Can the supervisory board reduce the management board's remuneration in a crisis?

published on 14 April 2025 | reading time approx. 4 minutes

In view of the continuing challenging economic situation, some companies are focusing on cost savings. Therefore, during crisis the question of under which circumstances a reduction in the remuneration of the management board – even at short notice – is possible is becoming more important for stock corporations.

For this situation, the legislator has provided the supervisory board with the option of Section 87 para. 2 German Stock Corporation Act (AktG). A recent ruling of the Federal Court of Justice (BGH) dated October 22, 2024 – II ZR 97/23 deals with questions related to this standard and clarifies how the deterioration of a company's financial situation and the in-equity of continuing to grant management board remuneration are related. Among other things, the ruling explains which criteria supervisory boards and insolvency administrators must consider when examining the permissibility of reducing the remuneration of the management board and to what extent they may take appropriate measures.

Composition and reduction of management board remuneration

The supervisory board is responsible for determining the remuneration of the management board. In the case of listed stock corporations, the supervisory board has the task of developing a transparent and comprehensible remuneration system that promotes the long-term and sustainable development of the company. For all stock corporations, the remuneration must be appropriate and may not exceed the usual remuneration without special reasons. Both the individual performance of the members of the management board and the eco-nomic situation of the company must be taken into account.

To ensure these objectives are met, the supervisory board typically sets out a multi-tiered remuneration structure. Therefore, management board remuneration usually consists of a fixed base salary and variable components such as stock options, which are linked to the performance and success of the company. In addition, a distinction is often made between so-called short-term incentives (STI) and long-term incentives (LTI) when it comes to bonuses.

According to Section 87 para. 2 AktG, the supervisory board has the option of reducing the remuneration of the members of the management board if the economic situation of the company deteriorates after the remuneration has been determined, so that it would be un-fair for the stock corporation to continue to grant the remuneration. This reduction can affect both, the fixed salary and the variable remuneration components. It is also implement-ed accordingly in the management board service contract, which is not affected otherwise. The aim of this regulation is to ensure that remuneration remains in line with the company's financial performance even in times of crisis and that the company's interests are protect-ed. However, there are still high requirements to a short-term reduction in management board remuneration, as the following case also shows.

The circumstances

The case decided by the Federal Court of Justice was based on the following circumstances:

On November 14, 2019, the plaintiff entered into a management board service contract with a stock corporation as a member of the management board, taking up office on January 1, 2020. The contract provided for a fixed annual remuneration of EUR 240,000 as well as a performance-related special remuneration (bonus). Even before he took up his duties, on December 23, 2019, insolvency proceedings were opened against the assets of the stock corporation. The insolvency administrator terminated the service contract and reduced the plaintiff's remuneration to EUR 8,000 per month, with no bonuses. On February 5, 2020, the plaintiff was released from his duty.

The plaintiff considered this reduction to be unlawful and demanded the outstanding remuneration.

Ruling of BGH

First of all, BGH expressly confirms that the right of reduction under Section 87 para. 2 AktG is not superseded by the insolvency administrator's right of termination under Section 113 German Insolvency Code (InsO). Rather, the scope of the provision also covers the period after the opening of insolvency proceedings and the remuneration adjustment remains in place as an independent instrument for safeguarding creditors' interests.

BGH also clearly states that for this period, the right to reduce the remuneration is not exercised by the supervisory board as usual, but by the insolvency administrator. As the creditors' trustee, the insolvency administrator is entitled to take measures to secure the insolvency estate, which also includes reducing inappropriate management board remuneration.

Furthermore, BGH clarified that when examining the fairness in terms of Section 87 para. 2 sentence 1 AktG, all circumstances of the individual case must be weighed up comprehensively against each other. The decisive factor is not whether the reduction is unfair, but whether it is unfair for the company to continue to grant the agreed remuneration. In this context, the degree of deterioration of the company's financial situation compared to the time of the original determination of the remuneration as well as the extent to which this change in the company's situation can be attributed to the management board member are of particular importance. A reduction of the management board remuneration is particularly justified if its continued payment further exacerbates the company's economic situation and endangers its continued existence. This is the case if the company is already in a financial crisis and an unchanged payment would lead to an inequitable burden on the company or the insolvency estate.

The above principles apply regardless of whether the management board member caused the crisis or not. In this regard, BGH clarifies, with reference to the wording of the law, that the attribution of the deterioration of the company's situation to the management board member is not a mandatory requirement for a reduction of the management board remuneration. Rather, the question of whether the deterioration can be attributed to the board member is to be considered as one aspect in the context of the necessary overall consideration of the open criterion of “inequity". The decisive factor for the reduction of the remuneration is whether, under the given circumstances, the continued payment of the original remuneration would endanger the interests of the company and its creditors.

Conclusion

The ruling of BGH continues the course of its previous case law and specifies the standards for the overall consideration in the context of the reduction of management board remuneration in accordance with Section 87 para. 2 AktG. BGH rejects the attempt to demand a mandatory attribution of the deterioration in the situation as a prerequisite for the reduction in remuneration. It emphasizes that the only thing that matters when it comes to the inequity of continued payment is the unreasonableness for the company; individual attribution is not decisive.

BGH thus makes it clear that in times of crisis, the supervisory board must pursue a remuneration policy that ensures the continued existence of the company and protects the interests of creditors. In practice, this means that the supervisory board or the insolvency administrator can or must adjust the remuneration of the management board members in the event of an economic crisis after carrying out an overall assessment. However, high requirements must be set for this overall assessment. The supervisory board must come to the comprehensible conclusion that continuing to grant the previous remuneration is inequitable for the company.