Payday Perks

Not-So-Great Expectations

CEOs-01
Not so good a job? These CEOs earned only about half of their potential salary in 2014.
  • Why it matters

    Why it matters

    If top managers live up to their many goals, compensation can be staggering, including perks that no one else can get.

  • Facts

    Facts

    • Of blue-chip DAX company bosses, only Martin Winterkorn, the head of Volkswagen, reached near his maximum possible pay of €15.2 million.
    • Many companies offer lucrative fringe benefits, including paying personal taxes, according to annual reports.
    • Some DAX companies are also changing the way they pay supervisory board members, switching from profit-sharing models to fixed compensation.
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    Audio

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The top 30 listed blue-chip companies in Germany earned €68 billion, or $74 billion, in profits last year, just under record levels set in 2007, the year before the financial crisis hit.

But there seems to be no sign of an upper limit on executive pay in Germany, going by performance bonuses paid to CEOs. Most could earn a great deal more if only they had reached 100 percent of their targets.

Average compensation increased by 4 percent in 2014, according to an analysis of company annual reports conducted for Handelsblatt by the German pay consultant Heinz Evers. The pay ranges from €2.2 million for Norbert Steiner of K&S to €15.2 million for carmaker Volkswagen’s Martin Winterkorn.

Aside from Mr. Winterkorn, seven other chief executives are in line for compensation of €10 million or more this year.

Executive compensation in Germany is based heavily on a company’s performance. It is measured not only by profit, but also by return on equity, share performance and even employee satisfaction.

Exactly how the big pay packages add up is still not always clear to shareholders. Some of it is hidden in fringe benefits that can include such things as paying an executive’s personal taxes.

The reason there is any transparency in executive salaries in Germany these days is the Kodex Commission, a body that oversees corporate governance and recommends minimum and maximum salaries for executives every year.

Executive compensation is based heavily on performance. It is measured not only by profit, but also by return on equity, share performance and even employee satisfaction.

For example, if the new boss at Linde, Wolfgang Büchele, had reached all of his targets at the industrial gas and technology giant, he could have earned twice as much last year – about €6.8 million, or $7.4 million.

Kurt Bock, head of BASF chemical company, was given about 60 percent of his €10.5 million maximum. The head of Germany’s flagship airline Lufthansa, Carsten Spohr, only managed 51 percent of his salary total.

The only CEO that even came close is MartinVolkswagen, head of Volkswagen, a perennial outperformer on Germany’s blue-chip DAX stock index. Mr. Winterkorn, Germany’s highest paid executive, earned €15.2 million out of a capped salary of €16.5 million. In response to public criticism, Volkswagen capped board members’ compensation two years ago, when Mr. Winterkorn’s salary threatened to top €20 million.

Anshu Jain and Jürgen Fitschen, the joint CEOs at Deutsche Bank, are two more managers whose pay is set to rise to the double-digit millions. If everything goes well at the bank this year, the two managers are set to be paid €13 million and €14 million respectively. Their predecessor, the former bank head Josef Ackermann, was pilloried for his excessive pay in 2006 when he received a similar salary.

Some executives saw major increases in 2014. They included Stefan Heidenreich, boss of the cosmetics company Beiersdorf.  His long-term bonus of €5.9 million propelled him to sixth place in the overall rankings.

Martin Blessing, head of Germany’s second-largest bank, Commerzbank, also did very well. Despite the bank still being part-owned by the German government, he booked his first performance bonus since the 2008 financial crisis that resulted in Berlin’s bailout.

“Why can’t a board member pay taxes like any normal employee?”

Heinz Evers, Pay consultant

But even if Mr. Blessing earned more this year, he won’t get all of it immediately. Some of the compensation still has to be earned over the long-term, based on stock performance for example.

Peter Terium, chairman of the board at the struggling utility RWE, is in a similar situation. He nominally earned 24 percent more in 2014, with €6.2 million. In actual fact, he only received €3.3 million in salary from RWE.

The difference is explained by bonuses and long-term incentives connected to longer-term targets, which he had no way of cashing in because the company has been going through critical times in recent years amid Germany’s dramatic shift to renewable energy.

The enormous spread of fringe benefits, such as company cars and insurance, is also conspicuous. The specialty chemical company, Lanxess, and the software company, SAP, are among the companies that make heavy use of these kinds of compensation.

Lanxess gave boss Matthias Zachert earned €2 million in fringe benefits. That included a big joining bonus after the former chief financial officer was hired back after a brief time at Merck, the chemical and pharmaceutical company.

Software developer SAP paid €860,000 in fringe benefits, picking up the tab for regular trips between Germany and the United States for its American CEO, Bill McDermott.

Other executive perks are noted in companies’ annual reports. For instance, the insurer Allianz as well as Commerzbank, Deutsche Bank, Münchener Rück, Siemens and Volkswagen even pay board members’ personal taxes as part of their fringe benefits.

According to the industrial conglomerate Siemens’ annual report, the company paid moving costs of €270,000 for former compliance board member, Peter Solmssen, in addition to €241,000 for taxes due on those costs.

In the view of pay expert Heinz Evers, a company paying board members’ personal taxes on fringe benefits is an unreasonable practice. “Why can’t a board member pay taxes like any normal employee?” he asked.

Sometimes it’s much more attractive to work for smaller firms on the MDAX index of 50 mid-cap companies. Thomas Ebeling, the boss of Pro-SiebenSat 1, a Munich-based TV company, was paid a massive €23 million bonus by former main shareholders, the private equity firms KKR and Permira.

Frequent flyers on the other hand, should think about a position on the board at Fraport, operators of Frankfurt’s international airport. Board members are guaranteed a parking space for life at the Frankfurt airport.

 

Missed Salary-01

 

Pay for members of non-executive supervisory boards is another matter and not nearly as attractive, especially in tough economic times, since members often are paid according to dividends.

This is partly because many members of supervisory boards, which have the power to hire and fire managers, often sit on more than one board. Some are even chief executives at the same time.

But change is afoot here too. At Siemens, for example, the supervisory board under chairman Gerhard Cromme has decided to pay its 20 supervisors fixed sums of money.

Their reasoning: Supervising management is especially important and time-consuming in bad times.

Thirteen other DAX firms have followed Siemens’ example. Many have given up the once popular but controversial linking of their performance bonus to the dividend. It also ends a potential conflict of interest, since it is the supervisory board itself that decides the size of dividends.

The change from profit sharing to fixed salary has meant considerable pay hikes for some board members. Mr. Cromme of Siemens, for example, is among the group of supervisory board front-runners with €616,000 in compensation.

The average pay of €380,000 for Germany’s top supervisors is a long way from boards in other countries. But German company controllers have a completely different function from, for example, their Swiss counterparts.  They do not have a direct management function and are not responsible for the strategic alignment of the company.

Wolfgang Reitzle knows both sides. As chairman of the board of directors at Holcim, the Swiss world market leader in building materials, he has just completed a difficult merger with Lafarge, a French rival.  He is likely to be paid considerably more in his new position in Switzerland than for his supervisory mandate at Continental, which comes with above-average pay of €455,000.

 

Dieter Fockenbrock is chief correspondent of Handelsblatt’s companies and markets department. To contact him: fockenbrock@handelsblatt.com.

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