What should simplified, company-specific remuneration systems look like? How can the remuneration system provide sufficient and reasonable motivation and adequately reflect the company’s strategic orientation as well as sustainability goals?
1.1. The supervisory board should formulate management board remuneration principles that guide the board in its decision making process to incentivise sustainable success and reflect relevant stakeholder objectives of the company.
Explanation: The remuneration principles include, amongst others, general objectives (“How can remuneration foster the interests of the company?”), as well as statements on the desired effect of the incentives. The remuneration principles should aim to simplify the remuneration systems, to include sustainability aspects and ensure transparency for the main stakeholders.
1.2. The supervisory board has to achieve appropriate management board remuneration. Regarding the appropriateness, the relevant national or international competitive situation should be taken into account. Deviations should be properly explained and justified.
Explanation: Analyses of the market relevance and decisions based thereon regarding remuneration adjustments, should be conducted with caution as they could result in a permanent ratcheting up. The analyses should consider the choice of the peer group, the company’s position within the peer group and the applied remuneration components. Increases in remuneration should typically be justified by improved company results, improved individual performance, additional duties or changes in the job description or a different positioning of the company.
1.3. Regarding the vertical appropriateness of the remuneration, a structure for all employees has to be applied. The supervisory board should disclose the management board remuneration in relation to upper management and other employees, also over time. The supervisory board should determine the definition of upper management and the relevant other employees for this comparison.
1.4. Remuneration systems should be based on no more than three pillars (fixed salary, annual variable remuneration, and multi-year variable remuneration) and should be designed as simple as possible and ensure a reasonable relationship between fixed and variable remuneration.
1.5. Company pensions should – if awarded at all – be in defined contribution form and be solely tied to the fixed salary. For new management contracts or contract extensions there should be no offer or extension of payments related to final pay (defined benefit).
1.6. Variable remuneration should be based on predominantly long-term and sustainability focussed corporate objectives to reflect a successful implementation of the company’s strategy and the company’s relative performance to its peers. Variable remuneration should be granted on a share basis or be invested in shares by the management board member. The long-term variable remuneration that has been granted should vest only after four years have elapsed.
Explanation: Long-term company objectives derived from the company’s strategy should include material sustai- nability parameters (e.g. innovation, environmental and social impact, corporate culture, customer satisfaction and employee satisfaction) alongside strategic and financial objectives. Sustainable corporate objectives should reflect relevant ESG (environmental, social and governance) criteria through long- term KPIs.
1.7. Companies should set absolute caps for total management board remuneration
Explanation: Total remuneration includes all components of remuneration and monetary perks, i.e., fringe benefits, special bonuses, pension benefits, sign-on bonuses, termination packages.
Explanation: Total remuneration is considered capped when all individual components of variable remuneration elements have an upper limit and pension contributions are only linked to fixed remuneration.
Explanation: Caps shall be agreed for all variable remuneration components and include the share price performance. Shares already held or acquired through remuneration payments by the management board members, for example as a result of personal investment or shareholding obligations in share ownership plans (see item 1.8) are not regarded as remuneration, as they are already owned by the management board members and are therefore not subject to remuneration caps with regard to share price performance. Subsequent payments for a fiscal year are allocated on an accrual basis.
1.8. Companies should require that their management board members acquire and hold company shares of at least one year’s gross fixed salary (“share ownership guidelines for the management board”). This personal investment shall be achieved no later than four years after the appointment to the management board.
Explanation: Companies should be aware that international institutional investors often expect higher share- holdings relative to fixed salaries, up to 300% or 500% of gross fixed salary for management board members and chief executive officers, due to the interest alignment connected therewith.
1.9. Companies should implement compliance processes to ensure that share investments by the manage- ment board members, arising from contractual terms are legally permissible purchases (e.g. by automatic purchases on pre-determined dates).
1.10. The supervisory board should implement rules for remuneration reductions (malus) and clawbacks in the event of serious breach of duty, misconduct and grave violations of material compliance and governance requirements.
1.11. In case of a premature termination of the management board member’s appointment, even when this is due to a change in control, the supervisory board should not agree to severance payments that exceed the total value of two years of total remuneration or the entirety of the remaining contract. No payment shall be made in the case of early termination if this is requested by the management board member.
Explanation: Remuneration rights already earned and unrestricted remuneration rights from long-term variable remuneration shall not be paid out/exercised before the end of the planned period – also in case of early termination.
1.12. The remuneration system should generally apply to all management board members, also in case of a change in the remuneration system
Explanation: The supervisory board should agree changes in the remuneration system with all management board members simultaneously. Deviations must be explained transparently with justified reasoning. Dis- advantages arising from a change in the remuneration system may be offset or compensated through a one-off payment. If this is not sensible or practicable (e.g. for pension plans), this deviation should be explained.
1.13. One-time payments for new management board members (“sign-on bonus”) should only be provided in justified cases. Otherwise, extraordinary payments outside the regular variable remuneration shall not be provided for in the remuneration system
Explanation: Sign-on bonuses may be justified to compensate for the loss of variable remuneration components with the previous employer that are forfeited as a result of the management board member’s transfer to the company. Sign-on bonuses may also be invested in company shares and thus serve to meet shareholding requirements.
Explanation: What are known as “Mannesmann” clauses should not be provided for.
1.14. Deviations from the remuneration system should only be made if doing so is necessary in the interests of the company’s long-term wellbeing
Guidelines for sustainable management board remuneration systems: DESIGN – REPORTING – ENGAGEMENT