Germany tightens rules on executive pay and liability

Jun 18, 2009, 17:24 GMT

   Berlin - Joining worldwide moves to crack down on excessive corporate pay, Germany's parliament voted Thursday to double the freeze period on executives' stock options.

In a key change, the German practice of taking out liability insurance so that executives do not have to pay for their mistakes will be modified.

In future, executives will have to pay up to 10 per cent of any court-awarded damages from their own pockets.

The legislation will also end the cosy system in which German chief executives retire and immediately join the supervisory boards of their companies. In future they must wait two years before returning as supervisor directors.

Business groups lobbied hard against the changes, with board chiefs of 15 top companies writing to Chancellor Angela Merkel asking her to stop the legislation, but government parties said change was needed.

The bill bans the practice of delegating chief-executive appointments to committees and requires the entire supervisory board to make the decision.

Last year, Germany set a cap of 500,000 euros (700,000 dollars) annual pay for chiefs of bailed-out companies.

But the bill, passed by the Bundestag but needing further steps to become law, sets no ceiling on executive pay at companies outside the state orbit, as demanded by some political groups. It merely requires pay to be 'appropriate.'

Where executives receive stock options as an incentive, they may not cash them in until they have waited four years, double the period currently in force.

The world economic crisis has been widely blamed on banking executives who received huge pay incentives to develop risky business models but were not liable when those schemes failed.