Haar, Brigitte --- "Executive Compensation under German Corporate Law: Reasonableness, Managerial Incentives and Sustainability in Order to Enhance Optimal Contracting and to Limit Managerial Power" [2012] ELECD 621; in Thomas, S. Randall; Hill, G. Jennifer (eds), "Research Handbook on Executive Pay" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Executive Pay

Editor(s): Thomas, S. Randall; Hill, G. Jennifer

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849803960

Section: Chapter 23

Section Title: Executive Compensation under German Corporate Law: Reasonableness, Managerial Incentives and Sustainability in Order to Enhance Optimal Contracting and to Limit Managerial Power

Author(s): Haar, Brigitte

Number of pages: 20

Extract:

23 Executive compensation under German corporate
law: reasonableness, managerial incentives and
sustainability in order to enhance optimal
contracting and to limit managerial power*
Brigitte Haar


What do Klaus Esser and Mickey Mouse have in common? This could be the over-
arching theme when looking at the German corporate law rules of executive remunera-
tion. In the long-lasting Disney Litigation the Delaware court finally did not hold the
Disney directors liable for damages, even though they had approved a US$140 million
compensation package for the number-two executive at Disney, Michael Ovitz, who
lacked any managerial experience in a public corporation and whose tenure was consid-
ered a failure.1 According to the Delaware court, the board was protected by the business
judgment rule. In the Mannesmann case involving a US$17 million bonus payment to the
Mannesmann CEO Klaus Esser, the members of the compensation committee of the
supervisory board were charged with making illegal payments during the firm's takeover
by Britain's Vodafone in 2000 and faced criminal sanctions.2 Although the latter were
based on the actus reus of misappropriation, the violation of the German Penal Code
required a judicial review of the severance package, which was guided by corporate
law standards. Therefore, at the bottom line the court analysis made reference to the
appropriateness of the bonus awards under German corporate law, accepting a margin
of business judgment as well.
The role of business judgment as a determinant of executive remuneration in judicial
review ...