. However, the vote of the shareholder meeting shall not be binding.
  
• Reduction of tax deductibility: The coalition partners have different views on whether or not managerial salaries and “golden handshake” deals should be subject to corporate tax deductions. The SPD demands a salary limit of 1 million Euros. Any benefits in excess thereof should only be tax-deductable at 50 percent. The Christian Democratic Union rejects this proposal until further notice. Interestingly enough, Federal Minister of Justice Brigitte Zypries (SPD) remarked sceptically on the suggestions of her own party.

The Milestones

During the next weeks, Christian Democrats and SPD will continue working on their concepts in order to overcome the various differences. Conciliation is seeked before the end of 2009. The then agreed-on measures are supposed to be integrated into the Publicly Listed Corporations Bill (Aktiengesetz) as well as into the Corporate Governance Index.

The EU deals with the issue of managerial salaries as well. According to an ECOFIN Council of Ministers declaration dated October 7th, the salaries should be more orientated towards the effective performance of the corporate leaders. The implementation of these recommendations will be, however, subject to the national legislative bodies of the member states.


Last Update: 7 October 2008