Sources of rules and practiceOverview
Provide an overview of the primary sources of law, regulation and practice that govern or affect executive compensation arrangements or employee benefits.
The primary sources of law regarding executive compensation and employee benefits are the corresponding employment contracts. Statutes for employees are not usually applicable for executives, such as members of the executive board of stock corporations or managing directors of limited liability companies (GmbH).
Laws that affect executive compensation generally depend on the company form. The compensation for members of the executive board of stock corporations is primarily ruled by section 87 of the Stock Corporation Act (AktG). Besides, special rules for listed stock corporations - such as paragraph 4, section 120 of the AktG - do apply. Furthermore, the German Corporate Governance Code (DCGK) summarises legislature for executive compensation and provides ‘best practice’ guidelines. The DCGK is not binding, but partially lists obligatory laws.
Compensation for managing directors of limited liability companies is regularly subject to individual negotiations. Section 87 of the AktG is not applicable.
Furthermore, one has to note that section 612 of the Civil Code (BGB) generally foresees that employees are entitled to a prevailing remuneration. Therefore, employers of certain industries need to consider the tariff standards for senior executives, if existent, to avoid culpability of wage extortion. In this context, employers also need to take into account the Minimum Wage Act, whose regulations are supervised by the customs authority.
The financial sector (CRD IV and ‘Institutions’ Remuneration Systems’) as well as the insurance sector (Solvency II and ‘Remuneration Ordinance for Insurance Undertakings’) are subject to special regulations. These regulations ensure that the compensation systems do not create harmful incentives for taking on disproportionately high risks and are supervised by the Financial Supervisory Authority (BaFin).
In addition, there are special regulations for specific employees such as works council members.
Typical employee benefits in Germany include:
- stock options;
- shadow stock options;
- employee participation rights;
- Christmas bonuses;
- pension schemes; and
- company cars or car allowances.
Aside from that there are various mandatory benefits for employees such as an extensive social security system including public health insurance, public pensions unemployment insurance and public accident insurance.Enforcers
What are the primary government agencies or other entities responsible for enforcing these rules?
Normally these rules are only reviewed by the company’s shareholders, the supervisory board or the civil courts. German authorities have limited possibilities for enforcing these rules.
GovernanceGovernance requirements and shareholder approval
Are any types of compensation or benefits generally subject to specific corporate governance requirements or approval by shareholders or government agencies? What is the general process for obtaining approval?
Compensation or benefits are not generally subject to specific corporate governance requirements or government agencies.
However, during their annual general meetings, publicly listed companies can vote on the remuneration system (‘say on pay’) according to paragraph 4, section 120 of the AktG. This vote is not binding and causes no rights or obligations; it is just an advisory vote.
Despite of that, the supervisory board of a stock corporation has to decide on the executive compensation of the board of directors.
For limited liability companies the shareholders decide on the executive compensation. There are generally no laws that determinate types of compensation.
Obtaining approval generally has to be in accordance with company law and the articles of association.Consultation
Under what circumstances does the establishment or change of an executive compensation or benefit arrangement generally require consultation with a union, works council or similar body?
Neither labour unions nor works councils deal with executive matters. They are only responsible for matters concerning non-executive employees.
Compensation of the members of the executive board in stock corporations, listed stock corporations and limited liability companies (in the case of limited liability companies with more than 2,000 employees) are established by the supervisory board. Employee representatives receive seats on the company’s supervisory board if the company employs more than 500 people. Thus, employees still have an indirect impact on executive compensation and related matters.
For limited liability companies, changes to executive compensation requires a resolution adopted by the shareholders.Prohibited arrangements
Are any types of compensation or benefit arrangements prohibited either generally or with respect to senior management?
On the basis of the freedom-of-contract principle, parties are free to set compensation as they wish. However, this broad understanding is limited by sections 134 and 138 of the BGB, which establishes that a legal transaction that violates a legal prohibition or good practise is void.
Standard employment contracts are subject to the same control as general terms and conditions (section 305 et seq of the BGB).Rules for non-executives
What rules apply to compensation and benefits of non-executive directors?
In general, the concept of non-executive directors is not applicable in Germany. In contrast to other jurisdictions, German stock corporations have a dualistic board system. On the one hand the executive board manages the company, while on the other hand the supervisory board controls the executive board and is in charge of representing the company towards the executive board.
The rules concerning members of the supervisory board are mainly defined by the statutes of association, AktG and regulations of the One-Third Participation Act (DrittelbG). These rules do not stipulate different compensation for non-executive directors and executive directors.
DisclosureMandatory disclosure of executive compensation
Must any aspects of an executive’s compensation be publicly disclosed or disclosed to the government? How?
Stock corporations must generally disclose the total compensation of executives and supervisory board members. Different compensation sums of the executives must be disclosed on a publicly available medium.
Employment agreementsCommon provisions
Are employment agreements required or prevalent? If so, what provisions are common? Are any terms prohibited or unenforceable?
In theory, employment agreements are not necessarily written contracts and can be concluded orally. However, written employment contracts are much more prevalent. In addition, an employee is entitled to a written record of the essential contractual conditions of his or her employment contract. For certain agreements the written form is required by law (eg, for a conclusion of a fixed-term agreements according to section 14 of the Part-Time and Fixed-Term Act (TzBfG) or certain non-competition agreements in accordance with paragraph 1, section 74 of the Commercial Code (HGB).
Common provision for regular employee contracts concerns the following:
- commencement of the employment relationship;
- subject matter of the employment duties;
- working hours;
- duty of confidentiality;
- secondary employments; and
- termination of the employment relationship, especially with regard to retirement age.
There is some additional provision for executives that are typically included, which include the following:
- incentive compensation, long- and short-term variable remuneration;
- business trips;
- company cars;
- pension schemes;
- accident insurance; and
- severance pay for termination.
Every contractual obligation is generally enforceable. But according to paragraph 3, section 888 of the Civil Procedure Code (ZPO) there is an exception for obligations to provide services under a service contract. Both employee contracts and contracts for executives fall under service contracts and are therefore not enforceable.
Incentive compensationTypical structures
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?
The remuneration of managers or directors usually consists of a fixed remuneration and a variable remuneration. Variable compensation typically includes both short-term incentives (STI) and long-term incentives (LTI).
For stock corporations that are listed in the German stock index (DAX) the breakdown is typically 25 per cent fixed income, 25 per cent short-term incentives, 40 per cent long-term incentives and 10 per cent additional benefits such as a company pension scheme. The higher the total remuneration, the lower is the fixed income in relation to variable remuneration. Executives in the Mid Cap Dax (M-DAX), for example, are typically granted a fixed income that makes up 30 to 35 per cent of the total remuneration.
Usually, the variable remuneration is contractually agreed as a royalty, based on the profits of the company. It is useful to point out the assessment basis (eg, accounting and finance, earnings before interest and taxes).
In case where a director or manager commences his or her position during the year, his or her variable remuneration is typically agreed to be calculated on a pro-rata basis.Restrictions
Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?
There are no general legal obligations to limit the amount or structure of incentive compensation. However, paragraphs 1 and 2, section 87 of the AktG state that the supervisory board has to work towards a ‘reasonable’ compensation that also reflects changes in the company’s performance. A violation of the principle of appropriateness may lead to claims of damages against the supervisory board.
Special rules apply for certain financial institutions and insurance companies.
There are no limits that affect the tax treatment.Deferral
Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?
Deferral and vesting of incentive awards are mainly permissible. The agreement, however, has to contain clauses that differentiate between ‘good’ and ‘bad’ leavers according to the way the executive leaves the company. In case of termination of the employment contract owing to circumstances that contain no breach of obligation (good leaver), the executive is entitled to partial incentive awards. There is no fixed maximum vesting period. However, for pre-formulated employment contracts there has been a ruling on inappropriate discrimination according to paragraph 1, section 307 of the BGB for vesting periods over four years.
Different rules might apply for companies in the insurance and financial sectors.
Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?
There are no limitations on the group of employees eligible to incentive compensation. Usually, however, directors and executive employees are granted incentive compensation elements in their employment contracts.
Concerns based on paragraph 2, section 87 of the AktG and the regulations of the DCGK are only applicable to members of the executive and supervisory board of stock corporations.Recurrent discretionary incentives
Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?
The recurring concession of discretionary incentive compensation may lead to a contractual entitlement to incentive compensation by implied alteration of the employment contract when usually granted three years in a row. The employer can prevent the emergence of entitlement for the future by direct indication to the employee.Effect on other employees
Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?
Generally speaking, employees assigned to the same tasks have to be paid equally unless there is a particular reason for certain unequal treatments. The legal foundation is the principle of equal treatment. For executives, this principle applies only restrictively.
If the executive is a significant shareholder, this principle is not applicable to his or her advantage.
Even if the principle is applicable, it does not require executives to be awarded the same compensation. This is permissible as long as there are objective reasons for unequal compensation between two or more executives. In addition, agreements that are individually concluded do not fall under the aforementioned principle.Mandatory payment
Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?
Repayment of compensation has to be individually agreed on in the contract (clawback-clauses) and is not prevalent in Germany.
These clawback-clauses give, for example, the supervisory board of a stock corporation the ability to cut variable remuneration. In addition, the supervisory board is obliged to reduce the total compensation including incentive awards of directors under the requirements of paragraph 2, section 87 of the AktG.
Furthermore, the current version of the DCGK states under section G11 that, the supervisory board is entitled to retain or reclaim variable compensation, if this element is agreed upon in the respective employment contract.
Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?
This depends on the kind of incentive. If the incentive is connected to the overall performance of the company (Tantieme), the payment cannot be conditional on continuing employment in the company.
The validity of incentives based on the achievement of certain objectives and pre-formulated in employment contracts is determined by No. 1, paragraph 1, section 307 of the BGB. Thus, the arrangement must not discriminate the employee inappropriately.
In a landmark decision by the Federal Labour Court in 2009, the judges ruled that an arrangement that stating that the payment of the incentive is conditioned on continuing employment until the payment date does not inappropriately discriminate against the affected employee and is therefore valid. However, the arrangement is only valid if the parties agree on objectives for the respective financial year and the arrangement does not include the obligation of the employee to continue working for the company beyond the payment date.
Individually negotiated contracts can state that the payment is conditioned on employment until the payment date.
Equity-based compensationTypical forms
What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?
Stock options are the prevalent form of equity compensation in Germany. According to No. 4, paragraph 2, section 193 of the AktG, stock options are subject to a four-year vesting period. The criteria of paragraph 1, section 87 of the AktG in relation to the appropriateness of the compensation must also be taken into account.
In principle, the company is free to decide which employees are granted stock option plans.
However, in handing out stock options in a standardised contract format, the company must not violate the statutes of the General Law on Equal Treatment (AGG). According to this, the company must not discriminate between members of one comparison group in handing out stock options as part of the compensation. If executives in general are to receive stock options, this group must be distinguished from other employees according to clear and transparent criteria.
Individually negotiated contracts do not fall under the provisions of the AGG.
Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?
The issue of stock options restricts the subscription right to which all shareholders are generally entitled pursuant to section 186(1) of the AktG, so that an authorisation resolution is to be adopted by a qualified majority of the annual general meeting (sections 192 and 193(1) of the AktG). This resolution grants the executive board and the supervisory board the authority to issue stock options to members of management and employees. This authority may not be transferred to other employees or executive employees.Tax treatment
Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?
Under certain conditions, stock options with a value of up to €360 per employee are tax free. Aside from that, there are no tax advantages when it comes to equity compensation.Registration
Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?
In general, equity based compensation does not require registration or notice. For some equity based compensation types, special rules such as prospectus regulation might apply.Withholding tax
Are there tax withholding requirements for equity-based awards?
The employer has to withhold income tax for the equity based award.Inter-company chargeback
Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?
Inter-company chargeback agreements are common and are used to avoid unnecessary tax payments.Stock purchase plans
Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?
Employee stock purchase plans are available but are not widely used in Germany. Probably the most frequently encountered issue when establishing stock purchase plans is the co-determination of the works council according to section 87 of the Works Constitution Act (BetrVG). The BetrVG is not applicable if the stock purchase plans do not affect non-executive employees or if issued by a foreign entity without any involvement of the German entity of the employer.
Employee benefitsMandatory and voluntary employee benefits
Are there any mandatory benefits? Are there limits on changing or discontinuing voluntary benefits that have been provided?
Mandatory benefits for employees in general are as follows:
- parents are allowed to take parental leave for up to 36 months;
- employees who work five days a week have a minimum of 20 days paid holiday;
- employees must be insured for social insurance by law. Social insurance consists of the following:
- national health insurance;
- unemployment insurance;
- private nursing insurance;
- retirement insurance; and
- accident insurance; and
- employees are allowed to minimise their working hours for a period of time. The rule applies only for companies that have more than 15 employees;
- workers are granted continuation of wage payments for six weeks in case of illness; and
- representation by a works council. Employees may have the ability to influence various decisions of the employer. They might also have the right to gain access to information on the employer.
According to abiding jurisdiction, a contractual employee claim could arise as a result of repeated employer practices such as granting benefits regularly over, say, three years. This makes it difficult to change or discontinue voluntary benefits in some cases. In order to prevent such contractual claims, the employer has to issue a clear and unambiguous caveat.Typical employee benefits and incentives
What types of employee benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?
The following benefits are prevalent for an executive. However, they must be agreed upon individually in an employment contract:
- a company car;
- a company phone;
- a pension plan, private health insurance, life insurance, private accident insurance;
- reimbursement of relocation costs (employment related), mobile phone costs and registered domicile;
- loans; and
- staff discounts.
There are tax advantages for company cars and company pensions.
Reimbursement of relocation costs and mobile phone costs are tax free. The annual exemption limit for free or discounted goods is set at €1,080.
Termination of employmentRules for termination
Are there prohibitions on terminating executives? Are there required notice periods? May executives be dismissed without cause?
Termination of executives can generally appear by the effluxion of time or by dismissal. For executives who are not significant shareholders, the notice periods of section 622 of the BGB apply. Notice periods depend on how long the executive has worked for the company and can be up to seven months. For executives who hold significant shares, notice periods of section 621 of the BGB are applicable. Notice periods can be as short as two weeks.
Besides these notice periods, there is the possibility of extraordinary (immediate) termination in cases of serious breach of contract.
According to the higher courts, executives can be dismissed without cause, and dismissals are effective even if they are considered to be an abusive exercise of a right (section 138 of the BGB). A hearing before termination is usually not required.Mandatory severance pay
Are there statutory or mandatory minimum severance requirements? Are there any other mandatory, post-employment benefits?
There are no general minimum severance requirements. In theory, severance payments are not mandatory at all, even though they are prevalent. Consequently, they can be waived and do not necessarily affect incentive compensation.
For stock corporations, severance pay has to be in accordance with section 87 of the AktG, which states that the severance has to be reasonable in order to protect shareholders’ interests. For such companies, section 4.2.3 of DCGK suggests a maximum amount of severance.
Severance payments are often part of an agreement to terminate an executive contract, especially when executive termination is contractually limited. Otherwise they can be negotiated in the management contract in advance.Typical severance pay
What executive severance payment level is typical?
Typically, severance is based on salary and the duration of the employment relationship. For executives above 50 years of age, severance pay is usually calculated by granting one month’s income for every year of employment in the given position. Executives who are between 40 and 50 years of age receive about 75 per cent of one month’s income for every year of service. Executives under 40 years of age typically get about 50 per cent of their monthly income for every year of service. Income usually includes bonuses.
However, severance pay is highly dependent on the negotiation of the parties, the agreements in the executive contract and the chances of success of dismissal.
It is common to pay incentives on a pro-rata basis for the termination year but this should be decided upon in the management contract. Courts ruled accordingly in several cases regarding incentive compensation in the termination year.Reasons for dismissal
Are there limits on dismissal for ‘cause’? Are there any statutory limits on ‘constructive dismissal’ or ‘good reason’? How are ‘cause’ or ‘constructive dismissal’ defined? Are there legal or customary rules relating to effecting a termination for ‘cause’ or ‘constructive dismissal’?
There are two types of dismissal in Germany:
- ordinary dismissal; and
- extraordinary dismissal.
Ordinary dismissal has less strict requirements but requires a notice period (see question 26). This form of dismissal is permissible as long as the executive contract does not exclud ordinary dismissals. If the parties concluded that the executive is employed for a fixed time period, this is seen as an exclusion of ordinary dismissal. It is common to exclude ordinary dismissal in management contracts.
Ordinary dismissal does not need a cause. Under German precedent, such an ordinary dismissal’s lack of minimum requirement (not even under section 138 of the BGB) means one need not have ‘good reason’ or similar.
Extraordinary dismissal has strict requirements but is effective immediately (section 626 of the BGB). A cause for extraordinary dismissal has to withstand a two-step examination. The first step examines if the breach is itself serious enough to be a considered reasonable cause for extraordinary dismissal. The second step examines if the extraordinary dismissal is, under all circumstances, reasonable. This second step contains a consideration of interest between the interests of the employer and the executive employee.Gardening leave
Are ‘gardening leave’ provisions typically used in employment terminations? Do they have any special effect on benefits?
In principle, gardening leave during a period of notice with continuous payment is permissible. It must be contractually agreed upon and may only be granted if the employer has a predominant interest in the exemption (eg, in the event of a dismissal owing to conduct or if there are justified concerns about the betrayal of company secrets or the infringement of competition law).
An employee’s right to continue employment, on the other hand, exists if the termination is obviously ineffective or a situation of protection against dismissal has prevailed in the first instance.
A distinction must be made as to whether the employer has granted an amicable or unilateral release.
An imputation of interim earnings can only be considered if this has been expressly reserved by contract.Waiver of claims
Is a general waiver or release of claims on termination of an executive’s employment normally permitted? Are there any restrictions or requirements for the waiver or release to be enforceable?
In general, waiver and release of claims are common when signing a separation or a winding-up agreement. To agree with an employee on a waiver not to file an action against unfair dismissal is permitted but needs to include compensation for the employee, such as money or leave. A certificate of employment with a very good grade is not sufficient in this regard.
A waiver or a release is generally enforceable.
Post-employment restrictive covenantsTypical covenants
What post-employment restrictive covenants are prevalent? What are the typical restricted periods?
According to paragraph 1, section 88 of the AktG, directors of stock corporations are generally not allowed to compete with the company during their employment. This rule does not apply to mangers of limited liability companies. Individual agreements or post-employment restrictive covenants possible.
Agreements on non-solicitation of customers and non-solicitation of employees are prevalent in Germany.
Non-competition agreements are not as common in Germany as the above-mentioned agreements, which is because additional compensation is usually required.
Typical restricted periods vary between six months and two years.Enforceability
Are there limits on, or requirements for, post-employment restrictive covenants to be enforceable? Will a court typically modify a covenant to make it enforceable?
Limits and requirements for post-employment restrictive covenants arise from section 138 of the BGB in connection with articles 2 and 12 of the Constitution (GG). Theymay also fall under the examination of section 305 et seq of the BGB. German courts examine limits following a two-step method. First, the court examines if there is a plausible cause for the non-competition agreement. Second, it examines if the scope of the agreement (eg, duration or geographic scope) is reasonable. Waiting allowances for post-employment non-competition covenants are common but not mandatory.
If the clause violates section 138 of the BGB, courts may shorten the term of the post-employment restrictive if it is too long. But if the covenant is a violation of the sections 305 et seq of the BGB, modifying the clause may be inadmissible.Remedies for breach
What remedies can the employer seek for breach of post-employment restrictive covenants?
If post-employment agreements are breached, the company may get an injunctive relief that they can enforce in court. Executives who breach such contracts could be held liable for damages. They also may have to pay a penalty for breach of contract.
Pension and other retirement benefitsRequired retirement benefits and incentives
Are there any required pension or other retirement benefits? Are there limits on discontinuing or modifying voluntary benefits that have been provided?
Employees are covered under public pension insurance by law. Executives are, however, not always insured under the public pension. In general terms, managing directors who are not significant shareholders and do not have a blocking minority fall under the Social Security Code. According to sentence 4, section 1 of the Social Security Code (SGB VI) directors of public limited companies do not fall under the national pension insurance. Aside from that, public pension plans only cover a certain amount of income that executives regularly exceed. Therefore, executives are often granted (private) company pension plans.
For executives, the requirements of the Company Pension Act (BetrAVG) may apply. Normally, if the executive has no significant shares, the BetrAVG is applicable and its requirements have to be taken into account.
If the BetrAVG does not apply, the limits for pensions are only defined by sections 134 and 138 of the BGB.
Pension agreements are prevalent because executives often earn more than the amount covered by the national pension insurance. Besides, company pension schemes increase loyalty to the company.
Other retirement benefits are, for example, payment for the time between termination of an executive contract and retirement age. It is usually agreed upon because the risk of losing employment for a director is greater than for a non-executive employee.
Voluntary benefits can only be revoked by the employer himself or herself if this option was originally agreed upon or by amending the corresponding contract. For executives of stock corporations, a subsequent decrease of the pension is possible according to sentence 2, paragraph 2, section 87 of the AktG.Typical retirement benefits and incentives
What types of pension or other retirement benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?
Pension benefits for executives are granted in various forms (eg, they can be divided into defined contribution and defined benefit pension plans).
A defined contribution plan is a pension plan that is defined by the amount of the company’s pension contributions. In the case of defined contribution plans, the company undertakes to pay a fixed amount to an external pension provider.
In the case of a defined benefit plan, the company assures payment of an amount after termination of the employment relationship. The amount of the contribution expense is not fixed and is under the company’s risk. As a rule of thumb, it depends on the length of service and the amount of the fixed salary.
There are both incentives concerning social security contributions and income tax. In principle, for contributions up to €268, employees do not have to pay social security contributions and they do not have to pay taxes for social security pension plans contributions up to €536.Supplemental retirement benefits
May executives receive supplemental retirement benefits?
Usually, executives receive more generous retirement benefits than non-executive employees. Overall, the benefits must be reasonable. Corresponding to a higher income, executives also receive higher retirement benefits. This is not considered to be discriminatory as long as there are objective reasons for these advantages.
IndemnificationDirectors and officers
May an executive be indemnified or insured for claims related to actions taken as an executive, officer or director?
There is no general law for indemnifying executives for claims related to activities taken as an executive. However, it is very common that the employer pays for insurance of executives even though this is not mandatory. Sometimes the employer arranges an insurance contract for the executive or else the executive has already taken out such insurance and the company accepts to pay for it. Many employers provide, for example, directors’ and officers’ liability insurance, private accident insurance or legal expenses insurance.
For directors of stock corporations there must be a retention of at least 10 per cent of the damage and not more than 150 per cent of the yearly fixed income (sentence 3, paragraph 2, section 93 of the AktG) This rule does not apply to managing directors of limited liability companies.
Change in controlTransfer of benefits
Under what circumstances will an asset sale in your jurisdiction result in an automatic transfer of benefit obligations to the acquirer?
According to section 613a of the BGB, an asset sale may result in the acquirer taking on the employer’s responsibilities. This includes all rights and obligations between the former employer and the employee. In this case benefit obligations will automatically transfer to the acquirer.
However, section 613a of the BGB is only applicable for non-executive employee contracts. For executives there generally must be a special agreement on transferring the employment contract and corresponding benefits to the acquirer.Executive retention
Is it customary to provide for executive retention or related arrangements in connection with a change in control?
Executive retention is typically agreed upon in case of closure, a change in control or in general for ensuring know-how transfer. But German labour courts are critical of retention arrangements. They usually only withstand a judicial decision in the case where the purpose of the clause is to recognise company loyalty.
In Germany, these retention arrangements are structured as bonus payments on the condition that before a certain date, the employee does not relinquish his or her employment contract. The relevant time periods vary between a couple of weeks and several months. Usually, however, they are no longer than one year. Agreements for longer periods are also common.Expedited vesting of compensation
Are there limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change in control? Are there restrictions on ‘cashing-out’ equity awards?
As vesting may lead to the loss of certain rights, and can be seen as an obstacle for dismissals by the executive. Hence vesting clauses must be in accordance with article 12 of the GG and section 138 of the BGB. Compensation agreements are not subject to strict regulation because of the principle of contractual freedom.
There are several different restrictions for ‘cashing-out’ equity awards. Primarily, company law, commercial law and tax law should be taken into consideration. Thus, cashing-out equity awards should be individually arranged with respect to company-related circumstances.
Are there adverse tax consequences for the employer or the executive relating to benefits or payments provided pursuant to a change in control?
Income tax has to be paid if a severance payment is regulated in the executive´s employment contract because such payments are seen as remuneration. If not agreed in the employment contract, severance payments are exempt from income tax.
Multi-jurisdictional mattersExchange controls
Do foreign exchange controls rules apply to the remittance of funds, or the transfer of employer equity or equity-based awards to executives?
Remittance of funds, transfer of employer equity or equity-based awards are subject to German law so that no foreign exchange controls are applicable. In a case where the parties have expressly agreed to apply foreign law, foreign exchange controls rules may apply if no mandatory German employee protection provisions are bypassed.Local language requirement
Must employment agreements, employee compensation or benefit plans, or award agreements be translated into the local language?
No. Employment agreements, employee compensation or benefit plans or award agreements do not have to be translated into the local language. The employment contract does not even have to be in the same language that is used during contract negotiations.
By agreeing to the contract, the parties implicitly agree on the language used.Net salary arrangements
Are there prohibitions on tax gross-up, tax indemnity or tax equalisation payments?
Net salary arrangements are uncommon in Germany. Nevertheless, the parties can implicitly or explicitly conclude a net salary arrangement. There are no general prohibitions on these agreements provided they are not used to enable tax evasion or similar objectives.Choice of law
Are choice-of-law provisions in executive employment contracts generally respected?
Choice-of-law provisions are respected and it is advisable to include them in executive contracts especially for multi-jurisdictional matters. In general, the principle of freedom of choice of law applies (paragraph 1, article 3 of Regulation (EC) No. 593/2008 (Rome I)). Choice of law provisions are void if they lead to a loss of protection according to paragraph 1, article 8 of Regulation (EC) No. 593/2008 (Rome I)).
Update and trendsKey developments of the past year
What were the key cases, decisions, judgments and policy and legislative developments of the past year?Key developments of the past year47 What were the key cases, decisions, judgments and policy and legislative developments of the past year?Executive compensation developments of the past yearKey casesBGH - II ZR 299/17, 14 May 2019
The shareholders’ meeting has the competence to regulate the compensation of the managing director; even if the company with limited liability (GmbH) has entered into an agreement with a third party according to which the third party may pass on to the GmbH the costs incurred by him or her because his or her employees are carrying out their activities as managing director of the GmbH. The competence results from No. 5, section 46 of the Limited Liability Companies Act (GmbHG). In this respect, there is a synchronisation of the competence to conclude contracts on the purchase of management services from third parties and the competence to appoint corporate entities.BSG - B 12 KR 13/17, 14 March 2018
Managing directors of a GmbH are regularly to be regarded as employees of the GmbH and are therefore subject to the social security obligations. A managing director who is also a shareholder of the GmbH is only not employed if he or she has the legal power to determine the fate of the company by exerting influence on the shareholders’ meeting.Legislative development
The DCGK describes legal requirements for the management and supervision of German listed companies and also provides recommendations and suggestions for good and responsible corporate governance.
The Code was revised following the resolution of the Government Commission of the German Corporate Governance Code on 9 May 2019. One new development was the recommendation of fixing a flat-rate maximum compensation (a cap). The recommendation that the proportion of long-term variable compensation should be higher than that of short-term compensation was also newly formulated. The compensation should preferably be granted in shares or be at least share-based in order to promote sustainable and responsible corporate management.
Furthermore, there is the new recommendation for a clawback agreement, according to which the supervisory board should have the option of retaining or even reclaiming variable compensation in justified cases.
Additionally, some aspects of the AktG might change with regards to Directive (EU) 2017/828 on the encouragement of long-term shareholder engagement.Employee benefitsKey casesBAG - 1 ABR 57/17, 12 June 2019
Co-determination of the works council in case of the issuing of stock options by a US-parent company.BAG - 9 AZR 362/18, 19 March 2019
Parental leave in connection with the right for holidays.BAG - 9 AZR 406/17, 19 March 2019
Statutory right for holidays with regards to special paid leave.BAG - 10 AZR 341/18, 27 February 2019
Judicial review of certain bonus payments.BAG - 9 AZR 321/16, 19 February 2019
Loss of statutory holidays in case of dismissal and involvement of the employer.BAG - 5 AZR 43/18, 30 January 2019
Clause for deterioration, minimum wage and statutory forfeiture clause - minimum wage - paid leave.BAG - 9 AZR 45/16, 22 January 2019
Holiday compensation for in case of the death of an employee.Legislative development
Since 1 January 2019, certain employees have the right to shorten their working hours for a period of time, and later to continue to work full time (section 9a of the Part Time and Fixed Term Act (TzBfG). Also, from the beginning of 2019, there are some new tax advantages for company bicycles and e-bikes and for tickets for public transport (Nos. 15 and 37, section 3 of the Income Tax Act (EStG). There is a new rule according to which the employer is obliged to support company pension plans (Occupational Pension Support Act (BRSG)). For 2020, the Federal Ministry of Labour and Social Affairs plans to implement changes to the TzBfG.