Bonus Battle Power to the Shareholders

Populist proposals by Germany's Social Democrats won’t prevent executives' over-the-top salaries. Instead of messing with taxes, politicians should look to shareholders to hold companies accountable.
It's time for shareholders of companies like VW to take a stand, the author argues. Photo: DPA

Listening to Martin Schulz, one gets the impression that executives are nothing but money-grabbing fiends who seldom consider the welfare of their employees. As the federal election campaign kicks off, the onetime European Parliament's top earner has proposed to remedy this “disturbing feeling” with legislation to limit executive board salaries.

But the disturbing thing is actually the Social Democratic Party (SPD) chancellor candidate's proposals, which are a hodgepodge of cheap populist showmanship and dirigiste intervention.

Sure, excessive salaries in stock market-listed companies are a problem. Just look at the absurdly high pensions and settlements for VW executives, questionable stock options for the head of Deutsche Börse, Deutsche Bank’s many years of inflated bonuses and the €50 million in severance pay for former Porsche boss Wendelin Wiedeking, who left the company close to bankruptcy, just as he had found it.

Instead of tinkering with the tax system, lawmakers ought to get shareholders to take a much closer look at what top managers are being paid.

The list goes on, but Mr. Schulz's sweeping judgment of German managers is nevertheless out of place. First of all, they don't earn extraordinarily much on an international scale. But more than that, the SPD proposal is simply absurd. Take the idea of barring the tax deductibility of executives’ salaries over €500,000 -- a legally questionable plan that misuses taxes for the purposes of social politics.

Equally absurd is the suggestion to limit managers’ salaries in relation to the company’s average income. How are supervisory boards and investors supposed to determine which multiplying factor is the correct one? Tenfold for an IT company? Hundredfold for a retail company?

The SPD has certainly latched onto a subject that gets voters riled up. But populism isn’t the answer. Instead of tinkering with the tax system, lawmakers ought to get shareholders to take a much closer look at what top managers are being paid. So far, major shareholders have failed to live up to their responsibilities as owners. In most cases, remuneration systems are being waved through in the shareholders’ meetings with a majority of more than 90 percent.

All too many shareholders refrain from questioning this, thinking that from a formal legal standpoint, salaries and bonuses are a matter for the supervisory boards. Cases in which a payment system has been rejected – such as last year at Deutsche Bank – are big exceptions. And examples of members of the supervisory board’s remuneration committee being voted out are virtually nonexistent.

Other countries are more advanced on this point. In the United States, Great Britain and France there have been veritable shareholder rebellions in companies such as Citigroup, WPP and Renault when the tie between success and salaries unraveled. But of course the fact that executive income is significantly higher in the English-speaking world, and that many a shareholders’ uprising is simply ignored, is also part of the reality.

But at least these votes increase the pressure on the supervisory boards to act differently going forward. They also create more transparency, and not just concerning the complex payment systems. Supervisory boards are pushed to justify their all too lavish generosity and investors are forced to take a position.

Shareholders in Germany principally have the right to determine a company’s payment systems in a non-binding vote. That is a solid basis by which shareholders can live up to the original meaning of their title -- by actually exercising their rights.

If investors and supervisory boards don’t live up to this responsibility in the next couple of years, then lawmakers should consider stiffer regulations. That could include a binding vote in shareholders meetings like the one that France introduced last year after Renault’s governing board simply ignored a revolt by the shareholders over the chief executive’s payment.

Even Confucius said: “He who draws a high salary, but is of use to no man, is a thief.” It's high time that shareholders stop letting themselves be robbed.


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