Executive Remuneration in the UK vs. Germany Essay

Introduction

One of the most serious crises of modern history, the 2008 financial crisis, pointed to several problems within the executive compensation system of companies. The gap between executive salaries and the rest of the workforce continued to widen dramatically, and the high proportion of variable rewards led executives to pursue short-term goals that could conflict with the organization’s long-term goals. Consequently, Germany enacted proper board compensation legislation, and Britain made significant changes to its Enterprise Bill and regulatory reform. This section will therefore focus on the aspects of executive remuneration and issues related to it.

Discussion

Arguably, the most important difference between the German and British executive remuneration systems is that in Germany, executive compensation must not exceed that of other companies of the same size and engaged in the same activity. In turn, in Britain, there is no legal requirement to compare remuneration to similar figures.¹ However, some guidelines exist according to which such a comparison can be made.

The two countries’ systems also differ in how the employee engagement criterion is implemented in their territories. Thus, there is a mandatory requirement for companies in Germany with more than 500 employees “to have employee representatives on the supervisory board when determining executive compensation”.² In the U.K., despite several proposals, there is still no mandatory requirement for employees to participate in determining the remuneration of their executives.

Another difference is the fact that compensation reporting for each individual is mandatory in Germany, while in Britain, it is advisory. This means that in Germany, companies must publish information about the remuneration of each of their employees in executive positions, while in Britain, such information is not mandatory.³ In practice, however, there are problems with implementing these measures in both countries, especially in pension contributions and stock options.

There are also essential differences in variable compensation related to the fulfillment of specific goals or objectives of the company. In the U.K., there are no laws governing the amount and structure of such compensation except in the financial sector. In Germany, there is also no law regulating this issue. However, there are several restrictions in calculating such compensation, justified by many years of evaluating such an indicator in the industry.⁴ These restrictions are necessary to limit the possibility of substantial deviations from the industry’s variable compensation standards. There are also more apparent constraints in the financial sector.

Conclusion

Thus, most of the processes in determining executive compensation in Germany are mandatory and statutory, while in Britain, they are advisory. Despite the current proposals for reforms to this system in Britain, there are still several practical problems associated with the growing pay gap between executives and other employees, which in Germany is partially mitigated by the existence of supervisory bodies that represent the interests of other employees in determining executive remuneration. The higher mandatory involvement of employees in such decisions and the need to act constantly within the existing norms of similar companies restrict German companies from assigning too-high rewards.

References

Hengeller M and May Slaughter, “Executive Remuneration in the UK and Germany” (2013) 6 Employment Law Newsletter 1. Web.

Footnotes

1. Hengeller M and May Slaughter, “Executive Remuneration in the UK and Germany” (2013) 6 Employment Law Newsletter 1.
2. Hengeller (n1) 15.
3. Hengeller (n1) 8.
4. Hengeller (n1) 9.