Since the financial crisis in 2008, lawmakers have significantly tightened the requirements for designing management board compensation systems. On a national level, the German Commercial Code (Handelsgesetzbuch, or HGB), the German Stock Corporation Act (Aktiengesetz, or AktG) and the German Corporate Governance Code (Deutscher Corporate Governance Kodex, or GCGC) provide a framework for disclosing and designing compensation systems for the executives of listed companies.

The European Shareholders’ Rights Directive to be implemented by member states in 2019 represents the establish-ment of an additional regulatory element at the European level, increasing the influence of investors and proxy advisors on management board compensation by granting them the right to approve the compensation report annually and submitting the compensation policy underlying this report to vote by the AGM at least every four years.

In addition to the evolving regulatory requirements, German listed companies find themselves in an investor landscape that is also changing.  Allocation of money to passive funds is growing significantly in Germany. At the time this study was conducted, around 40% of invested money in DAX were passive investments.

For investors, this means that their influence on their target companies is shrinking, because the nature of passive funds dictates that positions must be held. Governance of companies is the last lever remaining for these investors. The dialogue between issuers and investors therefore shifts from the fund managers to the investment firms’ ESG teams (environment, social and governance).

In addition to an altered investor landscape, proxy advisors have become more intensely involved since 2015. The US companies ISS and Glass Lewis are the most noteworthy in this context. Acting on behalf of the funds and asset managers, these companies analyze the agenda items for AGMs, make voting recommendations and/or exercise voting rights. Investors mainly in the Anglo-American region rely heavily on ISS and Glass Lewis. In the US, these two proxy advisors make up a market share of 97%.

Evidence of just how current the topic of management board compensation can also be found in the fact that a group of renowned supervisory board chairs of German listed companies as well as representatives of major institutional investors, academia and corporate governance experts have taken this opportunity to develop a set of simple and sustainability-focused best practices for designing management board compensation systems. The guidelines presented by the working group in July 2018, entitled “Guidelines for sustainable management board remuneration systems” draw conclusions on the design, the presentation in the compensation report, and the dialogue with investors, thus providing issuers with reference points. The guidelines address key stakeholder objectives as well as increased transparency for investors and proxy advisors..

Development of say-on-pay in the DAX

Under close observation and in the public eye, the topic of management board compensation provides investors and proxy advisors with an important opportunity to exercise influence, as Section 120 (4) AktG has given companies the option of allowing an annual advisory vote on management board compensation at the AGM since 2010. And since this option has existed, every DAX company has held a say-on-pay vote at least once.

While say-on-pay approval rates averaged above 90% up until 2015, the subsequent years have shown a rapid decline in approval rates. In 2017, three out of eight DAX companies were even unable to achieve majority approval of their compensation systems at the AGM.

Despite a decreasing number of negative votes in say-on-pay votes on management board compensation, investors continue to be highly critical of management board compensation at Germany’s leading companies.

Prof. Dr. Michael Wolff – Universität Göttingen

A slight recovery could be observed in the 2018 AGM season; none of the systems undergoing a vote in DAX failed. In four out of eight companies, the approval rate was still below 80%. This indicates that management board compensation is the subject of ongoing strong criticism, since whenever the opposition consists of at least 20% or 25% of votes, critical issues are generally addressed and, if necessary, the problems are taken care of (expectation of Glass Lewis and the BVI, resp.).

Similar to the trend of actual voting results, a decline can be observed in positive voting recommendations by both of the most powerful proxy advisors for the corresponding agenda items. Accordingly, ISS and Glass Lewis made more negative recommendations than positive for the first time in 2017.


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Figure 1: Average say-on-pay trend in DAX companies 2010–2018, source: hkp/// group analyses

Author Michael H. Kramarsch

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