Executive Compensation

On January 1, 2019, the German Act on the Strengthening of Company Pensions (Betriebsrentenstärkungsgesetz) leading to an amendment of the German Company Pensions Act (Betriebsrentengesetz), including its provisions regarding deferred compensation (Entgeltumwandlung), entered fully into force.

Deferred Compensation

Under the German Company Pensions Act, each employee is generally entitled to request from the employer that a certain part of the employee’s gross salary (up to an amount equal to 4% of the social security contribution ceiling (Beitragsbemessungsgrenze), i.e., currently EUR 3,216 per year) is used as deferred compensation for company pension purposes.  According to the newly implemented changes, employers are now obliged to provide their employees with an employer-paid top-up to the employees’ contributions to the deferred compensation. 
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In late March 2019, the Hertz Corporation and Hertz Global Holdings, Inc. (collectively, “Hertz”), filed two complaints (the “Damages Proceedings”) against its former CEO, CFO, General Counsel and a group president seeking recovery of $70 million in incentive payments and $200 million in consequential damages resulting from Hertz’s 2015 decision to restate its financial statements and an ensuing SEC settlement against Hertz and federal class action lawsuit (which was dismissed).  At the same time, the defendants in those actions each filed separate complaints (which have been consolidated in the Delaware Chancery Court) demanding advancement of their legal fees in the Damages Proceedings (the “Advancement Proceedings”).  The litigation between Hertz and its former executives raises novel questions about whether executives have a legally cognizable duty to set the right “tone at the top” and the consequences if they fail to do so.  The litigation also raises important and interesting questions regarding clawbacks and indemnification.[1]    
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In the wake of the Securities and Exchange Commission’s proposed clawback rules under the Dodd-Frank Wall Street Protection and Consumer Reform Act of 2010, many US public companies began implementing clawback policies.[1]  Although the proposal was originally issued in 2015 and the SEC has yet to adopt final clawback rules, instances of alleged executive misconduct in recent years has begun leading to claims under the clawback policies.  Increased scrutiny from legislators, institutional investors, shareholders and the general public has put significant pressure on boards of directors and compensation committees to exercise their rights to claw back compensation in the event of a corporate scandal.[2]

This post discusses two recent developments related to the exercise of compensation clawbacks.  The first confirms that boards should have broad discretion in deciding when to exercise a clawback, and the second discusses important indemnification and advancement issues that can arise in connection with a claim for the enforcement of a clawback policy.
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On January 1, 2019, the “Act on Further Development of Part-Time Employment Law” (Gesetz zur Weiterentwicklung des Teilzeitrechts) entered into force in Germany.

The new legislation implements considerable changes to the German Part-Time and Fixed-Term Employment Act (Teilzeit- und Befristungsgesetz ) and introduces (i) an entitlement to work part-time on a temporary basis, coupled with (ii) an entitlement to return to full-time employment (so-called “Bridge Part-Time Work” (Brückenteilzeit)).
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The overarching goal of incentive compensation plan design is, of course, to incentivize management to focus on value creation for shareholders.  Recent developments concerning corporate “sustainability” suggest that compensation committees of public company boards of directors, as well as human resources executives, should consider the use of metrics developed to measure sustainability in incentive compensation plans.  By way of illustration, Chevron Corporation’s latest climate report, released last week, notes that it plans to set greenhouse gas emissions targets and said the goal would be added to the scorecard that determines incentive pay for executives and approximately 45,000 employees.
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The market reaction to reports of harassment and misconduct in the wake of the #MeToo movement has led to a re-evaluation of the materiality of these complaints from a due diligence perspective, both in the context of mergers and acquisitions (M&A) and securities offerings. Companies and lawyers therefore need to re-examine the due diligence process,

As 2019 begins, companies continue to face global uncertainty, marked by volatility in the capital markets and global instability. And while change is inevitable, what has been particularly challenging as we enter this new year is the frenzied pace of change, from societal expectations for how companies should operate, to new regulatory requirements, to the evolving global standards for conducting business.

As companies navigate how to adapt, they are being held to increasingly higher standards in executing a coherent, thoughtful and profitable long-term strategy in this ever-evolving landscape. This memorandum identifies the issues across a number of different areas on which boards of directors, together with management, should be most focused.

We invite you to review these topics by clicking on the links below.

For a PDF of the full memorandum, please click here.
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ISS recently released updates to its Frequently Asked Questions (“FAQs”) on U.S. Compensation Policies and Equity Compensation Plans.[1]  The FAQs are intended to provide general guidance regarding the way in which ISS will analyze certain issues as it prepares proxy analyses and determines vote recommendations for U.S. public companies.

A summary of updates to the FAQs is provided below.  In addition to the ISS and Glass Lewis proxy voting guidelines that were released in the fall of 2018, U.S. public companies should consider the applicability of the ISS FAQs in light of their individual facts and circumstances.[2]
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In late December 2018, the Securities and Exchange Commission adopted a final hedging disclosure rule, as required by Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Final Rule generally requires U.S. public companies to disclose any company practices or policies regarding the ability of employees, officers, directors or their respective

The German Government published a draft legislation which would facilitate the dismissal of so-called “risk takers” in the German financial sector.  This is one of various measures by which the German Government intends to address upcoming Brexit challenges and to increase the attractiveness of Germany as business location for financial institutions currently based in the UK.

Current Legal Situation

German employees are benefitting from extensive protection against dismissal.  Under German labor law, the termination of an employment relationship requires a valid justification (e.g., redundancy or misconduct) for which the German labor courts have set high standards.  Therefore, the affected employee is often in a good position to challenge the validity of the termination and claim the continuation of the employment relationship before court.


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