Demands on Supervisory Boards are Rising even in SMEs while Compensation is Lagging Behind

The role of the supervisory board in corporate management is gaining in importance, with boards having a considerable influence over the future development of companies through staffing and incentivization of the executive board. Given the valuable role of the supervisors, the compensation given to them fails to adequately reflect the responsible task they undertake, especially in many small and medium-sized companies. Although compensation of supervisory boards in these companies has continued to increase, by an average of 5.9% in Germany over the past year (2016: +5.7%), remuneration per head, when compared to the year before, remains unchanged if robust median figures are considered. This is despite requirements continuing to increase. For its current study, HR and management consultancy Kienbaum evaluated the company reports of more than 1,400 German companies outside of the DAX, MDAX, SDAX and TecDAX indexes to assess the compensation given to members of supervisory boards—some 13,000 members in total.

The supervisory board shapes the company’s plan for the future

“Contrary to popular belief, the supervisory mandate is no longer an honorary post, even in SMEs,” says Sebastian Pacher, Expert on Supervisory Board Remuneration at Kienbaum.  “These days” he goes on to say, “supervisory boards need a wide range of skills and are the drivers—and in unfortunate cases, the blockers—of future investment and digitalization in their companies. They need to excel in terms of professional personal competence and contribute a significant and growing time investment to their professional monitoring activities. Appropriate compensation is a must.” Four out five of the companies surveyed by Kienbaum pay members of their supervisory boards no more than 30,000 EUR per year on average, with only three per cent being paid more than 70,000 EUR per year. The level of payment can depend on both the size of the company and the industry. The highest per-head compensation can be found in the renewable energy industry, averaging around 35,000 EUR, and in the electrical engineering industry, at around 34,000 EUR on average. By contrast, the transportation and warehouse management industries have the lowest figures per head, at around 10,000 EUR.

Performance-unrelated compensation for supervisory boards remains the trend

In contrast to members of German executive boards, for whom performance-related pay often far exceeds the shares of fixed remuneration, compensation for members of supervisory boards is performance-unrelated in as many as 100% of all cases, both in listed and non-listed companies. For Sebastian Pacher, the continued rise in performance-unrelated compensation is an indicator of the growing demand for more independence for members of supervisory boards. “It is often argued that the short-term variable compensation components for supervisory boards can thwart the control function exercised by the board. Performance-unrelated compensation that takes into account different roles and activities can be better reconciled with the control function of the supervisory board.”

Stable outlook for supervisory board compensation in SMEs

“Assessments of the level of compensation for supervisory boards have barely changed in the past few years, and in SMEs compensation is perceived as too low. We conducted a poll of 120 companies at the beginning of the year, and our findings confirm this,” says Sebastian Pacher. Almost two thirds of larger companies anticipate a continued increase in supervisory board compensation in the upcoming years, while only half of SMEs expect to see a rise, with the other half anticipating no change. Sebastian Pacher believes that “In many cases, the level of compensation for supervisory board members in large companies is perceived as too high when compared to small and medium-sized businesses, and it’s true that daily rates for supervisory board members are actually dependent on the size of the company being supervised.”

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The Kienbaum supervisory board study can be obtained online at https://shop.kienbaum.com/ for a cost of 1,100 EUR plus VAT.