Remuneration system for the board of management and consent of the supervisory board

The vote on the remuneration system by the annual general meeting has been introduced in Germany in 2019 by the German Act Implementing the Second Shareholder Rights Directive (ARUG II; Aktionärsrechterichtlinien-Umsetzungsgesetz II). Such resolutions are known as 'say on pay' in the Anglo-American legal system. In this way, shareholders are able to express their approval or their rejection regarding the remuneration and the remuneration system for the board of management, which is determined by the supervisory board. 

The resolution on the remuneration system has to be adopted whenever a significant change in the system occurs, in any case no later than four years after the last resolution has been adopted. The resolution approves the remuneration system for the future whereas the annual approval of the remuneration report refers to the actual remuneration received in the last financial year. 

From the date of convening the annual general meeting and after the annual general meeting took place, the remuneration system has to be published on the website of the listed company (Section 124a AktG). In case of changes to the remuneration system, the prior remuneration system has to remain available on the company's website for a period of ten years as well (Section 120a subsection (2) AktG). 

In order to counteract the increasing administrative burden on companies, the Fourth German Bureaucracy Reduction Act (Viertes Bürokratieentlastungsgesetz) has introduced extensive simplifications regarding the requirements of disclosure. Now, companies are entitled to make their documents relating to the resolutions available on their website and are no longer obliged to lay out the documents physically or to publish them in the Federal Gazette (Bundesanzeiger). Nevertheless, it may be advisable to include the remuneration system in the invitation to the annual general meeting or to attach it as an appendix to it in order to avoid misunderstandings regarding the content of the remuneration system and for purposes of evidence. 

Pursuant to Section 120a subsection (1) sentence 2 AktG, the resolution of the annual general meeting does not constitute any rights or obligations. It's more a consultative resolution by the annual general meeting having a recommendatory effect. In case of rejection of the remuneration system, the supervisory board must provide a revised remuneration system in the following annual general meeting. However, this does not mean that the remuneration system must be adjusted in line with the demands of the shareholders. The German legislature intentionally did not assign any authority for making legally binding decisions to the annual general meeting but wanted to maintain the division of powers between the organs according to stock corporation law. However, this has to be distinguished from the self-commitment of the supervisory board pursuant to Section 87a AktG. The supervisory board must adhere to the presented remuneration system without regard to the outcome of the resolution passed by the annual general meeting. 

Nevertheless, the possibility to refuse to grant discharge (Section 120 AktG) and to dismiss members of the supervisory board (Section 103 AktG) may be utilized as a strategic lever for the annual general meeting especially in case that the supervisory board does not provide a new remuneration system after rejection of the prior one by the annual general meeting. Hence, the resolutions on the remuneration system and the remuneration report represent a kind of early warning system for the management of the stock corporation, which may consequently undertake adjustments to its corporate policy. A disapproval of the remuneration system would actually have a significant impact on the work of the supervisory board due to the aforementioned possible consequences. Even the public reputation and the share price of the company could suffer from disapproval as the shareholders may be deterred from investments in the company.

The resolutions on remuneration cannot be challenged on grounds (Anfechtungsklage) (Section 120a subsection (1) sentence 3 AktG) as the resolutions don't have any legally binding effect according to the German law. This includes both challenges on grounds (Anfechtungsklagen) and actions for annulment (Nichtigkeitsklage). There is no need for legal protection, as the resolutions anyway cannot have any legal effect. 

Listed companies are required to ensure that the remuneration of their board of management is sustainable (Section 87 subsection (1) sentence 2 AktG). The meaning of the term 'sustainability' has become more specific in recent years and includes now, in particular, the consideration of environmental aspects, social issues and good corporate governance (ESG for short). 

Such aspects are usually reflected in the short-term and the long-term incentive of the board of management (STI & LTI). The supervisory board is free to determine the exact weighting and forming of the remuneration system within the context of its discretionary powers. However, it should ensure that remuneration is in line with the (sustainable) corporate strategy that has been adopted and communicated externally in the management report. In addition, large companies will be obliged in future (after the implementation of CSRD in Germany) to explain and disclose their remuneration system in their sustainability report (management report).

The EU Supply Chain Due Diligence Directive (CSDDD) initially provided for specific obligations. However, such obligations have been rejected as part of the so-called Omnibus Packages. 

Remuneration systems for the members of the board of management are topics of practical relevance. It is not uncommon that the remuneration of the board of management sparks social discussions, even during annual general meetings. In addition, international proxy advisors also increasingly influence relevant resolutions of annual general meetings, which makes careful preparation of the remuneration system in accordance with legal requirements necessary. Rejection of the remuneration system does not necessarily mean that the remuneration structure is flawed or even unlawful. A negative vote may instead simply be a warning for the management due to poor results.​​