The debate in Germany over executive pay has reached a climax with the publication of a new corporate governance code, which includes measures to address rising levels of remuneration.

The German Corporate Governance Commission released a new version of the country’s code, the first update in 16 years, including a provision proposing that companies introduce  “clawback” measures for executives who fail to deliver.

The commission said in a statement: “Contracts are set to be worded in a manner to ensure that remuneration may be reclaimed in justified cases…”

The precise clawback measure in the code says: “The supervisory board shall have the possibility to account for extraordinary developments to an appropriate extent. It shall be permitted to retain or reclaim variable remuneration … where justified.”

Pay levels

Executive pay levels in Germany have provoked a major debate, especially in the wake of VW’s dieselgate scandal. When asked to comment last year on pay among auto industry bosses, chancellor Angela Merkel said: “No, I don’t think this is fair.” She added that there should be a “more sensitive approach” to executive bonuses.

In January, a study by Vlerick Business School revealed that Germany had the third-largest CEO pay ratios in Europe, at 89 times that of an average employee. The UK’s ratio was 94.

Dr Rolf Nonnenmacher, chairman of the Governance Commission, said: “With the present draft we are providing a strong, modern, clearly worded, compact and relevant code for discussion, which reflects the status quo of international corporate governance discussion.”

The new code also proposes that share-based payments, as part of long-term remuneration, should not be sold for four years.

The code demands the proportion of long-term variables be bigger than short-term remuneration, which should only ever be paid in cash. There is also a line which ties the payment of long-term rewards to the delivery of “strategic measures”

New criteria

German supervisory boards have also been given new criteria for judging their independence. These include asking whether a supervisory board member:

• is a member of the company’s management board in the two years prior to appointment;
• is currently maintaining (or has maintained) a material business relationship with the company or one of the entities dependent upon the company (e.g. as customer, supplier, lender or adviser) in the year up to his/her appointment, directly or as a shareholder, or in a leading position of a third-party entity;
• receives other material variable remuneration from the company, or one of the entities dependent upon the company;
• is in a close family relationship with a member of the management board.

Boards are also asked to disclose detailed information about attendance at board meetings.

Apply and explain

In a departure from the UK code, German companies also face a call for an “apply and explain” approach when it comes to the overarching “principles” that have been used to structure the new code. This will be in addition to the “comply or explain” approach for the code’s provisions.

The draft code says: “The explanation regarding the application of the principles in the enterprise is intended to enable shareholders and other stakeholders to assess the corporate governance structure within the enterprise.”

The new code is open for consultation until the end of January. The commission hopes to submit the code for publication to the Ministry of Justice and Consumer Protection in April next year.