Damaging Debate Executive Pay Limits Could Hamper Brexit Boost

The political debate in Germany about limiting executive pay could act as a deterrent to banks thinking of relocating from London to Frankfurt in the aftermath of the Brexit vote.
Quelle: dpa
Frankfurt's banking quarter.
(Source: dpa)

The German government's plans to limit executive pay may deter financial institutions that were thinking of relocating from London to Frankfurt after Britain leaves the European Union, several senior bankers have warned.

The Social Democrats have drafted a parliamentary bill that limits tax deductability on salary packages worth over €500,000 ($528,075) a year and the party's chancellor candidate Martin Schulz has made it clear he wants to reduce wage inequality in a country where a director can earn 57 times as much as a normal employee.

Chancellor Angela Merkel has also indicated that the Christian Democrats would limit executive pay. But there are increasingly critical voices, even among her party's ranks, about how this would put Germany at a disadvantage.

"It’s one thing to talk about taking steps to limit privileging salaries as expenditures, but please do it at the European level," Helge Braun, a member of the Christian Democrats and a deputy minister in the chancellery, told Handelsblatt. "To worsen the regulatory conditions only in Germany would be a locational disadvantage."

To worsen the regulatory conditions only in Germany would be a locational disadvantage. Helge Braun, CDU lawmaker

Since the United Kingdom voted to leave the European Union, which will strand London’s financial center outside the bloc, a race has begun among E.U. countries to lure banks and bankers to their countries.

With its strong banking sector and the headquarters of the European Central Bank, Frankfurt is the first choice for many and Mr. Braun said the government should not do anything to deter financial institutions at this time.

"Banks are now in the decision-making phase," said Mr. Braun. "A debate about limiting manager salaries is very, very damaging."

Mr. Braun said the government should stick to the coalition agreement that salaries should be determined at companies’ annual general stockholders meeting rather than by their supervisory boards, instead of following the Social Democrats new proposals.

Mr. Braun is a member of the German government’s Brexit committee and his constituency is in Giessen, just 30 miles north of Frankfurt and he is close to Volker Bouffier, the Christian Democrat premier of Hesse, the state where Frankfurt is located.

The Hesse state government hopes to lure bankers and entire financial institutions from London to Frankfurt but is well aware that other major European financial centers such as Paris, Luxembourg and Dublin also have the same goal.

Financial sources say Goldman Sachs, among others, is looking to significantly expand its location in Frankfurt in order to maintain unhindered access to its customers on the continent after Brexit. Sources also said Britain's Lloyds Bank wants to turn its offshoot in Berlin into its European headquarters. Citigroup said it wants to make a decision by the middle of the year. Frankfurt is an option that is being scrutinized, said Citigroup’s European head, Jim Cowles.

International financial institutions based in London are monitoring the current debate about manager salaries very closely. "We are looking at a number of factors at the alternative locations, such as office rents or local regulatory agencies, as part of our preparation for possible moves," said one London consultant whose customers include some large banks. "And of course, that includes the legal framework that could be changed by new regulations for managerial compensation." How much this could impact companies’ assessment of Frankfurt compared with other European cities is still difficult to assess, this consultant said.

Another U.S. banker warned that the Social Democrats plans put Frankfurt at a disadvantage. 

"We are aware that this first and foremost is an election campaign and so it will remain unclear for a while how it will shake out in the end," he says. "But that increases the uncertainty factor for us, because we have to make a decision before the elections. And since the outcome of the debate is difficult to assess, this is a negative factor for Frankfurt. "

Within Germany, some businesses, both financial and otherwise, are already taking steps to tighten their belts. In January, Deutsche Bank announced that it would be limiting the amount it would be paying out in bonuses for 2016. Based in part on a $7.2 billion U.S. Justice Department settlement, the German bank won’t be getting anywhere close to the €2.4 billion it paid out in bonuses for 2015.


Finance sector - Employees and biggest earners

Volkswagen, under pressure for its continued high levels of manager pay despite its ongoing embroilment in an emissions scandal, has also throttled back top-level compensation. The automaker’s supervisory board adopted new salary caps for its nine executive board members. The chairman of the board is now only allowed to earn a maximum of €10 million a year, while a regular member of the management board has a limit of €5.5 million. Volkswagen’s top managers will thus have to accept reductions of up to 40 percent for the maximum possible salary. The fixed base salaries were raised somewhat, but not enough to make up for the significant reduction in the variable bonuses.

Germany had hoped to make Frankfurt more attractive not less to international banks for post-Brexit relocations. Ralph Brinkhaus, deputy chairman of the Christian Democrats parliamentary party, called on the main regulator BaFin to make it easier for companies to communicate with it in English and said that there needs to be more international schools Frankfurt, an important factor for non-German bank employees.

He said these measures would be more effective than lowering regulation to attract businesses.

Nevertheless, politicians are hoping to improve some regulatory hurdles. The Christian Democrats complain that German labor laws make the country unattractive for a companies.  German labor law applies to all employees even if they have a base salary of €300,000 or €500,000 and there is a debate over whether there needs to be a change in the law about how much protection the very highest earners actually need.

"There is a clear willingness, in Berlin as well, to talk about a relaxation of the protection afforded to bankers with a yearly income of more than €300,000," says Hesse’s Finance Minister Thomas Schäfer, but he admitted it would be hard to push this law through just before a general election.

"Dismissal protection is now an emotional issue," he said, but added that the law could still pass next year,  "and that would be quite sufficient for most banks."

Katharina Slodczyk is Handelsblatt’s London correspondent. Daniel Delhaes reports on politics, transport and airlines from Handelsblatt’s Berlin office. Martin Greive is a correspondent for Handelsblatt based in Berlin. To contact the authors: [email protected], [email protected], [email protected],