Financial Times, 27 June 2002


Greed as a motivator

Share option schemes are helping to expose German executives to closer scrutinity

By Daniel Bogler


At first sight, the brouhaha over executive pay at Deutsche Telekom looks like an example of how German capitalism, in its struggle to modernise, is adopting the worst excesses of the US corporate tradition.


But critics forget that only a few years ago a manager's pay, or a company's stock price, would not even have been the subject of popular discussion, let alone outrage. In that sense, the commotion at Deutsche Telekom is evidence of the growing maturity of German capitalism and the increasing potency of its fledgling equity culture. And the spread of share option schemes, warts and all, is helping to drive that process.

Traditionally, large German companies have been controlled by a community of stakeholders, including banks and employees, who have imposed their influence through the supervisory board. Price falls have not brought a threat of takeover and have had little influence on boardroom pay, which is largely fixed. Indeed, only in 1998, after a change in German stock company law, did it become possible for companies to grant proper share options.

Given that history, the spread of share option schemes in Germany has been impressive. By the end of last year, 43 of the Dax 100 companies had introduced such schemes. And though disclosure levels are still low, new research* Wuerzburg suggests that German share option schemes are relatively sophisticated. In particular, they strike a balance between the rather loose schemes prevalent in the US and the excessively complicated ones that are common in the UK.

US option schemes tend to be "naked" - that is, without performance conditions attached - which means executives benefit automatically if their share price rises with the market.


In Germany, executive option schemes are generally easier for shareholders to value (as in the US) but they always have at least one performance condition (as in the UK) - as explicitly stipulated in the stock company law.


German schemes also tend to cover a larger group of senior managers than is customary in the UK or the US. Deutsche Telekom's main plan includes 350 senior executives, compared with 25 at British Telecommunications. That should make it far more effective as a motivational tool. And when it comes to how much of a company's share capital is handed out in the form of options, German schemes are usually in the middle between dilutive US plans and tightly regulated plans in the UK.

Meanwhile, pay levels as a whole remain much more egalitarian. In 2000, the average total pay for a chief executive in in a large German company was 11 times the wage for an average worker. That compared with a figure of 25 times in the UK and 531 times in the US.

Getting executive rewards right is crucial in properly aligning the interests of managers and owners and thus it is a big step on the road to a more shareholder-friendly capitalism.


*First peep under the curtain: the Americanisation of German executive pay, Trevor Buck, Azura Shahrim and Stefan Winter. Contact [email protected]


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© 2002 Financial Times Ltd.