New Act regarding the Appropriateness of Management Board Remuneration
More responsibilities for Supervisory Boards
On August 5, 2009, the new Act regarding the Appropriateness of Management Board Remuneration came into force. Its main purpose is to link the variable remuneration of the Management Board to the company’s development based on several years’ assessment data. The Act imposes stricter responsibilities on the Supervisory Board to assess the appropriateness of the Management Board remuneration. The most important new rules are the following:
- The criteria for the assessment of the Management Board remuneration are stated more precisely.
- The remuneration matrices of listed companies should now be adjusted in line with the company’s development, e.g. by basing the variable remuneration on several years’ assessment data.
- Stock options may only be exercised after a vesting period of at least 4 years.
- The Supervisory Board is given greater allowance to retroactively reduce the remuneration if the company is distressed.
- Disclosure requirements have been extended to severance or termination payments.
- The Act explicitly states that Supervisory Board members are liable for agreeing to an inappropriately high remuneration for members of the Management Board.
- The decisions on Management Board remuneration can no longer be delegated to a remuneration committee but need to be taken by the Supervisory Board as a whole.
- D&O insurance should have a mandatory deductible of at least 1.5 times the annual remuneration of the individual members of the Management Board.
- Shareholders of listed companies may vote at annual shareholders’ meetings on a non-binding opinion of the remuneration system.
- The act introduces a two year cooling-off period before members of the Management Board may serve on the Supervisory Board. The only exception to this is cases where shareholders holding more than 25% of the voting rights nominate a candidate to the Supervisory Board.
Please find more detailed information in the following publication of the law firm Mayer Brown.
The legal revision does not grant specified provisions on compensation decisions and, thus, does not offer sufficiently clear guidelines for Supervisory Board members, but rather does the strengthening of the requirements that relate to hardly litigable personnel management (performance) and empirical (habitualness) criteria irritate.
If, however, differences to the new regulations are observed, early and proactive adjustments need to be initiated to further comply with the “Business Judgment Rule”. The overall independent evaluation of the remunerations of the management board, therefore, provides certainty of a verified and documentable decision.
Say-on-Pay: A Global Perspective
This publication provides a global review of practices related to advisory shareholder votes on compensation, including discussion of regulatory interventions, proxy adviser influences, and recommended next steps.
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- Act Regarding the Appropriateness of Management Board’s Remuneration (VorstAG)
- Act Regarding the Disclosure of Management Board’s Remuneration (VorstOG)
- Act regarding governmental requirements with regards to remuneration in financial institutions and insurance companies
- Regulation with regards to remuneration systems in financial institutions
- Regulation with regards to remuneration systems in insurance companies
Recommendations of International Institutions
- Communication and Recommendations from the European Commission
- ‘Principles for Sound Compensation Practices’ by the Financial Stability Board (FSB)