The German regulatory environment around corporate governance failed to keep the pace with that of many neighbouring countries for years. Now, an increase in shareholder opposition and media attention, along with the upcoming implementation of the European Shareholders Rights Directive (SRD), have stirred the pot.

While a revision of the German Corporate Governance Code (DCGK) is foreseen for June 2019 (source: Corporate Governance im Spannungsfeld von Investorenerwartungen und Kodexreform), German experts have gathered to draft new recommendations on sustainable remuneration for the management boards of listed companies, which were published at the end of July.

The working group, formed in early 2018, comprised six prominent supervisory board chairs, including Werner Brandt (ProSiebenSat.1, RWE, Siemens), Ulrich Lehner (Deutsche Telekom, E.ON, Henkel, Porsche) and Werner Wenning (Bayer, Henkel, Siemens), as well as four representatives of large German institutional investors, two academics and seven corporate governance experts.

The guidelines were explicitly initiated with the aim of modernising the remuneration structures, and disclosure thereof, of Germany’s top executives, making sure they can live up to the expectations of international shareholders, in preparation for regular shareholder votes on remuneration reports mandated by the SRD.

As such, the principles promoted by these guidelines align with the current global trends on executive remuneration: simplification, transparency and sustainability.

Said principles and recommendations are grouped into three categories, that relate to the structure of pay packages, their disclosure and the dialogue with stakeholders:


Focus on a decrease in complexity, with incentive structures only based on three pillars (the usual fixed + short-term bonus + long-term incentive), and on the introduction of sustainability targets, such as innovation, ESG metrics, social and corporate culture indicators, customer and employee satisfaction, along with the more traditional strategic and financial goals.

With regard to quantum, the group recognised the ratcheting effect of benchmarking seen in the past years across companies all over the world; as such, while the use of internal and external peers is still recommended, companies should disclose their peer groups and justify any increases. To ensure “vertical appropriateness”, it is also recommended that a pay ratio of the management board to senior directors below board level, as well as to other employees, is disclosed.

In line with the current provisions of the Kodex, individual remuneration should be subject to absolute caps. However, while the model tables of the Kodex failed to specify how to calculate these caps in the case of equity awards, splitting the complying companies into two interpretation groups, the new recommendations state that the ceilings should include potential share price increases.

Severance remains capped at two years (three years in case of change in control), although accelerated vesting of restricted equity awards is discouraged.

Finally companies are recommended to introduce explicit clawback and malus provisions, as well as share ownership guidelines for executives of at least one year’s base salary, i.e. deliberately lower than the threshold expected by international shareholders, perhaps to favour a gradual implementation of this tool.


Here the focus is on the provision of a transparent yet concise report, able to clearly present the infamous link between pay and performance. Disclosure shall now include a description of non-traditional or adjusted KPIs and pay ratios over multiple years.

Some controversial elements, typical to German remuneration policies, such as the grant of special one-off bonuses and the discretionary adjustments of award payouts, are not explicitly discouraged – although they become conditioned on a satisfactory explanation, in line with the comply-or-explain principle.

Addressing a key transparency gripe of investors, companies are recommended to disclose the target levels, weightings, and achievement levels at least retrospectively i.e. at the end of the performance period for which they were set.


Companies are recommended to foster regular dialogue with investors on executive remuneration, particularly when there are material amendments to the pay structure or where there was shareholder opposition of more than 25% at the previous meeting; discussions should generally occur at least six months prior to the AGM.

Finally, the guidelines call for increased transparency of investors, asset managers, proxy advisors, and shareholder advocacy groups in clearly disclosing their expectations and engagement processes.

As mentioned above, the guidelines are presented in the form of recommendations and principles, allowing the user to understand the rationale behind the group’s approach and decisions, and further promoting transparency for international investors.

Among the guiding motives of the guidelines, the working group refers to the increasing scrutiny of and opposition to management remuneration policies by investors and advisors in recent years, but also to the often-contradictory nature of their demands and expectations. This confusion may have partially derived from the evolving character of the German Code of Corporate Governance, which for a while remained somewhat distant from the more structured regulations implemented in countries like Switzerland, France or the UK. However, these new guidelines appear to finally provide some certainty and colour around the residual grey areas of the Code, while even setting ahead of the international market practice, through the endorsement of sustainability targets.

While the new German Code of Corporate Governance will not be released until the SRD has been transposed into German law, the next edition also seems set to include an overhaul of the recommendations on executive pay for corporate issuers, with a consultancy period expected to open in January 2019.

Silvia is an analyst covering Germanic markets.