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Germany overtakes UK in corporate executive pay stakes

Krisztian Bocsi | Bloomberg | Getty Images

Germany has overtaken the UK as the home of Europe's top-paid corporate executives in a shift that partly reflects public and investor pressure on remuneration at British listed companies.

A study of pay policy at more than 500 listed groups in five EU countries found that increased use of long-term pay incentives helped executives at big non-financial companies in Germany earn more than those in the UK.

At the same time, shareholder pressure and public scrutiny of UK-listed groups helped significantly constrain pay increases. While about two-thirds of companies in Germany increased executive pay in 2013, remuneration at two-thirds of UK companies was either flat or cut. The sample excluded financial institutions.

Xavier Baeten, a professor at the Vlerick business school in Belgium who led the research, said that UK executives had always been paid more compared with other European countries. While this remains true for companies with assets of €1 billion to €5 billion, the top spot for big groups has been taken by Germany, where median executive pay was €3.4 million, marginally higher than the UK.

"There has been a change. There is much more scrutiny in the UK from institutional investors. The UK is realising that it was perhaps paying too much," Prof Baeten said. "They have put a brake on top executive pay and that has not happened as much in some other European countries."

The shift comes even though some UK chief executives remain at the very top of the tree when it comes to pay. WPP chief Martin Sorrell made £29.8 million, according to the group's most recent annual report. Volkswagen chief executive Martin Winterkorn leads the German list with 15.0 million in pay and bonuses for 2013. US chief executives still outearn their counterparts in both countries.

Executive pay in Germany has increased substantially since the 1998 merger of Daimler and Chrysler exposed a wide gap between US and German pay levels.

Germany's executives have benefited as their companies have in general performed well since 2009 as China's rapid growth led to a surge in demand for German capital goods, chemicals and autos. Meanwhile UK-listed companies — from Burberry to AstraZeneca — have faced pressure from investors over pay policies.

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A 2009 German law that sought to make executive pay more closely tied to the long-term health of the business has also increased the importance of long-term variable pay elements, including those tied to the stock performance.

Prof Baeten said these changes paved the way for German executives to be granted more long-term incentives, which were increased without reducing the more typical, and already relatively generous, short-term bonuses. This could create, he added, a problematic imbalance.

There remain striking differences in pay practices between the EU countries. A far bigger share of total pay in Germany and the UK is variable remuneration — 61 and 67 per cent respectively — than France and Belgium, where two-thirds of executive pay is fixed.

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But across the Vlerick study's sample of Germany, the Netherlands, France, Belgium and the UK, the biggest determinant of pay was the size of company, with executives at larger companies enjoying higher pay, bigger bonuses and more generous pensions.

In 2013, groups with assets worth less than €1 billion endured a pay cut of about a fifth, while big companies with more than €5 billion assets saw a pay rise of 2 per cent.

The €17.5 million in salary, bonuses and long-term incentives awarded to Mr Winterkorn for his work 2011 triggered a debate in Germany on executive pay levels. Germany's corporate governance code now requires companies to set individual caps on executive pay, as well as for each compensation item. However, there is no federally mandated blanket pay cap.