Top management compensation has been a constant topic of public debate in recent years – in Germany, in Switzerland, and in all leading industrial nations. The issue stirs up strong opinions, but the discussion is rarely grounded in facts. A new study by hkp/// group entitled "Executive compensation in DAX companies 2006-2016: Facts and misconceptions" aims to bring objectivity to the debate. hkp/// group experts and authors of the study Regine Siepmann and Nina Grochowitzki talk about the background to the study and its key findings.
The busy period for annual general meetings is over, so in a sense the heat is off. Why publish a study now on executive compensation at DAX companies?
Regine Siepmann: Normally we analyze the previous year's compensation levels in the spring of each year. In this new study, however, we look at the whole period since the German Management Compensation Disclosure Act (VorstOG) came into force. We give deep insight into how executive compensation has developed over the last 11 years. That is quite new in terms of presentation and the quality of the data.
Nina Grochowitzki: We are also aware that our analysis is being published during campaigning for the upcoming federal elections, where the topic of managers' pay is frequently high on the agenda. The results arrived at by the team will help people separate myths from the truth, and we hope to make an important contribution to fostering an objective debate.
Do you really think that they will listen? People have very fixed opinions about managers' pay in Germany.
Nina Grochowitzki: That is exactly the problem we are trying to combat. We chose the date when VorstOG came into force as the starting date for our analysis. Since VorstOG and the subsequent legislation, and with the requirements of the German Corporate Governance Code, Germany has actually been a role model for transparency internationally when it comes to executive pay. That can't be stressed enough. All the important information is available. We can't simply ignore it – we have to use it responsibly.
Regine Siepmann: For some time now we have been engaged in dialogue with relevant actors and multipliers, including politicians, industry associations, and so on. We have seen a change here, a movement away from rhetorical arguments based on what "feels right" toward more fact-based discussions. But when it comes to election campaigns, it is difficult for politicians not to simply go along with popular opinion, but instead to actively challenge widespread misconceptions.
The new analysis sets out to refute these misconceptions. What finding surprised you the most?
Nina Grochowitzki: The No. 1 misconception is the belief that executive pay has increased massively in recent years. In fact, the data shows only a moderate increase in executive pay at DAX companies since 2006. For example, CEOs at DAX companies have seen a 2.4% pay rise each year, on average. In other words, the idea that executive pay has grown exorbitantly is wrong.
Regine Siepmann: Gross salaries and wages for employees grew by about the same rate during the period – 2.3% each year, according to the German Statistical Office. Of course, executive pay grew from a much a higher starting point than for the other 40+ million employees in Germany. But we're talking about the top 30 jobs in German business, and even their pay levels grew only moderately during the period in question. Plus there is no reason to think that this will change radically in the future.
But their compensation levels are sometimes ten million or more… these are headline-grabbing figures!
Regine Siepmann: Yes, there are exceptions that grab the headlines. But they are just that: exceptions, not the average levels. Those figures are frequently brought up and used as ammunition against everyone, but in fact most CEOs earn a lot less. Again, the facts provide clarity: The large majority of companies paid their CEOs direct compensation of less than EUR 6 million per year during the period that we looked at.
Which is also an extraordinarily large sum…
Nina Grochowitzki: Yes. But remember, we are talking about the few, very top jobs in German business, jobs with extremely tough requirements that only a limited number of the best candidates can handle. Jobs with responsibility for tens or even hundreds of thousands of jobs, where you are constantly under pressure to make decisions, where you have to almost completely sacrifice your personal life. That is a price that not everyone is willing to pay, or is in a position to pay. Working lower in the management ranks means a much more comfortable lifestyle.
Your study also looks at manager-to-worker pay ratios. In other words, the relationship between CEO pay and the average pay of employees within a company. Is that a valid indicator?
Regine Siepmann: The pay ratio is good for analyzing developments within a company over a period of several years. Where it doesn't work so well is if you try to use it to compare different companies or take it as an absolute ratio. Companies are all different – not just those in the DAX index, but also the many thousands of companies that are not in the DAX. Trying to set an absolute pay ratio – 20 to 1, say, or 50 to 1 – is pointless.
It's comparing apples with pears?
Regine Siepmann: Exactly. The manager-to-worker pay ratio is also very volatile, precisely because executive pay depends on various success factors, and those factors change each year.
Nina Grochowitzki: It is also not the case that the pay gap between executive and rank-and-file employees is generally growing. Sometimes it grows, and then it shrinks again. Employee compensation is largely non-variable and so highly stable over time, while executive pay varies substantially from year to year.
Regine Siepmann: So, in good years the manager-to-worker pay ratio gets bigger, and in bad years it gets smaller. That's simply the way it works.
What conclusions does your study reach?
Regine Siepmann: According to the experts, the situation is Germany is far from dramatic. Many of the misconceptions that crop up time and again in election campaigns – presented as absolute truth – simply do not stand up to the facts.
Nina Grochowitzki: Naturally, executive compensation in Germany still has room for improvement. No one would question that. And criticism must be allowed. But that criticism should be measured and based in facts – which the misconceptions that are bandied about are not.
Mrs Siepmann, Mrs Grochowitzki, thank you very much for this interview!
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