Worker representation on boards: lessons from the German model -
London, 21 March 2012:
The Friedrich-Ebert-Stiftung and the High Pay Centre organised a seminar on “Worker representation on boards: lessons from the German model”. The guest speaker was Sebastian Sick, who is an expert on the German model and is responsible for company and labour law at the Hans-Boeckler Foundation.
Since 2009, employees and trade unions have had a key role in setting the pay of their bosses in Germany. While the German two-tier board system came in for heavy criticism in the run-up to the financial crisis, it has been strengthened since then.
The supervisory board which consists of elected employee, trade union and shareholder representatives has been given the mandate to determine executive pay. Before new rules were passed in 2009, pay decisions were delegated to a separate remuneration committee. That committee still does the preparation for the decision-making, but the pay levels must be set by the board itself. The new rules were the outcome of a government review that looked into the operation of the supervisory board. According to Sebastian Sick the inquiry found that the involvement of employees on the supervisory board: “had a positive impact on motivation and important social effects, contributing to social harmony and productivity.”
The 2009 legislation was aimed at breaking up the “closed shop” system of remuneration committees and opening up pay to a wider debate on the supervisory board. The board must decide the appropriate level of executive pay, although the chairman who is elected by the shareholders, has a casting vote. This means the supervisory board must look at comparisons with pay levels in other companies as well as the ratio of top pay to the workforce at that particular company and incentives that encourage long-term decision-making by the executives. A provision for clawback of bonuses must be included in case the management board gets its decisions wrong. The supervisory board must also set the maximum amount of variable pay that can be awarded to the executive in any year. This can lead to some controversial discussions and many boards have set very high maximum levels – such as Euros20 million that are unlikely to be reached.
The new rules have so far not led to any reduction in executive pay which has risen swiftly in Germany in recent years as in other countries. However, it has not yet reached the heights of pay in the UK and US. According to Mr Sick, chief executive pay at Germany’s top 30 companies has risen from 14 times average wages in 1987 to 90 times while in the UK it has increased to 145 times average salary.