The German Government has enacted stringent rules on the remuneration of directors in both listed and unlisted stock corporations and have also introduced a mandatory deductible in Directors and Officers liability (D&O) policies.
The objective of the new law is to create incentives for directors to increase their commitment to the long-term success of companies.
The following are a few of the most important provisions:
- The remuneration of directors must be reasonably aligned to their actual performance, not just to their tasks and to the company’s success.
- Unless there are good reasons to do so, remuneration should not exceed the level normally paid in the relevant industry sector.
- In listed companies, remuneration should be an incentive towards the sustainable development of the company. In particular, variable elements of the remuneration should be based on parameters operating over a number of years. Where there may be negative developments in the company’s fortunes the board should reserve its right to make unilateral adjustments to the variable elements of the remuneration.
- More generally, the supervisory board will have the power (and normally the obligation) to reduce the director's fixed and variable remuneration if it would be unfair not to do so, e.g. because of seriously negative developments in the company's fortunes. The supervisory board will have the capacity, for a period of up to three years after the termination of a director’s contract, to adjust any post-contractual benefits where the payment of the full remuneration would be unfair because of the company’s adverse performance.
- Share options should be exercised by a director at the earliest opportunity after a term of four years, instead of the current two year term.
- The remuneration committee of the supervisory board will no longer be allowed to decide alone on the amount of the directors' remuneration. Instead, the entire board must vote, and, in listed companies the annual general meeting can consider the board's decisions on remuneration. This system will create much greater transparency, particularly where employee representatives belong to the board.
- The responsible members of the supervisory board shall be personally liable if they have agreed an excessively high remuneration package for a director. Even though an express provision was deleted from the draft law, the liability of the board members would under general rules, normally be equal to the excess of the amount which a court considers, on the basis of expert opinion, is the highest appropriate remuneration. This will make it much harder for remuneration packages to deviate from the benchmark data of other comparable companies.
- The company shall disclose the remuneration and other benefits to be received by a director in the event of a termination of the director's service agreement.
- Finally, D&O insurance policies taken out by the company for the benefit of a director must provide for a deductible in the amount of at least 10 per cent of each loss, up to an aggregate of no less than 150 per cent of the non-variable part of the director's annual remuneration. Directors will remain personally liable to the company for this amount, and, in the absence of any express statutory provision the courts will have to decide whether it will also be unlawful for directors to take out private insurance to cover this exposure. Previously, the German Corporate Governance Code recommended including suitable deductibles in D&O insurance policies. However, many companies did not follow this recommendation and provided only for very low deductibles. In any case, many legal issues can be expected to arise as traditionally D&O policies offered in the German market would normally only cover the management board's collective personal liability.