Dusseldorf Ahead of Bayer AG’s Annual General Meeting on Friday, numerous investors and shareholders criticized the way the company’s board of directors was paid last year. “We will vote against the remuneration report,” said the major German fund companies Union Investment, Deka and DWS, which are among the larger Bayer shareholders.
The two leading and influential proxy advisors ISS and Glass Lewis also recommend the rejection of the remuneration report. Since most foreign fund companies usually follow their vote, Bayer is threatened with defeat on this point in the vote at the annual general meeting on Friday.
This would not have any direct legal consequences for Bayer and the compensation system. But it would be a warning from which shareholders could expect consequences.
The investors criticize the payment of the board on several points. The Norwegian sovereign wealth fund – the fifth largest shareholder with a stake of just under 2.3 percent – would like a stronger long-term orientation: for example in the form of shares with a holding period of up to ten years.
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Deka also believes that the remuneration is too strongly based on short-term factors. Bayer rejects the criticism.
Short-term bonus for board members increases significantly
But most of the other shareholders are bothered by another point: They complain that the billions in out-of-court settlements with glyphosate plaintiffs were not included in the short-term bonus payments for the board members. They are based on earnings per share, profit margins and the amount of free cash flow.
Bayer spent around four billion euros on settlements in the United States last year. That significantly reduced free cash flow, which was 1.4 billion euros. The remuneration system stipulates that such one-off effects are not included in the bonus. It is the adjusted cash flow that counts.
That was one reason why the short-term variable cash compensation for the Management Board increased significantly in 2021. For CEO Werner Baumann, they accounted for 56 percent of the remuneration of 5.7 million euros.
Janne Werning from Union Investment does not consider the approach to be justified. He rates the cash outflows associated with the settlements “as performance-relevant for the Management Board and would have welcomed these outflows in free cash flow”.
>> Read about this: Shareholder advisors give Bayer board of management backing – except for the salary package
The fund company DWS made a similar statement on Wednesday in its statement before the Bayer Annual General Meeting. Hendrik Schmidt, senior investment stewardship specialist at DWS, said the compensation report will be voted against because it does not adequately justify why comparative payments are not taken into account when determining target achievement.
According to the influential American shareholder advisor ISS, Bayer’s remuneration practices and disclosures are in line with current practice. However, ISS accuses the supervisory board of having lowered the targets for the board of directors, which would have brought management high bonuses.
But Bayer rejects this. The Supervisory Board did not subsequently intervene in the targets for the variable remuneration in 2021, says the Chairman of the Supervisory Board, Norbert Winkeljohann, according to the already published manuscript of the speech that he will give at the Annual General Meeting.
Bayer sees the critical investors themselves as responsible. Winkeljohann says: “The Executive Board remuneration will continue to be granted according to the remuneration system that you, dear shareholders, approved with more than 94 percent approval at the 2020 Annual General Meeting of our company.”
The chief controller defends the company’s remuneration system.
(Photo: Bayer)
This means that the shareholders themselves have approved that special or one-off effects are not included in the bonus payments to the Executive Board. Bayer thinks that makes sense. Because that’s not how the board members earn it when the group achieves billions in special income, for example through partial sales.
Winkeljohann defends the remuneration system as “heavily performance-related”. The weak performance of Bayer stock since 2018 has had an impact on the overall compensation paid to members of the Board of Management. The amount to be paid out in 2021 from the long-term variable cash remuneration is only 32 percent of the target amount on average.
From 2022, Bayer will align Management Board compensation even more closely with the long-term performance of Bayer stock and the achievement of sustainability goals. Bayer is reducing short-term incentives.
Vote on Compensation Report is not binding
The shareholders will not vote on the remuneration system this year, this only happens every four years or if there are serious changes. However, shareholders can express their satisfaction with the current practice in the vote on the remuneration report for 2021. According to the regulations that have been in effect since 2022, this must be voted on annually.
The vote on the remuneration report has no legally binding consequences. The new German Stock Corporation Act expressly stipulates that the composition of Executive Board remuneration remains the responsibility of the Supervisory Board. Nevertheless, a company must not ignore the criticism from the circle of investors.
For example, the fund company Deka expects an amendment or a statement at the next general meeting if there is less than 75 percent approval for the remuneration report. In the event of non-compliance, Deka will vote against the discharge of the supervisory board next time, according to the company’s articles of association. According to its own statements, the voting rights advisor ISS could also react with such a recommendation.
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