The current economic crisis will leave its mark on top managers’ compensation. First evidence is provided by CEOs and/or entire boards of companies across Europe waiving parts of their compensation. hkp/// group experts Verena Vandervelt and Michael H. Kramarsch elaborate on these measures and give an outlook on the development of European top management compensation in 2020.

Ms. Vandervelt, Mr. Kramarsch, do you think that waiving top management compensation is an effective tool in the current crisis?  
Michael H. Kramarsch: Definitely yes, but against a different background than often assumed: executive compensation is not an economic issue. No company will recover from a crisis by this kind of self-restraint of its top managers. The absolute amounts are simply too low for this. Yet it is a signal to the market and first and foremost to the employees. It says: We are all in the same boat and act in concert to overcome the challenges of this crisis! Top managers feel obliged to make a contribution because they impose economic burdens on employees. 

So how high are these compensation waivers typically?
Michael H. Kramarsch:
We usually see decisions to waive 10 to 30 percent of the base salary for several months – either keeping these amounts within the company or donating them. However, there are also managers with more substantial cuts of up to 50 percent of their base salary. In some companies, managers have also waived their annual variable compensation for financial year 2020.

Does this reaction pattern apply to companies worldwide?
Verena Vandervelt:
Yes, such reactions can be observed worldwide, although we first examined the reactions of European companies, specifically those listed in the STOXX Europe 50 and EURO STOXX 50 stock market indices.

What were the results of your analysis?
Verena Vandervelt:
So far around one third of STOXX companies have planned compensation waivers in the context of the COVID-19 pandemic, whereby the affected companies are primarily from the more severely affected industries and less from the health care or IT & technology sectors. In terms of countries, we can see that most of the corresponding measures are taken by STOXX companies from France, Germany and the UK.  
Michael H. Kramarsch: However, these patterns can also be traced beyond the STOXX world: For instance, in Germany alone, the management of more than 20 companies have agreed to waive up to one third of their base salary for several months. These include renowned companies such as Adidas, Beiersdorf and Deutsche Bank.

Are there also countries where companies are rather restrained about this?
Michael H. Kramarsch:
Well, there are differences. For instance, in Switzerland and Austria, we are currently observing a lower level of willingness to waive compensation. However, we believe that this is only a matter of time. Based on our consulting experience we know that many boards are prepared for appropriate measures. So if and when the step is taken depends more on the specific situation, the extent to which the business is affected, the degree to which cost savings for employees are necessary, etc.

What do you think of the argument that a waiver of compensation would ultimately only benefit investors?
Verena Vandervelt:
Well, there is actually nothing wrong with this! After all, investors are more severely affected by dividend losses. And as already mentioned, compensation waivers are not primarily economically motivated, and concern amounts that at least leave institutional investors indifferent. The point is rather to publicly express solidarity with one’s own workforce.
Michael H. Kramarsch: At the same time, one must bear in mind that investors also look very closely at appropriate measures and appreciate action in terms of pay-for-performance.

Given the aforementioned waivers of remuneration: Will we face significantly lower compensation levels for CEOs in Europe in 2020?
Verena Vandervelt:
Yes, definitely - and not just in Europe, but also worldwide and especially in companies that are severely affected by the consequences of the crisis. However, lower compensation levels are not only caused by the waivers of compensation, but also by governmental requirements on compensation limits in case companies are reliant on public funds.

A mechanism we know from the last financial crisis...
Verena Vandervelt:
At that time in Germany, for instance, the limit for top management compensation in the companies affected amounted to half a million euros. This requirement is being discussed again in the current context.
Michael H. Kramarsch: But let me be clear: Compensation waivers and imposed limits are only one side of the coin. The fact that the variable compensation will often fall sharply or even be completely cancelled because of declining business results will have an even greater impact on compensation levels. The COVID-19 pandemic is thus becoming a litmus test for the professionalization of compensation systems for top managers, which has taken place in recent years.

Ms. Vandervelt, Mr. Kramarsch, thank you very much!


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