The German Government has enacted stringent rules on the remuneration of directors in both listed and unlisted stock corporations and has 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 management board members 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 benchmark market compensation. The determination of this amount should consider the overall compensation structure in the company as well as the remuneration of peer group board members.
- In listed companies, remuneration structures for management board members should provide an incentive towards the sustainable development of the company. In particular, performance based elements of the remuneration should be based on parameters operating over a number of years, and a cap should be agreed which limits the performance based compensation where there are extraordinary circumstances.
- If the position of the Company deteriorates, the supervisory board will have the power (and normally the obligation) to reduce the management board members' remuneration if it would be unreasonable for the company to pay the agreed compensation. The right of the supervisory board to decrease the remuneration also applies to post-contractual benefits, e.g. retirement pensions, within three years after resigning.
- Share options for management board members have to provide for a vesting period of four years, instead of the current two year period.
- The remuneration committee of the supervisory board will no longer be allowed to decide alone on management board members' 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 greater transparency, particularly where employee representatives belong to the board.
- If supervisory board members unreasonably agree to an unusual remuneration of the management board members, they may become personally liable towards the company. Although this was also the general rule in the past, legislators have introduced an explicit clause to this effect in order to oblige supervisory board members to take their personal liability into account when determining the remuneration of management board members.
- Finally, D&O insurance policies taken out by the company for the benefit of a management board member must provide for a deductible in the amount of at least 10 per cent of each loss, up to an aggregate of not less than 150 per cent of the fixed part of the management board members' annual remuneration. Management board members will be personally liable to the company for this amount, but are allowed to take out at their own expense a policy covering this deductible.
In addition to this new legislation BaFin has issued a circular laying out requirements for remuneration systems for insurance companies (Rundschreiben 23/2009). The circular sets standards for the remuneration of board members and supervisory board members as well as general requirements for the remuneration of employees, which are to be applied in addition to the new statutory provisions described above.
In Germany, six banks (and to date the three largest insurers) have implemented standards agreed in September 2009 by the European Financial Stability Board (FSB) on a voluntary basis. FSB expects Member States to ensure the adoption of these standards as soon as possible. In light of this action, BaFin had issued the December circular.
In order to fully incorporate the FSB standards into German legislation, the Federal Ministry of Finance (BMF) will, pursuant to the information given by the regulator, implement the December circular by way of a decree in the first half of 2010. With the BaFin circular, insurers, reinsurers, pension funds, insurance holding companies and ISPVs in Germany and such companies active in Germany but with a corporate head office outside the EEA, are asked to undertake a review of their remuneration systems and, where required, amend these in accordance with the new provisions.