Bonus payments are common in boardrooms, whether as a share in cash options or in the form of stock shares. Companies set out in written contracts how top managers are remunerated. Clear targets are agreed for the financial year, which are subject to labor law controls. Especially in Germany these agreements must be formulated clearly and transparently.
The German system mainly relies on so-called cap bonuses: These are capped bonus payments. The more goals the manager achieves, the more money there is. If he achieves all of his goals, a maximum payout amount is set in advance. In this way, companies prevent managers from being entitled to unreasonably high variable remuneration amounts with the help of a so-called “low-stack tactic” in the target agreement. According to the German Stock Corporation Act, there is also an adequacy requirement for the members of the Management Board.
This angers many managers, especially the top performers. If a manager achieves his goal, no more work is worthwhile with a cap bonus. This also disturbed the finance manager Alexander D. (name changed by the editor), who was regularly able to exceed the goals set for his company.
In Germany, the manager received an annual bonus of one to two years’ salary for this. Too little for D. – the US subsidiary of his company also recognized this and lured him with an uncapped bonus: if D. overshoots his goals, he can receive unlimited bonuses, so the promise. “I agreed. It was important to me that good performance is paid fairly,” says the manager.
Bonus payments in the USA have multiplied
In the USA Such bonus payments are the order of the day, as the country follows a different performance approach. As quickly as a top manager there can fall financially, things often go up in the land of a thousand opportunities. On Wall Street alone, bonus payments have multiplied from 1.9 billion euros in 1985 to more than 42 billion euros in 2021.
The reason why US companies are able to pay out such immense bonuses is not only due to the company’s sales growth, but often because the payments are not handled by a subsidiary like in Germany, but by a bonus pool. It is often the companies that manage or pay out the bonuses – based in the Channel Islands or the Bahamas.
For manager Alexander D., the newly won “uncapped” bonus model was motivation to give everything for the job. For several years he worked beyond his targets – and hoped for a bonus in the seven-digit range. But in conversation with the board of directors, the manager had to swallow. The company announced a mid-six-figure bonus for its time. A discussion ensued. D. demanded that the bonus criteria be disclosed. The company denied the claim. D. then decided to sue for information – and is now in court against the company.
Increased complaints about missed bonus payments: “High promises not kept”
Many managers in Germany who are employed by US companies are currently like him. After the record high in bonus payments in 2021, variable remuneration fell again in 2022, which is related to the current volatile economic situation. On Wall Street alone, 10 billion US dollars less were paid out than in the previous year.
This trend can also be observed in Germany, as a study by i-potentials shows. “Managers were lured with high promises that are now not being kept. I’ve also experienced that with my colleagues,” says manager Alexander D. However, many of his colleagues do not dare to take legal action against their company. “Continuing to work in the same house during the process is mentally very stressful,” said the manager.
The lawsuit was at least worth it for him. The court recently awarded the manager double the bonus already paid. However, the company can still appeal, which is why D. wishes to remain anonymous.
A law firm for top managers on Kurfürstendamm in Berlin shows that he is not an isolated case. Managing Director Christoph Abeln is currently observing an increasing number of such cases with his clients from American companies. “The crisis is carried out on the backs of managers,” he says. But he sees the right here on the part of the employee. “We have clear rules for bonus payments,” says the lawyer. Bonus payments would not be subject to free, but to equitable discretion. This means that the company must take the interests of the employees into account in an appropriate manner and justify in law why the bonus is paid out and at what amount. “This also results in a claim that the bonus will be adjusted if it does not correspond to the agreement after the service has been provided,” says Abeln.
However, there are special regulations for banks. A clawback clause makes it possible, for example, that bonuses paid out have to be repaid under certain conditions that were not sustainable from the Bafin’s point of view. This allows bonuses from top managers to be temporarily parked.
Risky phantom shares
As a rule, companies have to pay back if they do not want to hand out their promised bonus payments. However, due to the crisis in recent months, companies have repeatedly tried to avoid payments. In the meantime, US companies have even found ways to achieve this goal. For example through phantom shares. These are agreements between companies and employees through which an employee receives an indirect, often virtual share in the success of the company as a bonus. When a GmbH is sold, for example, employees receive a share of the proceeds via the phantom shares allocated to them. This profit sharing is then paid out as a bonus.
The advantage of such bonuses is that they attract particularly motivated employees. Shareholders can often reserve up to 10 percent of the company shares for phantom shares. That’s huge compared to other holdings. Normally, an employee can count on a participation of 0.25 to 0.75 percent, very good performers with up to 2.5 percent. Phantom shares have therefore become a popular method, especially in tech companies, and German managers at US companies, such as Microsoft, Amazon or blinded in the pharmaceutical industry. “They let sand be thrown in their eyes because they first see a lot of money,” says lawyer Abeln.
Since the regulations for such phantom shares are still relatively new, there are many loopholes: the bonuses can be forfeited in the event of termination or set to “bad leaver” if the company was not satisfied with the performance – even if the desired performance has been rendered. “We currently have many cases of German managers in US pharmaceutical companies who have not received their shares,” says Abeln. Many of them waited for their bonuses for years – and then got fired. “That’s how two million euros in phantom shares are lost,” says Abeln.
“Sleight of Hand”
In order to reconcile this practice with German labor law, the companies would often use a matrix structure: Managers are based in Germany and employed by a German subsidiary in a US company, but have customers all over the world and global tasks. “The American companies came up with a very clever idea of not having to pay out the phantom shares if they find a reason for termination after the manager’s performance,” says Abeln. “In return, the companies are canceling the work activities in Germany, which is a reason for termination for operational reasons, no matter how good the manager was,” says the labor law expert.
The tasks of the manager are not eliminated, but are only pushed to another country. “A classic sleight of hand,” says Abeln Creativity required under employment law.”
The German labor courts are therefore currently discussing how German employees can defend themselves against this. Many lawyers are of the opinion: If an employee is employed in a matrix structure and has tasks in several countries, then the company not only has to prove that the activities in Germany have ceased, but in the entire organization. “But there is still no supreme court ruling on this,” says Abeln.
Instead of being dazzled by promises of high bonuses, managers should try to reallocate the payments, i.e. to keep the cash bonuses as high as possible and to keep the proportion of phantom shares, which is relatively large in the USA, small. But not everyone has this room for negotiation. In the USA, the motto is often: take it or leave,” says Abeln.
IRA attracts with subsidies: Many German companies are relocating business to the USA
These problems and the legal procedures could accumulate. The reason: Many companies are currently moving from Germany to the USA. According to a survey by the German Chamber of Industry and Commerce, one in ten companies is already planning to relocate production: the US President’s government is promoting this with the “Inflation Reduction Act”. Joe Biden climate-friendly investments in the United States totaling $430 billion. This will also be of interest to German companies involved in the construction of electric cars, hydrogen production or metal recycling. The car manufacturer bmw for example, its Spartanburg plant in South Carolina is already expanding. competitor Audi is currently considering building a first US plant. And the solar cell manufacturer Meyer Burger also wants to move: “In the US, they roll out the red carpet for us,” according to the head of the company.
German managers should therefore increasingly deal with the bonus payments in the USA – and not be blinded. D. learned that too. “The performance concept is still good,” he says. “Only the system is not transparent and unfair. Something has to change here.”
With his case, D. also wants to encourage other managers to defend themselves against unfair payments. “No matter which bonus agreements and which guidelines: there is a difference between free and equitable discretion and thus protection by the German legislator,” says the manager. He believes that the bonus payment tricks will eventually fall on companies’ feet. “In the long term, this will cost companies a lot of talent if transparent and fair criteria are not applied to bonus payments.”