A government-appointed commission wants companies to set relative ceilings for managerial pay and disclose details of their salary structure. If implemented, the reform will bring more transparency. This should limit, but not eliminate, excesses.
The level of CEO compensation in Germany has reached a level that even the head of the national employers’ association finds disturbing. Now the German Corporate Governance Commission, a semi-official body consisting of high-level managers, academics, shareholder-rights activists and union representatives, has suggested setting a limit to executive pay – but its recommendations aren’t going far enough.
The commission wants to add a cap on managerial pay to its corporate governance codex. If the proposal is implemented, listed companies will be asked to set limits on top-executives’ remuneration. They would also have to publish a standardised breakup of the individual’s pay components including a calculation outlining the highest potential level of remuneration.
The appropriate level of pay is not discussed in the rules, and this will still be at the discretion of individual boards. But the new rules aim to make managerial pay more transparent and predictable. Currently, opaque salary schemes often mask the full pay package. Variable components may overshoot, puzzling investors. The new rules also try to make pay more comparable across firms.
But the amendments will not be legally binding for companies. The German corporate governance codex is merely a set of recommendations. Listed companies are free to ignore them, provided they explain why they do so.
Seen from that perspective, the reform proposals fall short of the real measures needed to curb excess. Moreover, even if the new rules were mandatory, they wouldn’t necessarily have a powerful impact. Transparency is no means in itself. U.S. managers, for instance, earn significantly more than their German peers despite the fact that American companies are already compelled by the SEC to publish a standardised and detailed breakdown of their top executives’ salaries.
Furthermore, there’s the risk that more transparency might even drive up remuneration. Every manager taking home a paycheck smaller than his peers will try to change that situation. Policymakers are faced with a difficult choice: Either they keep turning a blind eye to the lavish salaries that their voters deem excessive – or they introduce serious, binding limits.
This article was initially published as a Reuters Breakingviews comment on 7 February 2013.