GERMANY-law limiting executive compensation

This week the German parliament ("Bundestag") passed a law limiting executive compensation ("Gesetz zur Angemessenheit der Vorstandsvergütung" or VorstAG). The law is a reaction by the German government to the financial crisis and the excessive bonus and/or compensation payments to top executives in several firms.

The law mainly applies to listed companies. It does not give any explicit restrictions on compensation agreements, but rather requires bonus agreements with top executives (i.e., members of the board of directors) to have a long-term basis. For example, stock options may be exercised no earlier than four years after they have been issued.

Additionally, the law gives the members of the supervisory board who fix the compensation contracts with the top executives much more leeway to reduce variable or fixed compensation (even pensions in the first three years) if the company faces bad times (e.g., has to lay off people and cannot pay any profits to the stockholders anymore).

The law also increases the supervisory board's liabilities, i.e., the members of the supervisory board are liable towards the stockholders if top executive compensation is inflated. 

With respect to disclosure, the law requires comprehensive disclosure of top executive compensation.

Finally, the law stops the German practice of directors becoming members of the supervisory board immediately after leaving the board of directors. From now on, a cooling-off period of two years is required.