• hkp/// group analysis shows declining investor acceptance of compensation reports by DAX companies
  • Companies still without regulatory standard on compensation reporting
  • Some significant improvement in problem cases from 2022: Bayer, Continental, Commerzbank, Symrise, and Zalando

Frankfurt am Main, June 19, 2023. The customary review by hkp/// group's corporate governance consultants of the voting on compensation reports by Germany's leading listed companies reveals a mixed picture for the 2023 annual general meeting season. An average investor acceptance rate of 87.3% can be observed across all DAX companies that have already held their AGMs. This figure represents a 3% increase in acceptance compared to the previous year. The highest approval ratings are achieved by Sartorius (99.3%), Siemens Healthineers (98.7%), and Volkswagen (98.5%). Ranking at the bottom of the DAX comparison are adidas (67.9%), Zalando (55.8%), and Bayer (52.3%). Unlike the previous year, no company in the DAX group faces an approval rating of less than 50% from its investors.

However, the apparently positive overall impression needs to be contextualized. In fact, investor approval of compensation disclosure is decreasing at half of the DAX companies. It should also be noted that in the 2022 vote on their compensation reports for the 2021 financial year, Bayer, Continental, Commerzbank, Symrise, and Zalando received reprimands. Clearly, the points of criticism from investors have been taken into account, as reflected in the current approval ratings. These have improved significantly, particularly for Bayer (from 24.1% in 2022 to 52.3% in 2023), Symrise (from 52.9% to 89.9%), and Commerzbank (from 59.9% to 85.8%). Zalando, however, experienced further declines compared to the previous year (55.8% vs. 60.3% the prior year). Excluding the significantly improved "stragglers" from the current statistics, the average approval of compensation reports in DAX companies shows a negative trend (-0.5%).

Regine Siepmann, Senior Partner and Head of Corporate Governance Practice at hkp/// group, interprets this mixed outcome as a subtle erosion of compensation report acceptance. "Given the known expectations and established practices, investor approval of compensation reports should be on the rise, but it isn't. The reasons for this are typically company-specific, involving either criticism of the underlying system itself or how it is actually implemented by the supervisory board." Moreover, according to Siepmann, investors often exploit the discussion about compensation systems and reports as leverage to advance their ideas in other areas.

Causes of low investor acceptance

The factors contributing to fluctuating approval rates for compensation reports are varied. However, several overarching factors have emerged from the hkp/// group analysis:

  • Investors demand transparency. Fulfilling this demand with an excessive amount of text and figures has the opposite effect. What is required is meaningful and clear information presented through graphics, text, and tables.
  • Investors seek comparability, preferably in accordance with globally applicable standards. Companies that utilize key figures in their compensation reports that do not align with international standards face criticism for doing so.
  • Investors value consistency in capital market communications. In their view, a primary point of criticism involves the establishment of insufficiently ambitious targets in executive board compensation or setting goals that fall short of the guidance provided for capital markets.
  • Investors particularly object to discretionary decisions made by the supervisory board regarding compensation when these decisions lack substantiation or are inadequately explained. The lack of transparency in this regard is a common point of criticism.
  • Contrary to public perception, the extent of managerial salaries is not typically a concern for investors. Instead, they focus on the traceability of pay-for-performance within regulatory frameworks. Criticism arises when there are significant compensation increases without adequate justification or exceptional benefits such as severance payments, sign-on bonuses, or special bonuses. Inappropriate actions in this regard are directly reflected in the voting results.

Core problem: Interpretive guidance on regulations – companies left to their own devices

The introduction of the second European Shareholder Rights Directive aimed to ensure easy access to relevant information concerning a company's executive board compensation system. "This ambitious plan has fallen short," summarizes corporate governance consultant and hkp/// group Partner Nina Grochowitzki.

She primarily attributes this failure to the interpretations of the directive by the Institute of Public Auditors in Germany (IDW) regarding "granted and owed compensation," which continue to cause significant confusion. For example, the majority of DAX companies chose to display compensation received in the year, i.e., in line with their business results report, even if it had not yet been deposited into executive board members' accounts. The few companies that followed the IDW's original approach, which displayed compensation actually received in the year, also included the earned compensation. "Otherwise, compensation reports would undoubtedly have been rejected at the AGM," states Grochowitzki.

Overall, compensation disclosure has suffered considerably due to the amended legislation. "Our formerly world-leading transparency, bolstered by the model tables for compensation disclosure in the German Corporate Governance Code (DCGK), is now a thing of the past. Companies are adopting their own standards, and every table looks different. It's now more challenging than ever to trace the correlation between business results and compensation, which is central to pay-for-performance assessment," describes hkp/// group corporate governance consultant Siepmann.

The hkp/// group corporate governance consultants have abandoned the hope, raised by German legislators and the DCGK Commission, for a binding standard for compensation reporting at the European level. "This hope has been dashed. And when the European compensation tables do arrive, they won't align with German market practices – thus, they won't solve the current problem. Consequently, companies continue to navigate this challenge on their own," concludes Regine Siepmann.

Background Information on the hkp/// group

hkp// group is an international management consultancy in the field of strategic HR management and corporate governance. Our partners are long-term oriented owners and shape the consulting topics for our clients as much as our own organization. As passionate consultants, we are valued for our innovation and topic leadership. Together with our employees, we are committed to the guiding principle: sustainable performance through people. We support our clients as a trusted advisor for transformational issues around people strategy and good & responsible governance. We combine strategic foresight with in-depth expertise and also support our clients during implementation.

Contact Thomas Müller, hkp/// group, +49 176 100 88 237, thomas.mueller@hkp.com

Author Regine Siepmann

You would like to know more about this topic?

Arrange a (telephone) appointment with Regine Siepmann