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Case Study | From many to one: harmonisation of company-wide remuneration structures
Everyone doing their own thing on remuneration: that was the situation facing our client, a listed company in a regulated sector, when they sought our advice. The business had grown internationally via a number of acquisitions, but without aligning the widely disparate remuneration systems.
Remuneration as a business fairness issue
The resulting patchwork of remuneration regimes led to considerable organisational challenges for HR. It also proved to be a source of unease among employees, who found the different remuneration criteria difficult to understand. This led to growing dissatisfaction that threatened to undermine the organisation’s long-term human resources policy.
Starting point: thorough market analysis
Although it was recognised that remuneration needed to be reformed, the works council had major reservations. It was concerned that remuneration would in effect be cut and it wanted to preserve employees’ existing rights. To put the discussion on an objective footing from the start, we carried out comprehensive market analysis (among other work) prior to dealing with the legal aspects. This research was based on the following questions: What is the average remuneration in the relevant sector? Which remuneration components and remuneration instruments are customary in the sector? What are the longer-term forecasts for remuneration in the sector? By taking this objective look at the market situation, we were able to steer the works council away from a range of unrealistic ideas ahead of the actual negotiations. We benefited here from our broad market knowledge, gained through a large number of remuneration projects, and from our close links to leading remuneration consultancies.
Long-term remuneration models: key contributors to a sustainable business
Market analysis was followed by long-term structuring. Remuneration models often suffer from short-termism, which is problematic because remuneration is a key element in corporate fairness and of central importance for employee retention. Variable remuneration in particular, with its many structuring options – such as short-term and long-term incentives (especially stock option programmes, virtual share programmes and carry agreements) – helps to strengthen employee commitment to the company’s success and in turn boosts loyalty.
Working closely with our client, we concluded that in addition to fixed remuneration and annual bonuses, the most appropriate option seemed to be a long-term virtual share programme, given the company’s objectives and its peers in the market. Our client chose to embrace an innovative approach here. To incentivise staff, it decided to allow a broad range of employees to participate in the virtual share programme, rather than just senior managers.
The fact that the virtual share programme provides employees with a substantial financial opportunity ultimately also won over the works council. In return, skilful negotiation on our part persuaded the works council to accept a significant tightening of the previously very “loose” conditions for annual bonuses, as well as the introduction of a bonus pool to be determined annually by the company. Our client can now respond to economically challenging times by reducing the bonus pool and setting tougher targets, thereby avoiding uncomfortably high payouts.
Careful legal structuring is key
Even the best plan is useless without sound legal structuring. Case law on remuneration shows that the courts are extremely strict. The slightest lack of precision in how the scheme is implemented can quickly lead to the employer being defeated, with significant economic consequences. That applies not only to employment contracts, but also to workplace agreements, which are typically subjected to close scrutiny. In addition, this area of law is currently undergoing extreme change: flexibility instruments such as malus clauses, clawback clauses, qualifying-date arrangements, vesting provisions, good leaver/bad leaver clauses and bonus pools are all generating controversy both nationally and internationally. Thanks to our close involvement in the latest discussions around remuneration law, our long-standing partnership with leading remuneration advisors and our work on major projects, we have the advantage of being highly attuned to emerging developments. Accordingly, we were able to present our client with the very latest structuring options in the above-mentioned project. International aspects were covered in conjunction with our colleagues from the worldwide CMS organisation.
Regulation in the mix
Our client faced the additional challenge of operating in a regulated sector. It was therefore necessary to tailor remuneration to meet strict regulatory requirements; existing remuneration policies also had to be adjusted. Together with members of our remuneration team who are experts in regulatory matters, we guided our client safely through the pitfalls. Our experts also provided support around the discussions with the Federal Financial Supervisory Authority (BaFin). These team members benefit from also being in constant contact with the authority’s staff in connection with projects outside of employment law.
Transparent information
Following negotiations with the works council, extensive consultation with BaFin and drafting of the relevant documents, the crucial question was how employees would react to the new remuneration scheme. Since some of the employees’ existing contracts did not allow amendment by way of a workplace agreement, supplementary agreements needed to be added to employment contracts to safeguard implementation of the remuneration system. We helped to stage information events that provided a high level of transparency and proved hugely successful, with all employees signing the proposed supplementary contracts.
New remuneration packages also for the management board
Lastly, our client wanted to reform board member remuneration and make it part of the new system, rather than restricting the scheme to employees. In this context, it was particularly important to our client’s supervisory board to implement the recommendations of the new Corporate Governance Code (including clawback clauses, deferrals and remuneration caps). The new requirements imposed by the Act Implementing the Second Shareholder Rights Directive (Gesetz zur Umsetzung der zweiten Aktionärsrechterichtlinie, ARUG II) also had to be taken into account. This involved working closely with our experts in stock corporation law; we regularly pool our knowledge to advise companies on board matters. We also drafted the remuneration report, assisted by our stock corporation lawyers. Its approval by the annual general meeting meant that the remuneration system we advised on was also accepted by the shareholders.
Delivering one-stop advice on remuneration
It was an ambitious instruction. The objective was not just to restructure individual aspects of remuneration for specific groups of employees, but to restructure the entire remuneration system for employees and board members alike and to apply modern remuneration criteria. Alongside individual and collective employment law issues, this also involved dealing with stock corporation law, regulation and tax law. Our ability to provide one-stop advice on major projects of this type is down to an established remuneration team that includes experts on employment law, regulatory law, stock corporation law and tax law. This holistic approach enabled us to bring the above project to a successful conclusion for our client in a timely and efficient manner. Our client now has a sustainable, modern and competitive remuneration system in place, making it well positioned to face the future.
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