Tax Deductions Coalition Clashes over Executive Pay Limits

The Social Democrats have drafted a bill to limit the tax deductions available for executive pay. But with an election looming, the Christian Democrats are going on the offensive, and opposing the law.
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The SPD wants to tackle executive pay.

Germany’s center-left Social Democrats drafted a bill Wednesday that would tackle exorbitant salaries for top company executives in a move that has been criticized by their coalition partners, the center-right Christian Democrats.

The SPD’s parliamentary leader Thomas Oppermann said the bill was to remind everyone that "we don’t have a dog-eat-dog capitalism in Germany, rather a model of a social market economy.”

Mr. Oppermann also called for executives to use a sense of moderation and common sense. The draft law chimes with the campaign slogan of the party’s new chancellor candidate Martin Schulz, "time for justice."

The Social Democrats are the junior coalition partners to the CDU, led by Chancellor Angela Merkel.

According to the SPD bill, executive salaries could only be tax deductible up to €500,000 per year, including retirement benefits. Board members in large corporations can earn much more in salary and benefits, but the bill proposes that payments above that level would no longer represent tax-exempt business expenses.

The Social Democrats also want a fixed ratio between the maximum salary of directors and the average income of the workers, to be set by the supervisory board. The party is also pushing for ways to cut pay and take back pensions of poorly performing executives.

In previous election campaigns, Ms. Merkel would have simply co-opted the plan as her own and thus outdone her political rivals. In fact, this topic is one that the chancellor and her main adviser Peter Altmaier support, but Christian Democrats now believe they should attack the Social Democrats, instead of simply taking on their ideas. That is mostly because Mr. Schulz is doing so well in the polls, with the SPD catching up with the CDU since his candidacy was announced, and in one poll even surpassing them.

 

We don’t have a dog-eat-dog capitalism in Germany, rather a model of a social market economy. Thomas Oppermann, SPD parliamentary leader

In presenting the bill on Wednesday, Mr. Oppermann pointed out that during the period of Germany's "economic miracle,” that followed World War II, managers earned approximately 15 to 20 times the pay of the average worker. Today it can be up to 100 times.

Not everyone sees the statistic as relevant. Christoph Lütge, professor of business ethics at the Technical University of Munich, insists this does not affect the economic performance of a company. “Who says that bonus caps benefit companies? The ethic of moderation is rooted in pre-modern society, when there was no considerable economic growth… [today’s] societal and economic framework has changed drastically since the industrial revolution,” he told Handelsblatt.

Companies that limit their managers’ salaries risk falling behind their competitors in terms of how well their managers and profits perform, Mr. Lütge warned.

Most politicians seem to agree that executive pay has become an issue, but the Christian Democrats and their Bavarian sister party the Christian Social Union, say the SPD is undermining the coalition agreement with their proposed bill.

Michael Fuchs, a CDU lawmaker, complained that a limit on tax deductions was effectively a tax increase: something the coalition had agreed not to do. He warned that dividing tax deductible expenses into good and bad categories changed the whole way the tax system worked.

Finance Minister Wolfgang Schäuble has already criticized the SPD bill, arguing that the tax law is not viable. In a recent opinion piece for Handelsblatt, he did admit, however, that "if we notice the system of voluntary declaration and transparency does not work well enough, we must have stricter requirements."

The CDU strategy towards the issue of executive pay appears to be to both show a willingness to act and at the same time attack the Social Democrats.

The deputy finance minister, Jens Spahn, has led the way. The CDU rising star points to the coalition agreement, according to which manager salaries should be decided upon at the respective company's annual general meeting. He told Handelsblatt that this would lead to more transparency, and end "the wheeling and dealing of trade unions, who always agree to million-euro salaries."

Of course all this posturing is for show. It is highly unlikely that any new bill could be pushed through parliament in the current legislative period, with elections looming in the fall. In other words, it is already campaign season.

Heike Anger is covers economics and politics. Daniel Delhaes reports on politics, transport and airlines from Berlin. Jan Hildebrand leads Handelsblatt's financial policy coverage and is deputy Berlin bureau chief. To contact the authors: [email protected], [email protected], [email protected]