Executive pay is an ongoing controversy in Germany, with multi-million euro salaries, bonuses and pension pots sparking shareholder revolts, tabloid headlines and talk-show outrage. With federal elections coming up this fall, politicians of all parties have jumped to propose new restrictions on supposedly excessive compensation.
For shareholders, it can be hard to answer the basic question: Are executives worth it? A new study by Handelsblatt and Goettingen University answers that question, ranking the 30 leading companies that make up Germany’s most important stock market index, the DAX.
Based on data from 2012 to 2016, the study produced some surprising results. The highest salaries do not guarantee the best results. The best paid managers — the corporate superstars who run software giant SAP and the automaker Daimler — don’t give the best shareholder value.
“Do we invest in the future, or do we cash in now?”
That crown goes to the CEOs — mid-ranking in compensation — who run chemicals behemoth BASF, insurer Allianz and chemicals and pharmaceuticals corporation Bayer.
At the bottom of the rankings come the bosses of banks and energy giants, who actually destroy shareholder value while pocketing multi-million euro packages.
Top of the charts is BASF chief executive Kurt Bock, who saw the company’s value soar by billions over the five-year period. Although he earned a handsome €25 million during that time — around $30 million — the company’s value increased by a factor of thousand. Mr. Bock’s big idea was the networked factory, in which ancillary products are fed into the value chain. Waste heat, for example, provides energy for other BASF plants.
This has helped BASF’s bottom line. But Mr. Bock himself has questioned simplistic measures of shareholder value. As he said at the BASF general meeting in May, “Do we invest in the future, or do we cash in now?”
Handelsblatt’s survey compares executive pay with both external and internal value. External value reflects changes to a company’s earnings per share and market capitalization — the numbers that bring immediate financial reward to its shareholders. Internal value uses the principle of “economic value added,” which measures net operating profits minus capital costs — a widely used yardstick of value-oriented company leadership.
Companies’ internal and external results can vary. BASF ranks top on internal value-creation, but second on external value. Rival Bayer ranks first for external value creation, but comes in seventh on internal value. Measured against total executive pay, this puts the company third for overall value for money.
The results suggest middle-ranking managers are often better value for money than the highest fliers. Dieter Zetsche, CEO of carmaker Daimler, created roughly the same overall value as Mr. Bock at BASF, but took home twice as much pay.
Telecoms giant Deutsche Telekom ranks similarly in terms of overall value created. But this conceals the absolute figures, with chief executive Timotheus Höttges — in charge since 2013 — overseeing €196 of loss in internal value for every euro of executive pay, even as external value rose by €1,631 for every euro the boss was paid.
Many companies directly reward increases in value with pay-for-performance. “Executives are not paid for effort,” says well-known compensation consultant Michael Kramarsch. “They get it for results.”
And at firms where results fail to correspond with exorbitant pay, shareholder anger is evident. Volkswagen is the classic example, with executive bonuses continuing even after the Dieselgate scandal knocked billions of euros off the company’s value.
In companies’ estimates of external value, earnings-per-share remains the dominant index. But more and more firms are adding other criteria.
Half of the 30 corporations listed on the DAX now include goals on reputation and sustainability, including customer and employee satisfaction and environmental targets. BMW now offers executives a success bonus linked to cuts in overall CO2 emissions from the cars it produces.
“Executives are not paid for effort. They get it for results.”
Ranking internal value changes has always been trickier. Mr. Kramarsch, managing partner at consultants HKP, says in the past, badly designed criteria produced “a lot of nonsense.” Firms had a lot of leeway to discount one-off effects, making for dishonest figures.
As a metric, shareholder value of course depends on factors beyond chief executives’ control. Part of their job is to manage crises and long-term negative trends. This is reflected in the performance of the big German energy companies E.ON and RWE, both battered by massive changes in the electricity market, and Deutsche Bank and Commerzbank, struggling in the wake of the financial crisis.
In these sectors, both external and internal value eroded between 2012 and 2016. Deutsche Bank’s executives oversaw a €36 billion loss in internal value for the period covered by the Handelsblatt study. For every euro of executive pay, €1,305 was wiped off the company’s value.
One key factor to the success of top performer BASF may be that it scrapped individual bonuses for managers, which were deemed counterproductive for sustainable corporate development. Annual bonuses are now based on the whole senior management team’s overall performance, and on return on capital employed. Teamwork becomes key. Mr. Bock says it’s not just about economic success. “Just as important to us is how we do it,” he says.
Dieter Fockenbrock is Handelsblatt’s chief correspondent for the companies and markets desk. To contact the author: firstname.lastname@example.org