DSW’s survey on Directors’ Pay 2007

It is already tradition that DSW, Germany’s no. 1 shareholder association is taking a close look at the pay of the DAX 30 directors. It is new that DSW not only covers in this survey the cash remuneration of directors in 2006 including fix and variable components, but it cooperates with Professor Gunther Friedel from the Technical University of Munich in order to also include share-based remuneration into the survey.

Out of 30 DAX companies 29 for the first time individually disclosed their pay, as the new law ‘Vorstandsvergütungsoffenlegungsgesetz’ (law to individually disclose directors’ pay) introduced this general obligation to all publicly quoted companies. Unfortunately the law allows one exception to the rule, the so called ‘opting out’ of this disclosure, if a majority of 75 % of the votes present at the General Meeting votes for it. In the case of Merck KGaA the family as the majority owner voted for the opting out and is hereby the only DAX 30 company which refuses full transparency to the shareholders. As the survey shows the law clearly gives shareholders more insight into directors’ pay, but shows a lack in the standards of the reporting. It would be very helpful, if the law also indicates how the information should be disclosed.

A dark hole can also be found if we take a look at the pension schemes for management. An individual disclosure by law is only necessary, if the pension scheme differs considerably from retirement schemes used for the employees.
Besides the survey makes clear that it is worth to take a look at the stock option programmes and their outcome. While at the end of the nineties
stock options were often ‘under water’ and therefore worthless, the situation since 2003 changed dramatically. The ex-CEO of Daimler-Chrysler Jürgen Schrempp gives a good example: while the share price went down to 76 % during his active time, the profit Mr. Schrempp reached out of his stock options counts up to 50 million Euros by exercising the options after having left the company.

Methodology
DSW analysed the pay of all managers of the DAX 30 companies for 2006 and compared it to 2005. Besides the absolute figures for directors’ pay, DSW focused again on the development of the relation between the pay and the earnings per share in order to measure the company performance.
Only 2 out of 30 companies did not answer the questionnaire of DSW: these were Infineon and Merck, so we had to analyse ourselves the figures given in the Annual Reports.

Outcome of the survey
On average managers of DAX 30 companies earned a cash remuneration of 1.9 Mio Euro in 2006 compared to 1.7 Mio Euros in 2005. This is an increase of 7.7 %. If we take a look at the CEOs of the DAX 30 companies we see a comparable picture: they received on average 3.4 Mio Euro, 7.3 % more than in the previous year.
If we compare the pay of German directors with those in France or the U.K., the outcome is quite similar: while in France the directors of the CAC 40 companies receive on average 2.3 Mio Euro, U.K. managers of the FTSE 100 companies are paid less: on average 1.7 Mio Euro.

On the top position for Germany again we find the management of Deutsche Bank. In 2006 an ordinary director received a cheque about 3.7 Mio Euro. Compared to 2005 this is a decrease of 6.7 %. At the same time the bank could improve its earnings per share by roundabout 75 %.

No. 2 in the ranking is the management of Metro with 2.6 Mio Euro per director. This is 60 % more than in year before. This immense increase has its main reason in the variable part of the pay, which is linked to the EVA (Economic Value Added) which doubled from 2005 to 2006, while the earnings per share increased only by 7 %. No. 3 in the ranking is the pay of the management of Allianz with a plus of 30 % compared to the previous year, while the earnings per share showed a plus of 52 %. The highest reduction in pay suffered the management of DaimlerChrysler, who earned on average 1.58 Mio Euro compared to 2.98 Mio Euro in 2005, while the earnings per share increased at the same time by almost 13 %. A similar situation could be found at SAP: while the earnings per share increased by 26 %, the pay for the management decreased by 32 %.

Compared to the previous year it can be said, that the range of the pay was slightly reduced. In 2005 the best paid manager of the Deutsche Bank earned 3 Mio Euro more than the lowest paid one, an ordinary manager of Postbank. This time the spread between the best and lowest paid managers was only 2.8 Mio Euro. Altogether 6 out of 30 companies reduced their payments to the management. Thereof Deutsche Bank, SAP, RWE and DaimlerChrysler reduced them despite an increase in the earnings per share; while E.ON and TUI reduced them because of a decrease in the earnings per share. And we should also mention that the management of Deutsche Post, Deutsche Telekom and Infineon was pleased to receive a higher pay despite an overall reduced profit of the company.

It is even more interesting to take a look at the pay of the CEOs. No. 1 is as in the years before, Josef Ackermann, CEO of Deutsche Bank with a cash remuneration of 9.4 Mio Euro, which is an increase of 9 %. No. 2 in the ranking is Wolfgang Reitzle, CEO of Linde with 5.9. Mio Euro, these are 1.5 Mio Euro more than his peers on the management board received. No. 3 was with 4.5 Mio Euro Jürgen Zetsche, CEO of Daimler.

Share-based remuneration
Besides the cash remuneration another component of pay becomes more important: pay which is linked to the performance of the share. The variety of the programmes is enormously, it reaches from stock option programmes to the issuance of convertible bonds and pre-emptive rights to shares or virtual shares. In general the success of these programmes is based on a good share price performance.
Very often there is also a relative benchmark, e.g. the share performance of the peer group which has to be beaten. These programmes are not only very complicated, but also it is hard to measure their real value. There are 2 possibilities for the value measurement. The first one is the value of the shares at the time of the grant, which is called the ‘grant principle’. The second way is to determine the value at the time the managers are exercising their rights and thereby receive the pay, which is called the ‘pay out principle’. While the new law of 2005 requests the disclosure of the value at the time of the grant, the legislator unfortunately failed to further demand the indication of the amount of money which the managers receive when exercising these option rights. At least the DAX 30 companies followed the legislator by disclosing the amount of the share-based pay individually per manager at the time of the grant with one exception: Deutsche Telekom, which indicated the value at the day of the financial accounts on 31 of December 2006. Despite of this disclosure the explanation of the different value methods is still incomplete and even for an expert hard to find in the Annual Report.

Taking a close look at the figures makes clear: there are further weaknesses in the information to the shareholder. In a lot of Annual Reports you will find no or no detailed information on the payments to the management with respect to share based programmes. If we take the example of RWE, the utility company it becomes more obvious. Their CEO received in 2006 options at the value of 3 Mio Euro. At the same time he exercised share options of a programme from 2004, which led to a payment of 8.3 Mio Euro. A similar situation was met in the case of the former CEO of DaimlerChrysler Jürgen Schrempp, who received share options during his term of office, but exercised them after having left the company. Again no information could be found on these options in the Annual Report. Therefore in future the company should also include information on payments out of share-based programmes to former managers.

Also the quality of the information presented is in need of improvement. Very often the share-based components of pay are not included in the table of the overall pay of the managers, but only in the text or on other pages. This makes a comparison almost impossible. So there is a need for more standardised information. But let us now turn to the amount of the sharebased pay: The DAX 30 companies show a range of differences: On average the CEO or spokesman of the management board received share based components at a fair value of 1 Mio Euro. These are 23 % of the overall compensation excluding pensions. At the lead we will find the speaker of SAP with share options at a value of 5.6 Mio Euro. No. 2 is the CEO of Deutsche Bank with 3.8 Mio Euro of share options, followed by the CEO of RWE with 3 Mio Euro. On the other hand we also see 7 companies in the DAX 30 which do not grant any share-based payments.

If we take a closer look at the other 23 companies which grant share-based components, we can see a surprising tendency. These components increased by more than 35 % compared to 2005, which is beyond the average increase of the overall fixed pay. One reason for this development could be a higher degree of pay linked to success. And again there is a high need for more information with regard to pensions, transition and severance payments. Details on pension plans are in general poor. A real overlook on the costs of pension rights for the shareholders is hereby almost impossible.

The survey of DSW shows it clearly, there is still a lot of information to catch up on.