Manager Payouts

Putting Big Bonuses on a Cash Diet

  • Why it matters

    Why it matters

    Germany’s Social Democrats want to cap manager pay and make claw backs easier, if there is evidence of mismanagement or targets that were not reached.

  • Facts


    • A study by the Flossbach von Storch Research Institute found that shareholders felt there was insufficient transparency around decisions on manager payments.
    • Managers’ salaries have not risen so much recently. According to international consulting firm hkp/// top salaries rose on average about 1.9 percent annually, which is comparable to the rise in incomes of ordinary workers and business profits.
    • Politicians are getting in on the act, with Germany’s Social Democrats proposing a fixed ratio of executive pay to the average worker’s salary and Brussels setting new guidelines.
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Volkswagen – Jahrespressekonferenz
A nice parting gift: Martin Winterkorn, former head of the world’s largest car maker, makes €3,100 in pension payments per day. Source: DPA

At the height of his success, Martin Winterkorn had it all: he was the head of the world’s largest carmaker, took over luxury rival Porsche, and made more money than any manager in Germany before him.

But since the Dieselgate emissions scandal forced him to resign, he is no longer such an aspirational figure. In fact he’s turning some heads with distaste at exiting his professional high life with a fat parting gift.

While VW is forking out billions of euros in fines and settlements over Dieselgate, the former chief executive is making €3,100 ($3,290) in pension payments. Per day.

If one compares his disastrous legacy at Volkswagen and that kind of generous financial settlement, Mr. Winterkorn has become the face of more than Dieselgate. He is also the best example of managerial greed in Germany.

It’s not just Mr. Winterkorn either. While unions are fighting to save jobs and limit pay cuts at VW, members of the firm’s executive board never offered to forfeit their bonuses, even during the height of the scandal. Politician and judge Christine Hohmann-Dennhardt joined the VW board in January 2016 as the member responsible for integrity and legal issues. When she left a year later, she got €12 million ($12.7 million) in severance. Meanwhile management and unions came to an agreement that would mean pay cuts to workers in the future.

No wonder then, that manager remuneration is being hotly debated in Germany. It comes after banker bonuses aroused public wrath after the 2008 financial crisis.

Martin Schulz, newly minted Social Democratic challenger for Chancellor Angela Merkel, plans on making it into a big argument.

“If an executive makes disastrous decisions and collects millions in bonus for it, but a sales assistant is fired for just a little misstep, then that’s not just,” he said recently.

“There doesn't seem to be much shame out there.”

Brigitte Zypries, German economics minister

The Social Democratic Party (SPD) candidate plans to make justice and fairness a major topic of his campaign for federal elections this fall. Ms. Merkel is running for re-election for a fourth term, but has recently lost her long-running popularity. Mr. Schulz, the former head of European Parliament, recently returned from Brussels to Berlin, and has improved the SPD’s low approval rates.

Since the financial crisis revealed seemingly unconstrained greed in the banking sector, much has happened in Germany, at least on the surface. A new law requires companies to publish their executives’ pay. Large investors issue guidelines on appropriate remunerations. And members of non-executive supervisory boards – which hire and fire CEOs and approve their salaries – have agreed to moderate their own income under a corporate governance code. It was hoped that publishing figures would shame payees. “But there doesn’t seem to be much shame out there,” said Brigitte Zypries, Germany’s economics minister who had originally introduced the legislation.

Mr. Schulz is smart enough not to build his campaign around poverty, since most people don’t like to consider themselves poor. Instead, the Social Democratic party leader paints a picture of basic injustice, that sits somewhere between ordinary hard-working citizens and audacious executives pocketing millions, despite making major mistakes.

What’s in focus is not the numbers on managers’ paychecks, but the fine line between appropriate payments and shameless bonuses.

After Mr. Winterkorn, the German manager most associated with this kind of shamelessness is Carsten Kengeter. The head of Germany’s stock exchange, Deutsche Börse, is currently being investigated for insider trading. He took stock options during talks to merge Deutsche Börse with the London Stock Exchange that became worth a lot more once the potential merger became public. Mr. Kengeter’s investigation has now endangered the whole deal, which would have created Europe’s largest stock exchange.

Former boss of gas producer Linde, Wolfgang Reitzle, is under similar investigation. Since Mr. Reitzle shifted from the executive to the supervisory board, he’s been pushing for a merger with U.S. rival Praxair. Some critics say his move is motivated by personal gain, since Mr. Reitzle’s pay as chairman of a merged industrial gas giant would likely be 10 times higher than his current salary of €460,000 ($488,000) per year. He’s being investigated because he bought Linde shares worth €500,000 also just before merger talks became public.

And even in smaller companies, manager excesses are common. The chief executive of optical technology company Jenoptik, Michael Mertin, had not achieved his pronounced target of 10 percent annual growth seven times in a row, by 2014. Nevertheless, his pay – €2 million in 2014 – more than doubled over the same period.

And while mid-sized pharmaceuticals firm Stada was struggling with plummeting profits, its former boss raked in €3.4 million. Even more over the top was his pension plan worth €35 million. Upon pressure from unions and investors, Mr. Retzlaff ended up forfeiting €16 million of the total. Voluntarily, he claimed.

It’s not just politicians who criticize such blatant greed. Other company heads, who fear the rise of a new class struggle, speak out against the excess too, albeit cautiously.

“It’s not always this way but in far too many cases the size of remuneration and bonuses are just not plausible to me,” said Dirk Rossmann, founder and head of the Rossmann drugstore chain.

And the former chief executive of utility giant E.ON, Wulf Bernotat, said he always looks around at what the competition is paying. However decency dictates an upper limit. “There should be a cap at €10 million per year,” he suggested, although that cap does not need to be legally mandated, in his opinion.

Volkswagen – Christine Hohmann-Dennhardt
Christine Hohmann-Dennhardt left VW after a year and got €12 million. Source: DPA

Managers have been fighting such a law for almost 20 years, ever since executive pay in Germany rose sharply to match international standards. Supervisory boards can limit executive pay and bonuses, but rarely do, perhaps to avoid conflict with senior execs.

The claim that their counterparts in the U.S. and elsewhere still make much more money than them has been one of German managers’ favorite arguments in the ongoing debate. Even though in reality, only very few of them would be in line for a job with the multinational corporations they are talking about.


Philipp Immenkötter of the Flossbach von Storch Research Institute also pointed out that decision-making behind bonuses is often far from transparent. It’s impossible to trace the decisions behind the salaries of any CEOs salaries in Germany’s blue-chip DAX index, he said.  In a study called “The Black Box of Board Members’ Compensation”, it is extremely difficult to know whether goals set for board members have been achieved or not. On average, stock holders said they received only about half of the information they needed to discern whether their expensive managers were worth the price.

German economist Ann-Kristin Achleitner, who sits on the board of Deutsche Börse and insurance giant Munich Re, agrees. She says that payment structures have become so complex that nobody knows anymore who is being paid for what, and why. “And where there is no transparency, there is mistrust,” she said. “And that’s bad.”

Some institutional investors have picked up on this problem as well. Deutsche Asset Management, an investment subsidiary of Deutsche Bank, in 2016 rejected the proposed executive remuneration at 22 out of 23 general meetings it attended, including at E.ON, software firm SAP and pharmaceuticals giant Bayer. Nick Huber, responsible for corporate governance at Deutsche Asset Management, said the firm does not approve of variable pay being tied solely to the share price. A company’s fundamentals should be taken into account too, he added.

“The data is clear. We are a long way from any kind of earnings explosion.”

Michael Kramarsch, head of hkp///

Of course, investors rejecting remuneration proposals have no official consequences. But it will be difficult for the supervisory boards to ignore constant complaints from shareholders in the long run. And the European Union might soon aid critics. A new rule book currently in the making in Brussels would require executive salaries to be approved by shareholders. But E.U. member states are not bound by the guidelines just yet, and it will be another two years to come into effect.

Mr. Schulz’ Social Democrats don’t want to wait that long. The SPD is pushing for a new law that would only make bonus payments up to €500,000 tax deductible. The party hopes to get it through parliament before the election.

A new SPD position paper also calls for a fixed ratio of executive pay to the average worker’s salary. That would curb oversized payouts too.

“We don’t need new laws, we need the right attitude,” said Ms. Achleitner. She said the fault isn’t with the system, but individual cases. “We have hundreds of supervisory boards that do their jobs so well that they never become the subject of public debate.”

As it is, there has already been some success in this area. Managers’ salaries have not risen recently, not the way they used to anyway, international consulting firm hkp///, which specializes in performance management and compensation, confirms. Top salaries rose on average about 1.9 percent annually, which is comparable to the incomes of ordinary workers and business profits. “The data is clear,” said Michael Kramarsch, head of hkp. “We are a long way from any kind of earnings explosion.”

One way to improve feelings about the injustice of it all would be to install clawback clauses in top executives’ contracts. That gives companies the chance to reclaim bonuses if the firm gets into trouble or misses targets. The SPD even wants legislation on this, before elections in September. Thomas Oppermann, head of the SPD faction in parliament, recently said that when managers perform poorly or even break the law, “it should be possible to withhold, or even reclaim, variable compensation.”

Deutsche Bank has gotten a glimpse of how difficult that is. Germany’s largest bank has been fighting with former executives over bonus payments that it wants to withhold because of the lender’s poor performance. But the managers won’t budge. In fact, a former trader who may well be involved in the Libor manipulation scandal, made €80 million in one year. Former chief executive Josef Ackerman, who held the record for best-paid German manager for many years, only forfeited his bonus once and that was during the height of the financial crisis.

Last year, Deutsche Bank presented shareholders with an executive payment scheme that could have seen the head of investment banking make more money than current CEO John Cryan. The proposal was rejected and now it’s under review. A small victory for shareholders but possibly, given the current political climate, not the last of its kind.

A version of this article was first published in WirtschaftsWoche and was prepared by Cornelius Welp, Melanie Bergermann, Niklas Hoyer, Matthias Kamp, Angela Hennersdorf, Max Haerder, Henryk Hielscher, Annina Reimann, Hauke Reimer, Daniel Rettig, Dieter Schnaas, Gregor Peter Schmitz, Jürgen Salz, Nena Schink, Claudia Tödtmann and Silke Wettach.

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