Luxury Pensioners: German Execs Scrutinized over Fat Retirement Plans

By and Dietmar Hawranek

Photo Gallery: Fat Retirement Photos
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Despite public outcry, German executive pay continues to grow. While most people in the country are gradually becoming concerned about whether their retirement pensions will be adequate, many top executives can look forward to worry-free golden years.

There are no longer many certainties in the lives of Edwin Eichler, Olaf Berlien and Jürgen Claasen. At the moment, the three former executive board members of steelmaker ThyssenKrupp don't know what the future holds for them. Will they be able to find new jobs, or are they simply no longer capable of being placed?

They were let go at the end of last year after ThyssenKrupp posted a loss of €5 billion ($6.5 billion). There had been some failed business deals in North and South America, and the supervisory board wanted to send a message. Now the three managers are tainted with the reputation of being the personification of failure.

But there is one thing the three men can depend upon: a generous pension that should enable them to lead a carefree life. Eichler and Berlien will each receive €402,000 a year. Claasen, who had a shorter tenure on the executive board, will receive half that amount.

Tidy Rate of Return

The terms under which the men will receive their benefits are also favorable. Instead of having to wait until their 67th birthdays, like normal employees, they will begin collecting benefits at age 60. The managers won't even have to worry about external hardships, like rising inflation. At ThyssenKrupp, executive pensions are "adjusted annually according to the Consumer Price Index."

In other words, a tidy rate of return is guaranteed. And the executives' families will also be taken care of.

Should one of the former directors die, the steelmaker will continue to pay his wife 60 percent of his pension. In the case of Eichler and Berlien, their spouses would receive €241,000 a year. Each child entitled to support would qualify for another 20 percent the original pension, or €80,400. And although ThyssenKrupp would only provide benefits to the children of its former executives "until the age of 25," there are "certain well-founded cases" in which benefits would still be paid "until age 27."

ThyssenKrupp, like all corporations listed on Germany's DAX stock index of blue chip companies, spends a lot of money on the retirement pensions of its top executives. The total pension commitments are valued at €6.2 million for Berlien, €7.8 million for Eichler and €2.5 million for Claassen.

German carmakers are even more generous. The current record holder is Daimler CEO Dieter Zetsche. His pension commitments are currently worth €39.6 million. VW CEO Martin Winterkorn can expect to see benefits worth a total of €23 million, and even VW human resources chief Horst Neumann will receive about €18 million.

Industrial gas producer Linde and electric utility E.on have to set aside €16 million each for their respective CEOs, Wolfgang Reitzler and Johannes Teyssen, while VW is saving €14.8 million for its chief financial officer, Hans Dieter Pötsch. The list of benevolent deeds for top executives could go on and on.

Self-Service Mentality

The numbers reveal a self-service mentality among corporate leadership that stands in sharp contrast to the financial sacrifices executives often demand of their employees.

When it comes to compensation, corporate executives in Germany have now stepped beyond the level at which society still tolerates social injustice. Triggered by the €20 million that VW CEO Winterkorn would have been paid in 2012 if his contract had not been amended, a national debate began over equality and fairness. Even Chancellor Angela Merkel weighed in, saying: "Exorbitance is unacceptable in a free and social society."

Winterkorn decided to forego some of the money to which he was contractually entitled, which was probably not a very painful sacrifice for him. Including a second salary as head of Porsche Automobil Holding SE, Winterkorn received €15.3 million.

Anshu Jain, the co-CEO of Deutsche Bank, also wanted to send a small message. He declined a bonus in the millions, because if he had accepted it he would have earned more money than his fellow board member and chief executive Jürgen Fitschen, which wouldn't have gone over well at the bank.

Winterkorn and Jain apparently sense that there are limits to income growth. Besides, the German government reacted more quickly than many had expected.

Shareholders To Set Salaries

Under a new law the government intends to pass after the federal election in September, shareholders will determine the amount of executive compensation in the future. This is currently done by supervisory boards, in which representatives of labor and capital work out the details behind closed doors.

But as well intentioned as the new legislation is, it is unlikely to change much. Shareholders are interested in high profits and rising stock prices. To them, whether a chief executive who promises and guarantees these results earns €5 million or €15 million is somewhat irrelevant.

Still, the government's quick reaction shows how seriously it takes the problem. It doesn't want to hand over the subject of social justice to the opposition Social Democrats and the Left Party. "I understand perfectly well how people can only shake their heads at some salaries that are completely out of line," says Chancellor Merkel.

Pensions Easy to Hide in Disclosures

It is precisely because of the fact that the salary debate in Germany has become so heated that pension commitments for executives hold a special appeal. There's a reason for this, too: They are easy to hide in financial reports.

After SPIEGEL reported the pension claims of several corporate leaders last year, a few supervisory boards confessed that it wasn't an issue they had focused on until then. The supervisory boards at Daimler and VW indicated that pension commitments would no longer be as generous, at least for new contracts given to senior management. But in reality, the value of pension commitments has increased substantially once again.

ThyssenKrupp has to place €32 million in reserve for the pensions of its directors, while Siemens keeps €52 million in executive pension reserves, Daimler €82 million and the Volkswagen Group €104 million. Each of these amounts is about 20 percent higher than in the previous year. The value of the pension claims of Daimler CEO Zetsche, for example, increased from €29 million to €39 million in one year.

There is an actuarial explanation for this miraculous increase, but it only reveals a further problem with the retirement pensions of senior management.

Daimler, for example, guarantees Zetsche an annual pension of €1,050,000. The automaker has to form a reserve for the anticipated payments. The amount of this reserve depends on how much interest the money earns until the company has to pay pension benefits. Because interest rates for safe investments have declined, the Stuttgart-based company has to place a larger sum in reserve to be able to pay its CEO the guaranteed pension later on.

Unfair Advantage

Zetsche can look forward to something of a guaranteed pension. He and other executives know how much money they will receive in retirement, no matter what happens in between, since their employers assume the risk of falling interest rates.

Of course, ordinary employees who make private arrangements for retirement and buy life insurance policies don't have this guarantee. If interest rates in capital markets decline, the amount that will be paid out to them in old age is reduced. In light of the debt problems in the euro zone, more and more Germans are worried about slowly being deprived of some of their retirement income in this manner.

It is already impossible to justify the difference between senior executive and ordinary employee compensation. A number of DAX companies have now reacted to this imbalance. At ThyssenKrupp, Daimler, Linde and RWE, for example, managers who are newly appointed to the executive board receive a so-called contribution-oriented pension.

In addition to salaries, bonuses and profit sharing, the companies pay several hundred thousands of euros into an account for the pensions of top management. Over the years, this adds up to a handsome company pension for the executives. But the companies know how much money they are actually spending for their managers' retirement benefits. And if interest rates fall, they no longer have to constantly increase the amounts paid into the fund.

Should Executives Even Get Pensions?

This is a small improvement, and yet it doesn't address the underlying issue: Why do companies pay their senior executives a pension at all? After all, they are also expected to accept a certain amount of risk.

Employees are advised to save money in a private pension account, because the pension required by law is unlikely to allow them to maintain their standard of living. Factory workers and office employees are expected to set aside a portion of their earnings. But the top executives, who earn salaries in the millions and for whom saving money shouldn't be a problem, have no need to save, because their employer pays their luxury pension. When it comes to their own retirement pensions, top managers show a pronounced tendency to hedge their bets.

The amounts in question can no longer be justified. Pension commitments in the double-digit millions "are hard to defend from an ethical standpoint," says Christian Strenger, "even if there are contractual claims."

The former head of the DWS investment fund is a member of the German government's Corporate Governance Commission, which develops proposals for good corporate governance. Strenger is critical of the fact that "supervisory boards are unable to put a stop to such excesses."

"Salaries cannot be unlimited in a social market economy" like the one in Germany, says Berthold Huber, the head of the IG Metal metalworkers' union, referring to the country's model of capitalism, which encourages free markets but also includes support for organized labor and a comprehensive social system. Nevertheless, he and his fellow labor leaders, in their capacity as supervisory board members, have not stood in the way of corporate executives receiving generous pensions in addition to their salaries. Sometimes this acts as a hidden salary increase.

A Discrete Way of Padding Salaries

"Pension commitments are a very popular way to make sure managers get more money without attracting notice," says Peter Dehnen. As a member of the steering committee of the Association of Supervisory Boards in Germany, he has seen how companies have increased pensions for top management at times when management salary increases seemed unjustified, because the companies were imposing wage freezes on ordinary employees.

Pension commitments have developed into "an unregulated area in which some executives have essentially secured a second salary for themselves," says Ulrich Hocker of the German Protective Society for Security Holdings. Because all companies establish their own rules, with some granting executives pensions at 60 while others wait until the managers turn 63, it is already difficult to compare payments among different companies.

In general, Hocker thinks it would be a good idea "if managers paid for their own retirement pensions and perhaps received a higher salary in return." Executives could still hardly expect to face poverty in old age, but the process would be "fair and, for outsiders, comparable and transparent."

Many details are currently tucked away in the legal language on the back pages of company reports. E.on, for example, invented the term "third pension situation" for longstanding executives. The first situation occurs when a manager leaves the company at 60, and the second situation applies if he becomes disabled. So far, so good. But if the company decides not to renew the executive's contract, perhaps because of poor performance, E.on does not refer to this as firing the executive, but rather as a "third pension situation."

In that case, the manager receives an "early pension" of between 50 and 75 percent of his last base salary. In the case of current E.on CEO Johannes Teyssen, this would be €930,000 -- a year.

Translated from the German by Christopher Sultan

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