Executive pay

Mind the gap

  • Why it matters

    Why it matters

    Germans are increasingly aghast at the huge wages of executives, and the resurgent Social Democrat Party has sensed an opportunity to make election capital by calling for a pay cap. Experts argue that’s not easy.

  • Facts

    Facts

    • The average remuneration of a chief executive of a DAX-listed firm increased to €6.4 million in 2016 from around €5 million a decade before.
    • The head of Heidelberg Cement, Bernd Scheifele, was paid 190 times the €44,300 average income of his workforce last year.
    • Germany goes to the polls in September.
  • Audio

    Audio

  • Pdf
Schweiz – Referendum über Manager-Millionen
The prospect of protests against executive pay, as seen here during a Swiss referendum on the issue, could be a feature of the German election campaign. Source: DPA

With elections just months away, German trade unions have fired a fresh salvo at their employers over executive pay.

Works council leaders targeted the huge gaps between management and shop floor wages as Handelsblatt revealed that the heads of Germany’s leading firms take home up to 190 times the average wage of their employees.

Those kinds of gaps are socially unacceptable and highlight the need for a pay cap, they say. “The relationship between management remuneration and employees’ income has been thrown out of kilter,” the heads of the works councils of VW, Siemens, Daimler, Continental, BMW and ThyssenKrupp wrote in a joint statement.

Executive pay has become a burning issue among German voters, with many believing that the country’s top executives receive exorbitant wages while they struggle to secure above-inflation annual pay rises. The introduction of a pay cap has become a political subject.

The average remuneration of a chief executive of a firm listed in the DAX index, Germany’s leading share index, increased to €6.4 million in 2016 from around €5 million a decade before — a period that saw one of the biggest economic and financial crises in years.

“We shouldn’t upset the whole system just because some companies have taken unfortunate decisions.”

Hans-Joachim Böcking, economics professor, Frankfurt University

Handelsblatt’s calculations show that the head of German construction materials company Heidelberg Cement, Bernd Scheifele, was paid 190 times the €44,300 ($47,215) average income of his workforce last year. The bosses of Volkswagen and Adidas followed close behind with a ratio of 170.

The center-left Social Democrats (SDP), fighting to oust conservative Chancellor Angela Merkel in the September general election, have pounced on the issue with a pledge to cap executive pay.

The party, which has caught up with the conservatives in opinion polls by shifting to the left under its chancellor candidate Martin Schulz, wants supervisory boards to set individual targets for manager to worker pay ratios.

Union leaders would like to take the issue further. The head of engineering union IG Metall, Jörg Hofmann, said Germany urgently needs legislation that limits the ratio between management pay and average workforce incomes.

But defining how high those ratios should be is going to be difficult as they vary widely among DAX companies.

Heidelberg Cement has the biggest gap with its ratio of 190, miles ahead of Deutsche Bank, which comes last in the ranking with 39. So what should the ratio be? How should it be calculated? Should it be based on the entire workforce or just the people who work in consolidated subsidiaries, or should employees in outsourced divisions also be factored in?

The Swiss attempted to tackle the problem in 2013 when they held a referendum on capping executive pay at 12 times what a company’s worst-paid employee receives. It was rejected, and now no one in Germany is sticking their neck out to come up with a number.

The country’s Corporate Governance Code, a largely non-binding set of rules for ensuring sound management, merely recommends that companies “take account of” a pay ratio in determining executive pay.

The SPD, however, wants the government, business federations and trade unions to set the ratios together. Works council leaders want the supervisory boards to be legally obliged to set upper limits for management pay in their companies.

04 p16 Manager’s Salary-01

So far there has been only one prominent case of self-restraint. In 2010, German solar panel maker Solarworld announced that its management board members wouldn’t get paid more than 20 times a worker’s salary.

Ms. Merkel’s conservatives are against legislating on the issue, arguing that it would amount to regulatory interference that would curtail corporate freedoms. Some executives warn that enforcing a ratio could tempt managers to raise average employees’ pay just so they could get paid more themselves.

“We shouldn’t upset the whole system just because some companies have taken unfortunate decisions,” said economics professor Hans-Joachim Böcking of Frankfurt University.

Some in the SPD also question the move, and even some trade unionists are skeptical. “A good manager should earn a lot if he runs the company successfully,” said Michael Vassiliadis, the chairman of chemical industry union IG BCE.

Under German co-determination rules, worker representatives have a strong say in supervisory boards. So why haven’t they put a stop to exorbitant management incomes? They argue that shareholder representatives have more power, and that the supervisory board chairman has the casting vote whenever the board is deadlocked.

Heinz Evers, an expert on corporate pay, said most ideas to limit executive pay were ineffective in practice. But one measure that might work would be to require supervisory boards to decide on management remuneration with a three-quarters majority instead of a simple majority, he said.

“That would enliven debate in the boardrooms and lead to consensus,” he told Handelsblatt.

 

Dieter Fockenbrock is Handelsblatt’s chief correspondent for the companies and markets desk, focusing on corporate governance, opinion and rail transport. Frank Specht is a Handelsblatt editor focusing on the German labor market and trade unions. To contact the authors: fockenbrock@handelsblatt.com, specht@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!