Christian Democrats to Propose Executive Pay Reform

Volkswagen – Christine Hohmann-Dennhardt
Former VW executive Christine Hohmann-Dennhardt's €13-million severance package has sparked a debate about executive compensation. Picture source: DPA

Chancellor Angela Merkel’s center-right Christian Democratic Union (CDU) has drafted reforms to executive pay that would limit tax deductions and increase transparency, according to a position paper obtained by Handelsblatt.

Under the proposal, only executive pay earned in Germany would be tax deductible for corporations. Executive pay earned and taxed abroad would no longer qualify as a tax-deductible business expense in Germany if the manager works abroad most of the time.

The CDU’s legal experts in parliament will meet to discuss the proposed reforms on Tuesday.

Lavish executive compensation has become a hot-button political issue as Germany gears up for federal elections in September. The center-left Social Democratic Party (SPD) has made fighting income inequality a central plank of its campaign platform.

The CDU, however, has rejected a proposal by the SPD to impose a blanket limitation on the tax deductibility of executive pay.

“That would be an unconstitutional break in the system,” Heribert Hirte, a CDU legal expert and the author of the position paper, told Handelsblatt.

The CDU has also proposed reforms to increase the transparency of executive pay. In the future, shareholders would decide on the system of executive compensation presented by the supervisory board at the annual general meeting.

The supervisory board would also have to lay out the maximum amount an executive could receive based on the pay of the chair, his or her deputy and a simple board member. To avoid any loopholes, the transparency guidelines would apply to the best-paid board executive.

Minority shareholders would also have the power to call an external body to help adjudicate disputes over executive pay. Mr. Hirte proposed Germany’s financial industry regulator, BaFin, as the best body to investigate whether or not executive pay is appropriate.

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