The German Board Member Remuneration Act
By Thomas Griebe
As a result of the global financial crisis the German Government wants to implement additional statutory regulations on the remuneration of board members (see Sec. 87 subsec. 1 German Stock Company Act, "Aktiengesetz").
Even though the German legislator does not plan to enforce any limits on the remuneration of the management the annual remuneration shall be reasonable and shall also be linked to the individual performance of each member of the board. The remuneration shall also be in line with comparable remuneration schemes in the concerned business or country and shall provide for long term incentives to the member of the board, as well. In this respect the minimum vesting period for stock options shall be extended to 4 years, too.
According to the law the Supervisory Board ("Aufsichtsrat") is still competent and responsible for the remuneration of the board members (see Sec. 116 and 93 German Stock Corporation Act). The members of the Supervisory Board are personal liable in case of a violation of the law (e.g. the remuneration would not be reasonable in terms of the Act). In order to ensure a reasonable remuneration all members of the Supervisory Board are obliged to participate in the appointment of the remuneration package and, thus, the decision cannot be delegated to a subgroup of the Supervisory Board anymore.
The Act provides for a authorization and an obligation of the Supervisory Board to reduce the agreed remuneration unilaterally (see Sec. 87 German Stock Corporate Act) if the financial situation of the Company would become critical and the continuation of the remuneration would be unreasonable for the Company (i.e. the Company cannot contribute any profits to the shareholders or is forced to initiate a redundancy process in order to save costs).
Finally, members of the board shall not become members of the Supervisory Board for a period of 3 years after their active membership in the board (“cooling off period”).