DSW's Remuneration Survey 2004

There are only a few things that attract peoples attention like the question: what do German executives earn? Who would have thought that the recommendations of the German Corporate Governance Code concerning the individualised disclosure of directors’ pay would have initiated such a heated debate?

It is obvious that German managers being reluctant to make their individual compensation package public are facing stronger headwind. Especially since Professor Theodor Baums, the leading German Corporate Governance expert and head of the Government Commission Corporate Governance spoke of a “gentlemen’s agreement”, accusing the executives of the big German companies to prevent the individual disclosure by internal arrangements. The fact that so few of Germany’s blue-chip companies have agreed to reveal individual executive pay packages has been met with public indignation. Politicians have also weighed in. In August, Hans Eichel, finance minister, and Horst Köhler, the German Federal President, sharply criticised the non-disclosure of pay details. With more discretion but nevertheless clear in the matter Brigitte Zypries, Federal Minister of Justice, expressed her opinion. She said that unless a significant number of companies reveals salaries by summer of 2005, there will be a law requiring them to do so. From DSW’s point of view legislation is the right way forward, unless the majority of managers change track.

But there is still hope that legislation can be avoided. Slowly but surely critics show effect: Adidas-CEO Herbert Hainer revealed his remuneration in the meantime. The man on top of the sporting goods producer earns 1.5 to 1.8 millions of Euro. The CEO of Allianz, Michael Diekmann revealed at least his fixed payment: 900.000 Euro does the insurance company transfer to his account. In addition he receives a variable component which is notably higher. According to our calculations the overall remuneration of Mr Diekmann is about 2.8 millions of Euro. Our survey furthermore revealed that five more companies, E.ON, MAN and TUI, as well as Commerzbank and Schering, which already publish their chief executives’ remuneration, were considering publishing individual pay details for the whole board. HypoVereinsbank, Allianz, Adidas-Salomon and Linde recently made similar public announcements.

In the medium term, executives of German stock corporations will not get around an individual disclosure. Pressure is coming up from inside Germany. Professor Baums just finished writing a draft bill which could lead to the mandatory disclosure of executive pay.

And there is another important aspect in DSW’s view: It is not the quantity of information but the quality of the information which counts. Companies should not only disclose individual remuneration but it should also show the figures in a standardised and easily understandable format which should be adopted by all German stock corporations. Preferably, the figures should be disclosed in tables explaining in detail the overall amount of each remuneration component, including fixed, variable payment as well as payments in kind and pension awards. Furthermore, the companies should disclose the increase in remuneration in regard to the previous financial year. Last but not least, the companies should reveal information that show the link between pay and the development of the company’s profits.

And Brussels is turning up the pressure on German companies, too. In September, the European Commission published a draft recommendation on ‘Fostering an appropriate regime for the remuneration of directors’. The recommendations of the EU go far beyond the German Corporate Governance Code. According to the draft listed companies in the EU should disclose a remuneration statement which should not only include an overview of the actual remuneration policy but should mainly focus on the company’s remuneration policy for the following one or two years. New is that this remuneration statement should include further information on the individual director’s remuneration, but not only split into the fix and variable components but also pension or early retirement schemes for directors. The statement should also include information on the terms of the executive directors’ contracts (duration, applicable notice periods and details of provisions for termination payments). Furthermore, this remuneration statement should be submitted to the general meeting of shareholders for a vote.

These recommendations show that the European commission is pushing its member states towards the British model of corporate governance, including a powerful role for non-executive directors and a fully-fledged remuneration policy. The recommendations are non-binding, giving primacy to national preferences, but are clearly directed at countries such as Germany, where only about a third of the top 30 companies in the Dax index so far follow the Code’s transparency rule.

This behaviour of reluctance was reason enough for DSW to once again take a look at the pay of the Dax-30 top executives.

We analysed the average cash salary of the executives in the financial years 2002 and 2003. The result was compared to the Earnings per Share of the respective company. As in the years before we had to deal with different levels of transparency. On the one hand the companies following the recommendations of the German Corporate Governance Code by individualising the pay of their top management. Unfortunately, only three more companies, namely Deutsche Telekom, Deutsche Post and RWE, followed the pioneers Altana, Bayer, Deutsche Bank, Deutsche Börse, SAP and ThyssenKrupp, and disclosed individual information. Schering discloses, as in 2002, at least the remuneration of the CEO individually. Commerzbank, in the meantime, also discloses the pay for its spokesman. The majority of the Dax companies still disclose only the overall remuneration of the management board.

In these cases, DSW took estimated values from the annual reports. Estimated values, however, are relatively difficult to determine because significant differences can be included in the total sum. These differences could be severance remuneration for retired executives or the so-called “golden hellos”. This is why no convincing figures can be deduced from the companies reports alone. In addition, these figures can also include stock options and variable remuneration part for previous financial years or even postponed variable sums that are not due until the following year. The total remuneration of the board is not necessarily the actual sum paid in cash. As far as possible, DSW’s calculations are based on the cash component of wage packages, excluding stock or options awarded or other perks. Subsequently, the companies were asked for explanation and confirmation. Additional information was requested in form of a questionnaire which has been answered by all companies.Very good and detailed information was received by Deutsche Börse, Commerzbank, Linde and Schering. Traditionally less cooperative were BASF, BMW and Volkswagen.

For the first time we included questions on pension schemes in our questionnaire because the pension entitlements of active board members are an important portion of the remuneration. Whereas UK companies have to disclose detailed information on the pension schemes of their top executives there does not exist a similar obligation in Germany. Only the pension payments made to former executives and their surviving dependents is disclosed as a lump sum. This is not enough. Let’s not forget that especially executives being engaged in the company for more than one period of office do receive considerable amounts of pension entitlements. According to our survey the pension entitlement starts with 30 percent of the fixed salary and is going up to 70 percent. This means that among the Dax-30 top payers even ordinary board members could receive pension payments of up to 600.000 Euro per year.

The results of the DSW survey show that directors of the Dax-30 companies earned an average of 1.420 millions of Euro in fiscal 2003. In 2002 they received 1.279 millions of Euro. This is an increase of about 11 percent. The average profit of the Dax-30 companies increased by 30 percent in the same period of time. This shows that performance is reflected in the pay of the top executives.

The pay range again is very wide. This years' top payer Deutsche Bank hands roughly Euro 3.3 million more to each of its top executives than number thirty (Deutsche Lufthansa) on our list. The CEO or speaker of the management board receives on average 1.75 times the amount of his colleagues. But here again the range differs: While the CEOs of Schering and RWE receive 1.33 and 1.32 times, respectively, the money their ordinary colleagues receive, the spokesman of Deutsche Bank, Dr Josef Ackermann, gets 2.1 times the amount of his colleagues.

The absolute amount top executives receive is just one thing. It is also important that the remuneration reflects the respective management performance. Pay should not rise when profit falls! Unfortunately, this conclusion has not been realised by all Dax executives: Although twelve companies had to announce a decrease of their Earnings per Share only seven of those companies reduced the pay of their executives. Five companies even increased the pay of their directors in spite of poorer profits. Three of those companies even had to announce a loss per share in fiscal 2003. But at least the majority of the companies showed that directors’ pay is linked to company performance.

Information on pension payments to the top management in Germany still remains to be seen. Although individualised disclosure is common international practice, in Germany only the total amount paid to former management board members is disclosed. There is no information about what active management board members will receive after the retirement. Therefore, DSW demands for  for German companies to improve disclosure, citing the UK remuneration report as a model. Pensions and share options are two areas in particular where improved transparency is necessary in Germany.