Volkswagen managers set to secure frozen bonuses
Volkswagen has been strongly criticised after it emerged that the company’s executive pay plan makes it easy for top managers to secure bonuses that were withheld after the diesel emissions scandal — and they could even double their money.
Share price performance hurdles set by VW’s supervisory board for senior managers to recoup the withheld bonuses — or double the frozen payments — are not difficult to clear, according to experts.
VW was attacked by investors last month after it agreed to pay 12 current and former members of its management board a total of €63.2m for 2015, the year in which it slumped to its worst ever loss because of the emissions scandal.
TCI, a leading activist investor, last week demanded sweeping reform of executive pay at VW after revealing it had amassed a €1.2bn stake in the company’s preference shares.
To try to mollify investors and trade unions, VW trumpeted at its results last month how €4.2m of top managers’ bonuses, including that of Matthias Müller, chief executive, was being withheld because of the emissions scandal.
But VW’s supervisory board agreed that if the company’s preference shares rise 25 per cent by 2019, the managers will secure their withheld bonuses in full — plus stock appreciation and dividends. The total could therefore be €5.68m.
Crucially, the starting point for measuring the 25 per cent rise is €112 per preference share.
This is a depressed valuation compared with past performance of VW’s shares and forward-looking estimates by analysts.
Just before the emissions scandal was revealed in September, VW’s preference shares traded at €162.6. The average price for the year until then was €208, hitting a peak of €255 in March.
But VW did not take these figures into account.
Instead, the starting point for the pay plan is based on a 30-day average trading price for VW’s preference shares leading up to April 22, when VW revealed it had fallen to a €1.6bn net loss for last year. That average, which is not included in VW’s annual report, is €112.
“It’s definitely not a high hurdle,” said Jürgen Pieper, analyst at Metzler Bank. He added he was surprised at the arrangements under which VW’s top managers could recoup withheld pay.
The VW annual report also discloses executives can secure double the value of the withheld bonuses. This means they could obtain €8.4m.
Christian Strenger, a corporate governance expert, calculates that VW’s shares must rise 50 per cent, to €168, for managers to double their withheld bonuses.
“It’s extraordinary,” said Mr Strenger, who called the €112 starting point “unjustifiably low”.
According to Bloomberg, the average 12-month price target for VW’s preference shares among 33 analysts polled is €140.
Adam Hull, analyst at Berenberg, expects the shares to rise to €210 in 12 months. His estimate is the highest among his peers, but his analysis to justify this is not especially bullish.
“It’s very feasible that this company is trading at €250, or €260, within two or three years,” said Mr Hull.
Ingo Speich of Union Investment, a VW shareholder, said it would be “perverted” if management could actually profit from the emissions scandal, by receiving up to two times the withheld bonuses should the company’s shares perform moderately well.
“The target reference price should at least be higher than it was before the diesel scandal became public,” he added.
A VW spokesman said management’s 2015 pay would still be less than that for 2014, even if the withheld bonuses were doubled, reflecting how the company fell to a loss last year.
He added that variable remuneration for management board members was, on average, cut from €5.3m in 2014 to €3.2m last year.
Mr Pieper said the low thresholds for receiving withheld bonuses were another example of weak corporate governance at VW.
But he added that, after 20 years of covering VW, it was not particularly surprising. “We simply have gotten used to it,” he said.
VW’s supervisory board on Wednesday recommended that shareholders approve the work of senior management during 2015 at the company’s annual meeting on June 22.
The board said that, based on work so far by Jones Day, a law firm commissioned to investigate the emissions scandal, “no serious and manifest breaches of duty on the part of any serving or former members of the board of management have been established”.