German bill promises much needed executive pay disclosure

Germany's listed companies have proved so resistant to revealing the remuneration of their top executives that 21 left-of-centre parliamentarians yesterday tabled a draft bill to make disclosure compulsory.
The legislators from the Social Democrat party of Gerhard Schroder, the chancellor, have lost patience because only 10 of Germany's top 30 blue-chip Dax companies have so far complied with a three-year-old voluntary disclosure code.
That the parliamentarians should act is understandable. Getting Germany's listed companies to follow the code drawn up by Gerhard Cromme, supervisory board chairman of Thyssen-Krupp, the steel and engineering group, has become the corporate governance equivalent of pulling teeth. The hard-core refuseniks include some of Germany's premier companies, including DaimlerChrysler and Munich Re.
Yet it is also true that pay disclosure rules need careful handling. Legislation can give huge incentives to the remuneration industry to find and exploit loopholes. Disclosure of executive pay - by law or a voluntary code -can also unleash an unedifying and socially divisive ratcheting up of pay as executives gull remuneration committees into granting income and benefit packages that leapfrog those of rivals. The UK has experience of this.
On balance, however, the draft legislation in Germany is welcome. True, 10 other Dax-30 companies have already promised to comply with the Cromme code this year. But that was only because Brigitte Zypries, the justice minister, threatened legislation if fewer than 80 per cent of Dax companies complied by mid-2005. Even if the 10 companies fulfil their pledges, the number complying with the code will still fall short of the government target.
Unlike the Cromme code, the draft legislation promises to create a level playing field. It applies to executive board members of all listed companies. It specifies that all sources of income, including bonuses, options, pensions and compensation in the event of a company takeover, be disclosed.
One common objection is that such disclosure breaches individual privacy. But top executives in listed companies are in a position of stewardship and should be accountable to shareholders. Executive pay levels, and especially the structure of incentive packages on top of basic salary, give investors important insights into how a company is run and the targets that motivate top managers. Transparency in executive pay therefore helps create efficient and liquid capital markets.
To their credit, the authors of the German bill emphasise this point. They also noted that the drive to greater transparency in executive pay is catching on elsewhere in Europe. It has the support of the European Commission. It is, in short, an idea whose time has come. The refuseniks among Germany's corporate elite should recognise this and follow the lead of their more enlightened peers.