The level and structure of executive pay took up a lot of time during the 2024 annual general meeting season. The topic has become increasingly important for investors in recent years, especially since shareholder rights to have a say have been expanded by law. Listed companies are now required to put their remuneration report to the vote every year at the AGM – something which has long since been an accepted practice internationally. In Germany, a vote on the actual structure of the remuneration system must also be on the agenda at least every four years. The Say on Pay is not binding, but clearly calls on the supervisory board to act if investors pull out the yellow or red card.

In the 2024 AGM season, the results of votes on remuneration issues are a mixed picture. For the remuneration report, the average yes vote for the DAX 40 rose once again, to 90.24%, according to investors association DSW. Vonovia received the lowest vote, with 58.31%. Adidas also received a clear message from shareholders, with 58.92%.

Approval of the remuneration system fell on average to a level of 87.10%, down from 94.83% in 2023. With this vote, 14 companies entered the ring in the current cycle – in 2023, there were eleven. The real estate group Vonovia came last here, too, falling short of a majority with only 40.41% yes votes. MTU barely got through with a paltry 56.51%. Adidas is doing significantly better in the vote on the system, with 94.8%, than in the vote on the compensation report.

From the point of view of compensation consultants, the opinion shaping on the part of investors is constantly changing. „You can see that investors are becoming more critical when voting on the compensation systems,“ warns Ralph Lange, Senior Director Executive Compensation at management consultancy WTW.

Anyone who wants to achieve „good voting results“ must deal with the expectations of investors, and voting rights advisors, regarding the remuneration systems. And transparency is critical. „The compensation reports must be revised if they are not comprehensible to external parties,“ says Lange. During the most recent AGM season, it was noted that some companies had revised their reports without changing anything in the system. This alone managed to achieved significantly better voting results.

The consultant recommends that companies maintain regular communication with key investors on the topic. Only then can they ensure that investors understood adjustments to the remuneration system. At the same time, dialogue is needed to discuss investor concerns individually. Because, on some points, criticism from voting rights consultants is not consistent.

Investors have pointed out trouble spots in recent years, and are moving resolutely when it comes to votes, says Lange. Most companies have responded to this „so that on average the voting results are not that bad, even if they go down in some cases,“ he says. There are also companies „that consciously take a contrary position and accept declining voting results“.

Investors value predictability and understandable rules for executive board salaries. There was also criticism of inaccurate deviation clauses in the 2024 AGM season. These provisions allow the Supervisory Board to deviate from the remuneration system in certain exceptional situations. This can affect the remuneration as a whole, or individual components. „Companies can, if necessary, use other key figures or redefine the target curves for compensation,“ explains Lange.

Investors do not fundamentally reject adjustments, but they do demand specific information about the situations in which these clauses can apply. Many companies do not provide this transparency. „In a few cases it is stated precisely in which specific situations the supervisory board can deviate from the remuneration system and which remuneration components can be intervened in, and how,“ says the consultant.

Many companies would like to define the framework for deviation clauses very broadly, and Lange has some understanding for this. After all, it is difficult to predict which unusual situations could arise that lead to undesirable effects over which the board of directors has little influence. For example, "who would have expected a pandemic or a war in Ukraine?“

The setting of the goals as long-term incentives has been a frequent point of criticism. German companies generally use a symmetrical curve for relative stock performance (total shareholder return). „If the performance is on par with the comparable companies, there is a payout for 100% target achievement,“ says Lange. In countries like Great Britain, however, payments are only made when the median is reached. „So you have to perform above the market to get an LTI payout.“

Some companies have now responded to the criticism and are a little more demanding in determining the TSR curve. Lange believes that the symmetrical curve is definitely justified. „Anyone who only receives their target compensation if the stock return is better than the market has the incentive to take on greater risk,“ he points out.

The voting rights advisor ISS raised a relatively new point of criticism in 2024. It complained that the compensation systems only provided limited information about the amount of the basic salary. According to their critical assessment, the fixed salary is only partially understandable. „Our guess is that it’s about the process of compensation adjustment,“ says Lange. ISS wants to know within what time frame adjustments can be made and how the process works. From Lange's point of view, the background to the criticism could be that executive compensation in other countries is „disclosed in a much more forward-looking manner“.

For example, in the current year's remuneration report, companies abroad have already provided information about adjustments to fixed salaries in the management team in the coming cycle. In Germany, however, the remuneration report is backward-looking.

The issue of pensions is a constant source of criticism in Germany. „Historically, there are relatively high pension commitments. This raises concerns among investors and voting rights advisors,“ says Lange. But companies are reacting, and there is an inevitable trend towards a utility fee. „In the model, the board members receive an annual payment and thus provide for their own retirement,“ explains Lange. „The companies no longer have any risks from pension provision, and no subsequent payments to board members.“

Companies are also paying greater attention to concretising ESG goals in executive board compensation. Investors have complained in the past that the environmental and sustainability goals set are often not sufficiently ambitious. The trend is now to set ESG criteria as independent goals, and to weigh them separately. Meanwhile, 75% of DAX companies also included ESG criteria in their long-term incentives.