The German Bundestag yesterday adopted the Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG, Act on the Appropriateness of Management Board Remuneration). The Act introduces important changes concerning the composition of management board remuneration and the manner in which it is determined by the supervisory board. It also introduces 'say on pay' in Germany, i.e., a non-binding advisory vote on remuneration for listed company shareholders. Further information about the Act has been published here (in English) by the Federal Ministry of Justice, from where the following summary of the Act's provisions is taken:
In future, there must be an appropriate relationship between the remuneration of the management board of a public limited company and the management board's performance, and this remuneration may not exceed the usual (sector or country-specific) level of remuneration in the absence of special reasons.
The remuneration structure of listed companies must be oriented towards sustainable corporate development. Components of the remuneration package that are variable should be based on assessment criteria covering a number of years; the supervisory board should provide the possibility of introducing caps in the event of unusual developments.
Share options may be exercised at the earliest four years after the option was granted. This is intended to give managers who benefit from such schemes a greater incentive to act with sustainable goals in mind and in the interests of the company.
The supervisory board's right to subsequently make cuts in the level of remuneration in the event that the company's situation worsens has been extended. Explicit statutory regulation is necessary in this respect since this constitutes an interference with existing contracts. An example of 'worsening' in this sense would be where a company is forced to make redundancies and is unable to distribute profits; in such a case, continuing to pay the agreed remuneration to the management board members would be inequitable for the company in question. There is no requirement of insolvency to enable this. The possibility of reducing pensions is restricted to the first three years following the board member's departure.
A decision concerning remuneration of a board member may - unlike at present - no longer be delegated to a committee of the supervisory board but must be made by the supervisory board in a plenary meeting. This will contribute to making the determination of remuneration more transparent.
The liability of the supervisory board has been increased. If the supervisory board determines a level of remuneration that is inappropriate, it thereby makes itself liable to compensation vis-à-vis the company. This rule makes it clear that determining an appropriate level of remuneration is one of the most important duties of the supervisory board and that it is personally liable for any violations of its obligations.
Companies are required to disclose more extensive information regarding remuneration and pension payments made to management board members when they discontinue their board activity, be it premature or under normal circumstances. This will enable shareholders to gain a better insight into the extent of agreements entered into with members of the management board.
If the company takes out so-called 'directors and officers liability insurance' (D&O insurance), something which is common practice, a mandatory deductible amount must be agreed. This amount must not be lower than one and a half times the amount of annual fixed remuneration. This is intended to promote business conduct that is focused on greater sustainability.
In future, the general meeting of shareholders of a listed company will be able to give a non-binding vote on the system of management board remuneration. In this way, an instrument for controlling the existing executive remuneration system is put at shareholders' disposal, which enables them to express their approval or disapproval thereof. Thus pressure will be exerted on those responsible to act particularly conscientiously when determining management board remuneration.
Lastly, former management board members may not become a member of the supervisory board within a two-year period following their departure from the management board, in order to prevent any conflict of interest arising. This restriction period rule does not apply if election to the supervisory board takes place at the instigation of shareholders who hold more than 25% of voting rights in the company. This balanced rule permitting exceptions is designed to take account the interests of family-run companies, in particular".
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