Survey on Directors’ Pay of the DAX-30 Companies

Despite increasing share prices and good company results the discussion on directors’ pay has intensified. The impression lasts: greed prevails in the executive floors. An example for this is Jean Pierre Garnier, CEO of the Anglo-American pharmaceutical enterprise GlaxoSmithKline, who proposed to the AGM to double his remuneration despite poor results. This demand was refused at last year’s AGM by investors in Great Britain who are now able to vote on the remuneration report. Although the vote is not legally binding it had an impact. Mr Garnier's pay has not been increased, in return  the performance hurdles of the company’s performance share plan have been raised.

The former chairman and CEO of the NYSE, Richard Grasso, who had to leave the stock exchange after an outcry by the big investors, also did his bit to intensify the discussion. He quit the exchange as his infamous Euro 140 million package (including pension plan) became public.

Reason enough for DSW to once again take a look at the remuneration of the directors of the Dax 30 companies. We examined the average cash salary of the management board members in the financial years 2001 and 2002. The result was compared to the development of the Earnings per Share of the company.

The Dax companies first had to be divided into two different groups:

First, there were the companies that set a good example and disclose the top executives salaries, bonuses and stock options in line with the German Corporate Governance Code. But only six out of the thirty Dax companies did so in 2002, i.e. Altana, Bayer, Deutsche Bank, Deutsche Börse, SAP and ThyssenKrupp. Schering at least individualised the salary of its CEO. We found a very good presentation in the annual report 2002 of Deutsche Börse. This presentation would be ideal for a uniform standard being as transparent as possible for the investors. DSW welcomes that the named six companies stepped towards more transparency and appeals to the remaining stock corpo-rations to follow this example.

Secondly, the other 23 companies only disclosed the overall remuneration of the management board although the German Corporate Governance Code now de-mands to individualise the management board members’ remuneration. In these cases, DSW took estimated values from the annual reports. Estimated values, how-ever, are relatively difficult to determine because significant differences can be included in the total sum. These differences could be severance remuneration for retired members of the management board or the so-called "golden hellos", i.e. start remuneration for new members. This is why no convincing figures can be deduced from the company reports alone. In addition, these very often include stock options and variable remuneration parts for previous financial years or even postponed variable sums that are not due until the next year.  The total remuneration of the board is not necessarily the actual sum paid in cash. As far as possible, DSW's calculations are based on the cash component of wage packages, excluding stock or options awarded or other perks.

Following this first phase, the companies were asked for explanation and confirmation. Additional information was requested in form of a questionnaire which has been answered by most of the companies. On the whole, the willingness to participate in the study again was very high. Of the 30 DAX firms, 28 reacted to the survey. Volkswagen and BASF stated only that the figures were wrong,  without correcting them. Tire maker Continental and medical services company Fresenius Medical Care didn't respond at all. But all in all we noticed that transparency and quality of the answers have clearly increased.

Very good information were received by Deutsche Börse, Commerzbank, Bayer, Linde, Schering and Siemens. Except for Deutsche Börse, last year not included in the Dax 30, these companies had also been highly transparent at last years’ remu-neration survey. Altana and ThyssenKrupp are real 'climbers’: at DSW’s last remuneration survey in 2002 they both gave unsatisfying information. This year, both Altana and ThyssenKrupp disclosed the individual remuneration of its directors.

The results of the DSW survey show that German executives are moderately paid by international standards. In France, the average salary of a management board member in the CAC 40 is about Euro  1 million. The average salary of the CEOs is about twice as high. In the Netherlands, executive pay is likewise about Euro 1 million on average. Spanish mamagement board members have to manage with less money: they receive an average of Euro 450.000 per director in the companies included in the IBEX-35 index. Among the 8 largest spanish companies the average remuneration amounts to Euro 2.8 million.

In Germany, the executives of 30 Dax companies earned an average of Euro 1.25 million in the financial year 2002. In 2001, they only received about Euro 1.16 million. And the pay range is very wide. The top payer hands roughly Euro 3.4  million more to each of its top executives than number thirty on our list. The CEO or speaker of the management board receives on average 1.75 times the amount of his colleagues. But here again the range is wide. While the CEOs of Schering and MAN receive 1.35 and 1.4 times, respectively, the money their ordinary colleagues receive, the spokesman of Deutsche Bank, Dr Josef Ackermann, gets 2.1 times the amount. The CEO of Deutsche Börse even receives 2.35 times the amount his ordinary management board members receive.

The executives of DaimlerChrysler received by far the highest income. The German carmaker led the Dax Index by paying its board members an average of Euro 3.7 million each in 2002. Compared to 2001 this means an increase of 131 percent. Deutsche Bank was the second-best payer, handing Euro 2.1 million on average to each of its top executives. This represents a reduction of roughly 30 percent. As in 2001, the executives of Infineon  brought up the rear in 2002. They received an average of Euro 280,000. Apparently, the crew around CEO Ulrich Schumacher rigidly tries to go against this development. There was a stock option program resolved in 2001 which guarantees benefits to the top executives if the share price inceases by only 0.7 percent per year.

The absolute amount top executives receive is just one thing. It is also important that the remuneration reflects the respective management performance. A payment for failure is not acceptable. To prevent this it is necessary to pay a performance-related bonus beside the fixed salary. Our survey showed that the bonuses paid to the Dax 30 top executives are linked to many different parameters: dividend or earnings, dividend and earnings or as benchmark the performance of the company in comparison to the line of business or the development of the company’s internal EVA (= Eco-nomic Value Added).

However, from DSW’s point of view, the dividend is not necessarily the ideal criterion for the success of the management. DSW is therefore – in case of the variable remu-neration - in favour of a strong link to the earnings of the company. This is increas-ingly realised by the companies. Only Bayer, Linde, RWE and TUI still link the bonus payment to the dividend. But as the example of BASF shows, the variable component does not necessarily guarantee a parallel development of pay and earnings. The chemical company raised  executives' salaries by an average of 41% in 2002, a year in which earnings per share slipped by 73%. But E.ON shows that the other way round is also possible. The company increased both its earnings and the pay for its top executives by about 11 percent. Regarding this, even the enormous increase in pay at DaimlerChrysler is relative, after all, the earnings of the company increased by more than 350 percent.

Altogether, 7 companies show increasing salaries although the earnings per share declined. Four companies paid less to their top executives despite increasing earnings. 19 stock corporations had a parallel development of pay and earnings per share.

The discussion on directors’ pay will keep us busy for quite a while. A number of things have been achieved since our last survey in 2002. But by international standards Germany still is second-rate. More transparency would also give advantages to the managers. Transparency leads to credibility and confidence. It would bring more objectivity into a discussion that seemed very populist and heated up. Therefore, the changes in the German Corporate Governance Code are a step onto the right path. Now, companies that refuse to disclose the individualised remuneration have to explain why they do not comply with the recommendation of the Code. Due to the fact that this recommendation is an unknown territory in Germany, resistance is persistent. But what a lot of people in Germany regard as an unreasonable demand is already an internationally accepted standard in the US, the UK or France. In the Netherlands a respective law will become effective in February 2004.

German companies will not get around adopting international standards. And we still have the chance to regulate it via the German Corporate Governance Code. In the land of regulations and laws this would be a great achievement. But until now, the changes in the Code do not show the expected transparency.  And for the year to come we are not more optimistic. About one third of the Dax 30 companies will probably disclose the pay of their executives individually. This is not enough. The stock corporations should be aware that there will be a legislatory solution (German or EU-wide) unless they comply with the recommendations of the code on a wide base.

Beside the topic directors’ pay, information on pension payments to the top executives in Germany still remains to be seen. Although individualised disclosure is common international practice, in Germany only the total amount is disclosed. There is no information about who gets how much money. Not to mention that re-appointed managers receive considerable amounts of money by pension plans. After one election period they are usually entitled to 30 percent of their fixed remuneration. This sum increases to up to 60 percent of their fixed income over the years.

„Transparency of pension entitlements“ will be the next important topic for German top executives to come up.

Here you can download the tables of the DSW survey: