International Human Resource Management and International Labour PDF

International Human
Resource Management and

International Labour Law
A Human Resource Management
Accouting Approach
by
Prof. Dr. habil. Wilhelm Schmeisser,
Univ.-Prof. Dr. Dieter Krimphove
and
Dipl.Kffr. (Univ.) Rebecca Popp
with the collaboration of
Kristin Kirchhoff, Martin Schuster, Edith Teschner,
Susan Burghardt, Lydia Clausen, Alexa Hellweg,
Daniela Liersch, David Luwisch, Bettina Pape,
Cornelia Pape, Karin Peters, Katja Schneider,
Anja Seifert, Daniela Woitok
Oldenbourg Verlag Mnchen

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Authors list
Wilhelm Schmeisser, Prof. Dr. habil., holds the chair of
business administration. He is a director and speaker of the
Kompetenzzentrum Internationale Innovations- und Mittelstands-
forschung (Competence Centre for Innovation and SME Re-
search), Berlin, as well as of the Forschungsstelle Europisches
Personalmanagement und Arbeitsrecht (Research Centre for
European HR Management and Industrial Law, EPAR) at the
University of Paderborn.
As its full professor Dr. jur. Dieter Krimphove teaches at the

University of Paderborn European Business-Law, which em-
phasis European Labour-Law, European Banking-; Finance-Law
as well as Competition-Law. At the University Paderborn he
chairs also the Institute of Harmonization of Law, Business Law
and Finance. Concurrently he works as visiting professor of the
Donau-Universitt Krems. The European Commission granted
Prof. Dr. Krimphove the Jean-Monnet Chair ad personam.
His numerous professional publications and scientific papers
made him known to a broad audience.
Rebecca Popp, Internationale Dipl.-Kffr. (Univ.), graduated in

international business administration at the University of Nurem-
berg and is currently a freelance research assistant and a doctoral
researcher with the Kompetenzzentrum Internationale Innovations-
und Mittelstandsforschung, Berlin (www.mittelstandsforschung-
berlin.de). She is the translator of the book.
COMPETENCE CENTRE INTERNATIONAL
INNOVATION AND SME RESEARCH, BERLIN
KOMPETENZZENTRUM INTERNATIONALE INNOVATIONS- UND

MITTELSTANDSFORSCHUNG, BERLIN
Making innovation, human resources and strategies calculable
OUR PRODUCTS
Controlling and Berliner Balanced Scorecard Approach
Berliner Human Resources Evaluation Model
Innovation Performance Accounting
Financing Decisions and Risk Assessment of Innovation Processes
Technology Management
OUR SERVICES
Evaluations of strategies
Calculations and approaches to innovation evaluation
Managing Human Resources: Financial Approach
IF YOU NEED SUPPORT, PLEASE DO NOT HESITATE TO CONTACT US!
Email: [email protected]
www.mittelstandsforschung-berlin.de
Preface
On International Management and also on International Human Resource Managements
there is from the point of view of behavioral science an almost unmanageable amount of
literature. Common topics are personnel recruitment, staff selection, personnel development,
international assessment centers and reintegration issues for delegated persons. It is almost
impossible to develop and write a fundamentally innovative textbook in this genre. Looking
at the daily business of business managers and lawyers who work in the field of international
personnel management and international labor law of a company makes clear that their
activities are not only coined by classical personnel functions, but also by international
design of contract, international remuneration systems with stock-option programs, social,
pension and other insurance issues for delegated persons, international human resource
controlling and international human resource information systems, diversity management in
Europe and world-wide as well as European Labor Law, if applicable supported by first
country studies.
One will try in vain to find all those contents in one textbook on International Personnel
Management. This is mainly due to formation problems of Human Resource staff that have
not learned their competence field from a classical business managerial, especially finance-
oriented and including legal point of view. In order to close this research and educational gap
and to support students but also practitioners in this field with a textbook, this textbook was
created.
The authors
Contents
Authors list V
Preface IX
List of Abbreviations XXIII
I Finance oriented Human Resource Management for the support

of globalization strategies of international enterprises 1
1 Introduction 1
2 Differentiation of international and national human resource management 2
3 Problems and aims of international HR management 3
4 Options of personnel policy in international personnel management 4

4.1 National model ...........................................................................................................5
4.2 Multinational model ...................................................................................................5
4.3 Global model ..............................................................................................................6
4.4 Transnational model ...................................................................................................6
5 Internationalization strategies in personnel management 6

5.1 Basic strategies...........................................................................................................7
5.1.1 Ethnocentric strategy..................................................................................................7
5.1.2 Polycentric strategy ....................................................................................................7
5.1.3 Geocentric strategy.....................................................................................................8
5.2 Culture strategies (Monoculture, multiculture, mixed culture) ..................................8
5.3 Decision strategies (central, local, federal) ..............................................................10
5.4 Nine strategies of internationalization......................................................................11
6 Conclusion 12
Literature 13
XII Contents
II International remuneration system 15
7 International delegation of executive managers exemplified by BASF 16

7.1 Importance of international deployment of staff ...................................................... 17
7.2 Structural and contractual aspects ............................................................................ 18
7.3 Salary system ........................................................................................................... 19
7.3.1 Reference salary and other payments....................................................................... 19
7.3.2 Delegation and mobility bonus ................................................................................ 21
7.3.3 Share of rent ............................................................................................................. 24
Literature 25
Annex 28
III Stock-option programs as part of the remuneration management system 43
8 Basic considerations on economic philosophy and ethics 43

8.1 Shareholder-Value-Approach................................................................................... 43
8.2 Principal-agent theory .............................................................................................. 46
8.3 Goals of stock-option programs ............................................................................... 48
8.3.1 Minimization of the principal-agent problem .......................................................... 48
8.3.2 Personnel commitment and recruitment of top managers ........................................ 49
8.3.3 Improvement of the companys liquidity ................................................................. 49
8.4 Criticism of the use of stock-options........................................................................ 50
8.4.1 Manipulation of stock quotation .............................................................................. 50
8.4.2 Changes in the capital structure of the company...................................................... 51
8.5 Stock-option programs in the context of modern remuneration systems ................. 51
9 Changes in the remuneration structure in Germany 52

9.1 Demands for performance-oriented remuneration systems...................................... 54
9.2 Company law aspects of remuneration .................................................................... 57
9.2.1 The German Corporate Governance Codex ............................................................. 57
9.2.2 VorstOG Executive Board Compensation Disclosure Act.................................... 63
9.3 Remuneration aspects under stock corporation law ................................................. 64
9.3.1 Regulations in accordance with sec. 87 Companies Act (AktG) ............................. 64
9.3.2 Appropriateness of Executive Board Remuneration Act (VorstAG) ....................... 65
10 Categorization of Stock-option Programs 67

10.1 Overview.................................................................................................................. 67
10.1.1 Convertible bonds and warrant bonds ...................................................................... 68
Contents XIII
10.1.2 Naked warrants.........................................................................................................70

10.1.3 Stock Appreciation Rights........................................................................................72
10.2 Excursion: incentive programs .................................................................................72
10.2.1 Phantom shares.........................................................................................................72
10.2.2 Restricted Stocks/Restricted Stock Units .................................................................73
10.2.3 Performance Shares/Units ........................................................................................73
10.2.4 Performance Cash-Plan ............................................................................................74
11 Criteria for the arrangement of stock-options programs 75

11.1 Circle of beneficiaries ..............................................................................................75
11.2 Determination of the base price................................................................................76
11.3 Performance targets..................................................................................................77
11.4 Time components .....................................................................................................83
11.4.1 Chronology of a stock-option program ....................................................................83
11.5 Personal investment and cap ....................................................................................86
11.6 Dividend policy ........................................................................................................87
11.7 Dilution effect ..........................................................................................................88
12 Possibilities of financing stock-option programs 88

12.1 Overview ..................................................................................................................89
12.2 Conditional increase in capital .................................................................................90
12.3 Authorized capital increase ......................................................................................92
12.4 Ordinary capital increase..........................................................................................94
12.5 Purchase of own shares ............................................................................................95
12.5.1 Repurchase in accordance with sec. 71 subs. 1 n 2 AktG.......................................95
12.5.2 Repurchase in accordance with sec. 7 subs. 1 n 8 AktG.........................................96
12.6 Cooperation with third parties ..................................................................................99
12.7 Stock Appreciation Rights......................................................................................100
13 Execution of a stock-option program in the company 101

13.1 Decision on the introduction of a stock-option program ........................................101
13.2 Preparation of the decisions of the general assembly .............................................102
13.3 Grant of stock-options ............................................................................................103
13.4 Assignment of shares..............................................................................................104
XIV Contents
14 Accountancy of stock-option programs 105

14.1 Accounting under IFRS.......................................................................................... 105
14.1.1 Field of application ................................................................................................ 105
14.1.2 Real equity settlement ............................................................................................ 107
14.1.3 Virtual own capital instruments ............................................................................. 111
14.1.4 Combination models .............................................................................................. 112
14.1.5 Disclosures............................................................................................................. 113
14.2 Balancing in accordance with US-GAAP .............................................................. 115
14.3 Regulations under SFAS 123(R)............................................................................ 115
Literature 119
IV Delegations and their consequences for labor, tax and social security law
aspects 127
15 Aspects concerning labor contracts 127

15.1 Contents of labor contracts..................................................................................... 127
15.2 Possibilities to design contracts in the case of delegations abroad......................... 129
15.2.1 Supplementary contract as addition to the labor contract....................................... 129
15.2.2 Dislocation agreement and local labor contract ..................................................... 130
16 Tax law aspects 132

16.1 Income tax liability ................................................................................................ 132
16.2 International tax law............................................................................................... 133
16.3 Double tax agreement ............................................................................................ 134
16.3.1 General explanations.............................................................................................. 134
16.3.2 General allocation criterion: residency................................................................... 134
16.3.3 Domestic tax law.................................................................................................... 136
17 Social security aspects 137

17.1 Employment abroad ............................................................................................... 138
17.1.1 Territory principle .................................................................................................. 138
17.1.2 Existence of a so-called Ausstrahlung (transmission) ........................................ 138
17.2 Domestic labor relation .......................................................................................... 140
17.3 Limitation in time of delegations ........................................................................... 141
17.4 Trans- and international agreements with Germany .............................................. 142
17.5 Bilateral social security agreements ....................................................................... 144
17.6 Payment of contributions during the assignment abroad ....................................... 146
Contents XV
17.7 Provisions in the case of lack of insurance obligation............................................148

17.7.1 Pension insurance...................................................................................................148
17.7.2 Health insurance.....................................................................................................149
17.7.3 Nursing insurance...................................................................................................149
17.7.4 Accident insurance .................................................................................................149
17.7.5 Unemployment insurance.......................................................................................149
17.8 Termination of transmission...................................................................................150
18 Conclusion 151
Literature 152
V International remuneration systems for companies listed

on stock exchange in flux 153
Literature 158
VI Application of the Berlin Human Capital Assessment Model

in an international bank for the control of its branches 159
19 Bank internal controlling data as basis 159
20 Selected key figures and their weighting 160
21 On the calculability of the bank human capital assessment model 165
22 Results of the bank human capital assessment 167
23 Bank-Human Capital Assessment Model in the context of remuneration

management 172
VII Development of a human resource information system of international

personnel controlling 175
24 About the description and definition of international personnel controlling 176
25 Targets of international personnel controlling 177
26 Use of personnel information systems 178
27 Obtaining personnel information 180
28 Design of personnel information systems 187

28.1 Targets of an international personnel information system......................................187
XVI Contents
28.2 Functional design of an international personnel controlling system ...................... 189

28.3 Process supporting tasks of international personnel controlling ............................ 190
Literature 191
VIII Design, functionality and application fields of information systems in HR 193
29 International personnel information systems 193

29.1 Definition of information systems.......................................................................... 193
29.2 Tasks ...................................................................................................................... 194
29.3 Reasons for introduction of personnel information systems .................................. 194
29.4 Personnel information systems as condition for process optimization................... 195
30 Basics 196
30.1 Architectonic basics ............................................................................................... 196
30.1.1 Architecture............................................................................................................ 196
30.1.2 System architecture ................................................................................................ 197
30.1.3 Layer model ........................................................................................................... 197
30.1.4 Implementation ...................................................................................................... 198
30.2 Organizational basics ............................................................................................. 199
30.3 Legal basics............................................................................................................ 200
30.3.1 Data protection....................................................................................................... 200
30.3.2 Co-determination ................................................................................................... 200
30.3.3 Equal treatment ...................................................................................................... 200
30.3.4 Data transfer........................................................................................................... 201
30.3.5 Remuneration accounting....................................................................................... 201
31 Structure, functionality and application area 201

31.1 Structure................................................................................................................. 201
31.2 Functionality .......................................................................................................... 202
31.3 Area of application................................................................................................. 203
31.3.1 Users ...................................................................................................................... 203
31.3.2 Examples for application areas .............................................................................. 203
31.4 Structure, functionality and application of the model with four layers .................. 204
31.4.1 Data management layer.......................................................................................... 204
31.4.2 Application layer.................................................................................................... 205
31.4.3 Presentation and Integration Systems .................................................................... 207
Contents XVII
32 Conclusion 208
32.1 Opportunities..........................................................................................................208
32.2 Risks.......................................................................................................................208
Literature 209
IX International external personnel recruitment and staff selection 211
33 Internet as medium of international personnel recruitment 211
34 Instruments of Electronic Recruitment 212

34.1 Internet job boards..................................................................................................213
34.1.1 Advantages and disadvantages of internet job boards ............................................213
34.1.2 Providers of electronic job boards..........................................................................214
34.1.3 Arrangement and structure of internet job offers ...................................................215
34.2 Human-Resources-Websites...................................................................................215
34.3 Virtual recruiting fairs ............................................................................................217
34.4 Online recruiting games .........................................................................................218
34.4.1 Definition ...............................................................................................................218
34.4.2 Siemens Challenge Unlimited..........................................................................218
34.4.3 Possible limitations to online games ......................................................................219
34.5 Newsgroups............................................................................................................219
34.6 Risks and opportunities of e-recruiting ..................................................................220
34.6.1 Opportunities..........................................................................................................220
34.6.2 Risks.......................................................................................................................221
35 Scouting 222
35.1 Scouting through university presence ....................................................................222
35.1.1 Concentration on selected disciplines and universities ..........................................222
35.1.2 Personalization and differentiation of offers ..........................................................222
35.1.3 Use of multi-step programs ....................................................................................223
35.2 Scouting via graduate-oriented measures ...............................................................224
35.2.1 Graduate fairs .........................................................................................................224
35.2.2 Graduate Workshops ..............................................................................................225
35.2.3 On-Campus-Recruiting ..........................................................................................225
35.3 Future perspectives of Scouting .............................................................................226
36 Personnel leasing 226

XVIII Contents
37 Personnel selection process 229

37.1 Selection process in form of a personnel selection chain....................................... 229
37.2 Selection procedures in internal and external applications .................................... 231
37.3 Process of external selection of personnel ............................................................. 233
38 External procedures of selection of personnel and instruments 235

38.1 Electronic applicant data administration workflow management ....................... 235
38.2 Online application .................................................................................................. 236
38.2.1 Possibilities of online application .......................................................................... 236
38.2.2 Default in online applications ................................................................................ 237
38.3 Telephone interview............................................................................................... 238
38.4 Digital interview .................................................................................................... 238
Literature 239
X Company culture and country culture 243
39 Factors in the company environment 244

39.1 Economic factors.................................................................................................... 244
39.2 Socio-cultural values.............................................................................................. 244
40 Company-internal factors 245
41 Cultural values 245

41.1 Types of cultural values ......................................................................................... 245
41.2 Functions of cultural values ................................................................................... 246
41.3 International aspect ................................................................................................ 247
42 Communication of culture 248

42.1 Communication of culture via socialization........................................................... 248
42.2 Communication of culture via stories, rituals and company language................... 250
42.3 Communication of culture via other means of communication ............................. 251
43 Formation of company culture 251

43.1 Employee characteristics........................................................................................ 252
43.2 Ethics within the organization................................................................................ 252
Contents XIX
43.3 Disposition rights ...................................................................................................252

43.4 Organizational structure .........................................................................................253
Literature 254
XI Country research at the example of South Africa:

history, population and culture 255
44 Early history 255
45 Arrival of the Europeans and development of the partitioning of the land 256
46 Population groups 258

46.1 Whites ....................................................................................................................259
46.2 Coloureds ...............................................................................................................259
46.3 Indians/Asians ........................................................................................................259
46.4 Blacks.....................................................................................................................260
47 Religion 260
48 Culture 261
49 Socio-political aspects 262

49.1 Concept of Apartheid .............................................................................................263
49.2 Reservation- and Homeland Policy ........................................................................263
49.3 Democratization .....................................................................................................264
50 Demographic and social aspects 265

50.1 Population growth ..................................................................................................266
50.2 Development of the population under the influence of AIDS ................................266
50.3 Birth control and decline in the rate of birth ..........................................................267
50.4 Age pyramid and future growth .............................................................................267
50.5 Education deficit ....................................................................................................268
51 Economic aspects and employment policy 270

51.1 Unemployment .......................................................................................................270
51.2 Work relationships and Black Economic Empowerment .......................................272
51.3 Reasons for the discrimination against women ......................................................272
XX Contents
52 South Africa: automotive industry 273

52.1 International automotive manufacturers in South Africa ....................................... 274
52.2 Motor Industry Development Program .................................................................. 274
52.3 Influence of the unions on the automotive manufacturers ..................................... 275
52.4 Future of the automotive industry .......................................................................... 276
Literature 277
XII The AGG and Diversity Management a managerial and

European-national legal response to the internationalization
of labor markets in Europe and worldwide 281
53 Changes in the company environment 282

53.1 Internationalization of labor markets ..................................................................... 282
53.2 Technological advance........................................................................................... 284
53.3 Demographic development .................................................................................... 285
53.4 EU-antidiscrimination directives............................................................................ 286
54 General Equal Treatment Act 287

54.1 Objective and content of AGG (Sec. 1 AGG)........................................................ 287
54.2 Elements of unequal treatment............................................................................... 288
54.2.1 Race........................................................................................................................ 288
54.2.2 Ethnic origin........................................................................................................... 288
54.2.3 Disability................................................................................................................ 288
54.2.4 Sexual identity........................................................................................................ 289
54.2.5 Age......................................................................................................................... 289
54.2.6 Religion and secular belief..................................................................................... 289
54.2.7 Sex ......................................................................................................................... 289
54.3 Scope of Application.............................................................................................. 290
54.3.1 Objective scope of application (sec. 2 AGG)......................................................... 290
54.3.2 Personal scope of application (sec. 6 AGG)........................................................... 292
54.4 Elements of discrimination (sec. 3 AGG) .............................................................. 294
54.4.1 Direct discrimination.............................................................................................. 294
54.4.2 Indirect discrimination ........................................................................................... 295
54.4.3 Harassment............................................................................................................. 295
54.4.4 Sexual harassment.................................................................................................. 296
54.4.5 Instructions to discriminate .................................................................................... 296
54.5 Permissible differences of treatment ...................................................................... 297
54.5.1 Positive action ........................................................................................................ 297
Contents XXI
54.5.2 Permissible differences of treatment because of occupational requirements .........297

54.5.3 Admissible differences of treatment on grounds of religion or belief ....................298
54.5.4 Admissible differences in treatment on the grounds of age....................................299
54.6 Organizational obligations of the employer ...........................................................301
54.6.1 Preventive measures ...............................................................................................302
54.6.2 Reactive measures ..................................................................................................303
54.6.3 Information obligations ..........................................................................................303
54.7 Legal consequences of violations of the AGG .......................................................303
54.7.1 Right of appeal .......................................................................................................304
54.7.2 Right to refuse performance ...................................................................................304
54.7.3 Right to compensation............................................................................................305
54.7.4 Right to claim damages ..........................................................................................306
54.7.5 Prohibition of victimization....................................................................................307
54.8 Court enforcement of claims under the AGG.........................................................307
54.8.1 Terms......................................................................................................................307
54.8.2 Statement of facts and burden of proof ..................................................................308
Literature 308
XIII International/European Labor Law 313
55 On a personnel resource management approach in international, European

and national labor law 313
56 On the terminology labor law 314
57 International labor law 315

57.1 International labor law as public international law.................................................315
57.2 International special regulations.............................................................................317
57.3 Regulations of international private law.................................................................317
58 European Labor Law 318

58.1 Application of European Labor Law in the labor law systems of the member states ... 319
58.2 Free movement of workers (Art. 39 EC) in labor relations ....................................321
58.3 Equal treatment of men and women in labor relations ...........................................323
58.3.1 Equal treatment regarding formation of the labor contract.....................................324
58.3.2 Equal treatment in the determination of salary.......................................................326
58.3.3 Equal treatment in the context of termination of labor relations ............................327
58.3.4 Equal treatment in disability law as ground for dismissal protection.....................328
58.3.5 Excursion: Dismissal protection under European Labor Law ................................329
58.4 Consequences of technical work protection in Europe on labor relations ..........353
XXII Contents
58.5 Operational impacts of European social work protection................................... 357

58.6 Collective European Labor Law ............................................................................ 359
58.6.1 European law on collective contracts..................................................................... 361
58.6.2 European Works Constitution Law ........................................................................ 361
58.6.3 Labor Law and company size................................................................................. 363
59 Conclusion 369
XIV Conclusion 371
Literature 375
Subject Index 377

List of Abbreviations
AGG General Equal Treatment Act
AktG German Stock Corporation Act
APB Accounting Principles Board
Art. article
BDSG German Data Protection Act
BetrVG Industrial Constitution Law
BGG Act on the Equal Treatment of Persons with Disability
CFROI Cash Flow Return on Investment
comp. compare
DCF Discounted Cash Flow
DCKG German Corporate Governance Codex
DP data processing
e.g. exempli gratia, for example
EBIT Earning before interest and taxes
EC European Community
EC Employee Capacity
ECHR European Convention on Human Rights
ed. editor, edition

XXIV List of Abbreviations
EEC European Economic Community
EStG German General Fiscal Code
et seq. and following
etc. etcetera
EUR Euro, Euros
EVA Economic Value Added
FASB Financial Accounting Standards Board
fig. figure
GDP Gross Domestic Product
GeWO German Trade, Commerce and Industry Regulation Act
HGB German Commercial Code
HR Human Resources
IAS International Accounting Standards
IASB International Accounting Standards Board
IFRS International Financial Reporting Standards
MIDP Motor Industry Development Programme
mn marginal note
N.N. nomen nescio (name unknown, no name)
N, n number
NUMSA National Union of Metalworkers of South Africa
OECD Organization for Economic Cooperation and

Development
List of Abbreviations XXV
p. page
ROCE Return on Capital Employed
ROE Return on Equity
SAR Stock Appreciation Rights
sec. section
SFAS Statement of Financial Accounting Standards
SGB German Social Code
subs. subsection
tab. table
TEC Treaty Establishing the European Community
TSR Total Shareholder Return
UDHR Universal Declaration of Human Rights
US United States of America
USD US-Dollar
vol. volume
VorstAG Appropriateness of Management Remuneration Act
VorstOG Executive Board Compensation Disclosure Act

I Finance oriented Human
Resource Management for the
support of globalization
strategies of international
enterprises
1 Introduction
Globalization stands for the technical and economic change which has taken place in the
last decades all around the world. The reduction of trade restrictions, regulations regarding
service and capital movements as well as quickly diminishing transport and communication
costs which are made possible by new technologies are causal for this development.1
A company expects higher profit chances, increase of sales in foreign markets and the
achievement of competitive advantages through internationalization. Besides, diversification
of risks and transfer of technology and know-how can be achieved. Sometimes, also public
subsidies can be used on the basis of internationalization, when a subsidiary is established
abroad and trade with a foreign partner is reinforced. A further important aim of
internationalization is to react to exchange rates developments and other trade restrictions.
The internationalization of a company has effects on all areas and thus also on human
resources with administrative, legal and finance-oriented characteristics and on behavioral
personnel management. The tasks of international personnel management are much more
comprehensive as the ones of national HR management, because an important task of
international personnel management is to promote, organize and control foreign assignments.
Foreign assignments involve numerous measures, as for example a comprehensive
remuneration management system with contractual problems with respect to foreign
assignments regarding for example matters relevant for tax, pension and insurance law, the
employment of staff and their support, personnel development and country specific
1
Regnet/Hofmann, 2000, p. 43, own translation.
2 I Globalization strategies
characteristics, an international HR information and accounting system for a better

diversification of corporate group activities etc.
2 Differentiation of international and

national human resource management
Personnel management is the systematic analysis, evaluation and arrangement of all HR
aspects in a company, including on a worldwide basis, e.g. by a German, international and
thus European corporate group. This comprehends amongst other things the determination of
needs, the analysis of inventories, labor displacement as well as personnel recruitment,
selection, development and remuneration.
This is due to the fact that personnel management is the HR key to a sustainable success in
competition of an international company, which means that it has to be regarded as one of
the most important value drivers in value creation in finance-oriented human resource
management and international, value-oriented business management.2
With the growing internationalization of a company also personnel management has to adjust
to new circumstances. This does not only imply handling language barriers, but also taking
cultural, political, economic and social hurdles, because these environmental factors and
circumstances provide different stability for a foresighted personnel management with the
instrument of country research.
The most influential frame conditions of personnel management are
1. rise of national/ international competition (competitors)
2. quality and customer orientation
3. development of value of employees
4. globalization of competition
5. merging of economies
6. decrease in workforce supply
7. change of employment structures
8. ecological challenges.3
However, not every internationally active company has to have a special department for
international personnel management. Depending on the kind and intensity of the companys
activities abroad the HR management is adjusted to the cooperating foreign partner. In case
of a cooperation, the influence on personnel management by the foreign cooperating partner
2
Comp. Schmeisser, 2008 as well as Schmeisser/Clausen, 2009
3
Wolf, 1994, p. 2, own translation.
3 Problems and aims of international HR management 3
is only limited or even inexistent. If a Joint Venture is concluded with a foreign partner, the
national personnel management is only influenced in the case of staff exchange.4 In case of a
buy-out of a company abroad, however, the national company can determine the
management of the foreign office via the corporate structure. The same happens in case of a
foundation of a new subsidiary abroad.
In this case the International Human Resource Management is influenced by the local
country cultures (comp. country research, e.g. South Africa) as well as by country specific
personnel management systems. Also the strategy of internationalization and the
management system of the company and the company culture play a role.
The international human resource management can be distinguished from the national human
resource management by the following factors:
bigger amount of activities,
global perspective,
consideration of privacy of employees,
more risks in Corporate Governance and Compliance Management,
consideration of different economic, legal and cultural conditions and factors and
attempt of non-discrimination of different nationalities through diversity management.5
3 Problems and aims of international HR

management
Task and aim of international personnel management is to quantitatively and qualitatively
assure the right allocation of labor on a national and international level.
In order to fulfill this task cultural understanding as well as disposition and capacity of
mobility of employees are promoted, e.g. with the help of business trips and shorter
delegations abroad. Besides, the international personnel management supports a harmonious
and constructive contact between the employees on a worldwide basis, in order to make a
cross-national know-how transfer possible. Via the development of an open and tolerant
company culture the adaptation of local branches of an international company to other
countries different economic and cultural frame conditions can be more efficiently achieved.
With regard to the tasks of international personnel management, one has to pay attention that
different patterns of thinking and acting of country culture are taken into consideration in
4
Comp. Drumm, 2008, p. 625
5
Comp. Bartlett/Ghoshal, 1990, p. 99 et seq.
order to avoid misunderstandings and failures. Besides, the delegated employees are required
to have the capacity to react flexibly to challenges.6
The international personnel management also has to consider social targets besides the HR-
related support of the whole company when striving for economic and profit aims. The legal
minimum requirements are different in every country (e.g. minimum wage). Furthermore,
international personnel management contributes to the creation of a uniform identity of the
company at home and abroad by the unification of the frame of action of personnel
management within the frontiers of governing law.7
4 Options of personnel policy in

international personnel management
Depending on the degree of internationalization, the company has to adjust its strategy to
new challenges. Each strategy offers advantages and disadvantages for the company and
personnel management. On the one hand it might create a competitive advantage for the
company, if personnel tasks as selection, training or remuneration can be globally
coordinated. On the other hand it can be problematic if specific requirements of the local
branch are not sufficiently considered by adequate adjustments with regard to local or
regional prerequisites like regulations of working hours, labor union requirements, salary
structures or different labor mentalities of the other culture.8 Four variants of international
personnel management are differentiated which combine advantages and disadvantages
differently.
Among these are:
national,
multinational,
global and
transnational model.
6
Comp. Regnet/Hofmann, 2000, p. 261
7
Drumm, 2008, p. 628, own translation.
8
Kumar/Wagner, 1998, p. 5, own translation.
4 Options of personnel policy in international personnel management 5
high
Global Human Transnational Human

Resource Managment Resource Managment
Forces of
global
integration
National Human Multinational Human

Resource Managment Resource Managment
low
low Forces of high
country-specific
adjustment
Fig. 4.1: Variants of international personnel management9
As can be seen in Fig. 4.1., the different models can be differentiated by the degree of global
integration and local adjustment.
4.1 National model

The national model of international personnel management stands for little foreign activities.
The small number of overseas branches, which often serve as pure sale base, does not yet
require a global integration and local adjustment. Coordination of the foreign activities and
of the business activities is undertaken in the main office, which transfers all important
decisions to the branch offices. This model is often applied in the adjustment phase of the
company to internationalization, during which personnel management can be arranged in a
flexible way.
4.2 Multinational model

In the case of multinational personnel management the companies act more often in very
different countries. Because of the strong differentiation of the individual countries it is
9
Comp. ibid., p. 5
necessary to adjust the personnel management to the frame conditions of the country in
question. Due to the differentiated adjustment it becomes difficult to implement standardized
actions in the corporation. Personnel related problems are solved independently and without
connection to other corporate parts in the local offices.10 Thus, central coordination in the
main office is not necessary.
4.3 Global model

The global model of international personnel management is inappropriate for companies
which are inexperienced in the area of international business. It is rather an adequate model
for companies which act in many countries with many differences. It is characterized by
globally standardized personnel measures as selection criteria or motivation systems which
can well be new to the host countries.11 Therefore, experience is needed in order to deal
with resistance and achieve advantages. Besides, cost advantages can be reached, because
uniform measures are applied. On the other hand specific aspects of the host country are
neglected.
4.4 Transnational model

The transnational model is applied in companies which are acting in many different
cultures, but which have enough experience and capacities in order to achieve worldwide
coordination advantages despite of this.12 It is possible, for example, to achieve cost
advantages by coordinating trainings uniformly. Besides, the internationalization of the
company is promoted because of the interchangeability of staff.
5 Internationalization strategies
in personnel management
Company aims, strategy and company culture have to be adjusted to the requirements of
internationalization and globalization of the individual company, taking the companys
historical development, the company structure and the national and international sector-
10
Comp. Kumar/Wagner, 1998, p. 6 et seq.
11
Ibid., p. 6, own translation.
12
Ibid., p. 6
specific conditions and development trends into consideration.13 Because of growing

internationalization of the company also personnel management has to be adjusted to new
challenges. Different internationalization strategies provide the basis for this, as will now be
described.
5.1 Basic strategies

Permutters categorization is one of the basic strategies.14 He distinguishes the ethnocentric,
polycentric and geocentric strategy. The regiocentric strategy, which is a split form of the
geocentric strategy, has been added recently.
5.1.1 Ethnocentric strategy

The ethnocentric strategy is characterized by the centralization of decisions in the head
office, i.e. all decisions are taken in an authoritarian way in the head office and assigned to
local offices. Besides, all controlling measures of the home country are also applied to the
host country. In case of this strategy, the communication flows almost exclusively from the
head company to the subsidiary. Key jobs are in most cases filled in with skilled labor and
managers from the head company.15 The aim of this strategy is to transfer proven concepts to
the subsidiaries.
Cultural distance with leaders at the home office can be avoided by the appointment of
personnel from the home office in leading positions. There might even be a personnel
relation between them. The disadvantage is that higher costs arise because of the delegation
of specialized and executive staff (travel expenses, costs of further trainings). Furthermore,
the possibility of promotion of the employees of the local branch is limited, because the
executive staff generally comes from the head office.16
5.1.2 Polycentric strategy

In case of the polycentric strategy the local branches are seen as independent units.
Generally, decisions are taken on a local level, which leads to little flow of information and
less communication intensity between the head office and the subsidiaries. Each subsidiary
takes its own decisions and adapts the nationality and culture of the host country. The
13
Regnet/Hofmann, 2000, p. 40, own translation.
14
Comp. the Perlmutters E.R.R.G. categorization quoted from Perlitz ,1995, p.142 et seq.
15
Comp. Scholz, 2000, p. 96
16
organizations are different and independent from each other. Multinational companies chose
this strategy for their personnel management.
The disadvantages of the ethnocentric strategy are equal to the advantages of the polycentric
strategy. Only small remuneration costs result, because delegation costs do not apply and the
employees of the subsidiary have enough possibilities of promotion, because the leading
positions are filled in with employees of the individual subsidiary. Besides, communication
problems of the employees of the subsidiary in the host country are avoided. On the other
hand there are communication problems with the head office, because there is often a
language barrier. Besides, conflicts between the ideals of the individual subsidiaries can
arise. A further problem can be the recruitment of specialized and executive staff. As every
country searches its own executive staff higher searching and placement costs can be the
result.17
5.1.3 Geocentric strategy

The geocentric strategy aims at a uniform concept for all subsidiaries. Employees are
motivated to reach international and national targets because of awards. The communication
between the subsidiary and the head office is very intense in this case. In this case, the
individual subsidiary identifies itself with the worldwide business, taking national interests
into consideration. Worldwide cooperation between the head office and the individual
subsidiaries is needed for decision taking.
The regiocentric strategy differentiates between regional characteristics. There is a close
cooperation between the subsidiaries in the individual regions. On a regional level the
individual units of the subsidiaries strongly depend from each other and adjust to the
geographic conditions of the region.
A big advantage of this type of strategy is the fact that a uniform company culture is
developed. However, also in this strategy very high costs and acceptance problems arise.
5.2 Culture strategies (Monoculture, multiculture,

mixed culture)
The culture of a company has direct effects on its personnel management. The culture
strategies determine the content of cultural transfer and lead to totally different measures.18
17
Comp. ibid., p. 97
18
Monocultural Strategy
Multicultural Strategy
Mixed-cultural Strategy
Head Office Subsidiaries

cultural elements
Fig. 5.1: Three cultural strategies19
In the case of the monocultural strategy, the company culture of the head company is
transferred to the subsidiary abroad. The head office considers its own company culture as
superior to the foreign one and takes care that a company culture which is identical to the one
of the head office is created in the foreign subsidiary.20
The multicultural strategy, in contrast, is characterized by the fact that the subsidiaries
develop their own company cultures and adopt them to their individual country cultures. This
means that it is possible that the subsidiaries have a company culture which is completely
different from the one in the head office. However, generally, the main features of the head
office are also recognizable in the company culture of the subsidiary.
It is called strategy of mixed cultures when cultures of the subsidiary and the head company
are mixed and a homogeneous company culture is created. Because of the influence of the
country culture on the subsidiaries a culture results which matches at least to a certain degree
each individual country culture.
The choice of the cultural strategy has direct effect on the individual tasks of human resource
management. In the area of human resource development an appropriate choice of
development measures has to be made in the case of the monocultural strategy. A job
rotation is only possible between the head office and the subsidiary. In the case of the
multicultural strategy, however, one has to keep the qualification level of employees all
19
Comp. ibid., p. 99
20
Comp. ibid., p. 98
around the world in mind. There are only few possibilities of rob rotation in case of this
strategy, because every subsidiary has its own culture. The mixed-cultural strategy on the
other hand is very appropriate for a systematic job rotation for the integration of employees
across all companies.21
5.3 Decision strategies (central, local, federal)
central lokal federal
Fig. 5.2: Three decision strategies22
In the case of the central structure there is a parent company where all important decisions
are taken.23 These decisions are then transferred to the subsidiary through exact hierarchies
and the abandonment of autonomy.
The local structure is characterized by free and independent decisions. However, the parent
company still provides guidelines which are binding for the subsidiary. In extreme cases it
is even possible that the subsidiary defines own targets which need only to be approved by
the parent company.24 Through individual decisions the subsidiaries negotiate their
relationship themselves. The result is a partnership of convenience where important aspects
are agreed upon.
21
22
Comp. ibid., p. 101
23
Comp. ibid., p. 100
24
Scholz, 2000, p. 101
5.4 Nine strategies of internationalization

Nine different internationalization strategies in personnel management are the result of these
three cultural strategies and three decision strategies. These strategies connect the
characteristics of cultural strategies with the organizational design of decision strategies.
culture monocultural multicultural mixed-cultural

strategy strategy strategy strategy
decision
strategy
central (1) (2) (3)
lokal (4) (5) (6)
federal (7) (8) (9)
Fig. 5.3: Internationalization strategies of personnel management25
Alternative 1 combines the monocultural strategy with the central decision strategy, which
means that all decisions are taken within the head company and from there jointly taken to
the different subsidiaries.26 Variant 2 is different: In this case a central structure exists, too,
but in combination with the multicultural strategy, which accepts different company cultures.
This internationalization strategy is applied when a company is active in different country
cultures and wants to avoid problems of a inflexible culture.
25
Ibid., p. 102, own translation
26
Only alternative 3 can be realized on a long term basis, i.e. the combination of the central
structure with the strategy of mixed cultures. In this case there is a uniformly defined
decision center in the corporation. However, through the multitude of merger processes a
company culture is created which consists of the different partial cultures. [].27
Alternative 4 is characterized by a local decision strategy. It is true that in case of the local
solution, there are several decision centers, but there is always one which disposes over
some more power at least.28 Exactly this characteristic can be observed in the fourth
alternative, in which the company culture of the lead company is transferred to the
subsidiaries. In the case of alternative 5 the company culture is mixed with country specific
characteristics. Alternative 6 leads to the formation of a totally new company culture, as the
subsidiaries contribute the respective cultural characteristics. Alternative 7 is a combination
of the federal decision strategy and the monocultural strategy, which means that there is no
single decision center and one has to assume that a company disposes of a dominant
company culture because of coincidence.29 In alternative 8 different decision strategies
with different company cultures exist which jointly try to solve problems.30 Alternative 9
makes the adaptation of company cultures possible.
6 Conclusion
More and more companies will have to seriously think about how to reach their financial
and performance oriented aims more effectively abroad.31 In order to reach these aims it is
also essential to dispose over a personnel management oriented towards the strategy of the
company, because a good personnel management will only have success if the cultural, legal,
technical, economic and ecological conditions of the host countries are analyzed and taken
into consideration for the creation of personnel management strategies and measures. 32
This leads to a change of the quantitative and qualitative labor supply with regard to
regional and structural aspects:
labor supply grows,
labor supply develops differently from region to region due to different birth rates
27
Scholz, 2000, p. 102
28
29
30
31
Wolf, 1994, p. 6; own translation.
32
Wolf, 1994, p. 7; own translation.
6 Conclusion 13
differing growth leads to different age structures of economically active people

(industrial countries higher, developing countries younger) and
worldwide adjustment of qualification (more students from developing countries,
introduction of a dual education in China)33.
Literature
Bartlett, Ch. / Ghoshal, S.: Internationale Unternehmensfhrung. Frankfurt on Main/New
York 1990.
Drumm, H.-J.: Personalwirtschaft. 6th edition, Springer Verlag, Berlin 2008.
Kumar, N. / Wagner, D.: Handbuch des Internationalen Personalmanagements. Verlag C.
H. Beck, Munich 1998.
Regnet, E. / Hofmann, L. M. (ed.): Personalmanagement in Europa. Verlag fr Angewandte
Psychologie, Gttingen 2000.
Schmeisser, W.: Finanzorientierte Personalwirtschaft. Oldenbourg Wissenschaftsverlag,
Munich 2008.
Schmeisser, W. / Clausen, L.: Controlling und Berliner Balanced Scorecard Ansatz.
Oldenbourg Wissenschaftsverlag, Munich 2009.
Scholz, C.: Personalmanagement. 5th edition, Verlag Franz Vahlen, Munich 2000.
Stahl, G. K. / Mayrhofer, W. / Khlmann, T. M. (ed.): Internationales
Personalmanagement neue Aufgaben, neue Lsungen. Rainer Hampp Verlag,
Munich and Mering 2005.
Wolf, J.: Internationales Personalmanagement Kontext, Koordination, Erfolg. Gabler
Verlag, Wiesbaden 1994.
33
Ibid., p. 5, own translation.
II International remuneration
system
The task of international personnel management is to organize the company policy and, thus,
the remuneration system in a uniform way for employees from different countries and with
different cultural backgrounds.
The assignment of employees beyond the frontiers of the lead companys country is an
important instrument, in order to cope with this task. These assignments can be limited or
unlimited. Among the limited assignments are business trips, secondments, delegations,
deployments and dislocations, which are different with regard to the duration of the
employment abroad. In the case of unlimited assignments a local work contract exists. The
employee is not contracted by the home company but completely integrated in the foreign
enterprise.
If an employee is sent abroad for a medium term, this is referred to as secondment. If the stay
abroad is shorter, it is called business trip, in the case of longer assignments the
nomenclature would be dislocation.34
Also when an employee from a foreign company is contracted by the home country for a
limited period of time, this is called a secondment.
The delegating company follows different aims with regard to international personnel
management. These can be divided into three categories:35 On the one hand know-how is
transferred between the companies, on the other hand the company units at home and abroad
are easier to coordinate and control. Finally the aspect of personnel development is an
important aim of international assignments.
34
Comp. Haufe Personal Office Online, 2009
35
Comp. Schmeisser, 2008, p. 255
16 II International remuneration system
7 International delegation of executive

managers exemplified by BASF
Die BASF The Chemical Company BASF is actively represented by over 300 subsidiaries
and holdings on five continents.36 The named continents, on which the company BASF is
globally active, are Europe, North America and Central America (including the Caribbean),
South America, Africa and Asia (Pacific Rim). The company BASF is present in over 100
important sites in 170 countries all over the world with its production and is, thus, close to
the customer, ensuring a reliable provision of its products. Therefore, the company can be
found in all economic regions with production and sales, because it wants to benefit from the
opportunities of profitable growth all over the world. Europe is the home market of the
BASF, but the dynamic regions North America, Asia and South America are becoming more
and more important.37
At the end of the year 2007 the company BASF employed 95,175 employees all over the
world, with about 1,000 executive managers. In the BASF executive managers belong to one
of the four upper levels. There are regional differences with regard to the labor turnover rate,
which was about 1.6 percent in 2007 on the worldwide average. Moreover, in 2007 2,160
trainees as well as 22,223 employees of other companies, who rendered technical and other
services for the company in the different regions worked for the BASF. The following table
shows the number of employees by region, in which the BASF is supra-regionally present
(status: 31 December 2007).38
Percentage Percentage
Regions Employees
2007 2006
Europe 61,020 64.1 64.5
Of which Germany 46,890 49.3 49.7
North America 15,191 16.0 16.3
Asia, Pacific Rim 13,278 13.9 13.4
South America, Africa, Middle East 5,686 6.0 5.8
total 95,175 100.0 100.0
Table 7.1: Number of employees in the regions39
36
Comp. Brinkktter, 1997, p. 413
37
Comp. BASF The Chemical Company, Globale Prsenz, 2007
38
Comp. BASF The Chemical Company, Mitarbeiter in den Regionen, 2007
39
Adapted from: BASF The Chemical Company, Mitarbeiter in den Regionen, 2007
In 2007 the BASF spent 6,648 million Euros on personnel expenses and social contribution,
which includes salaries, social security payments, old age contributions and social support.
The amount has grown by 7.1 percent compared to the year 2006 (see table 7.1). The BASF
offers a market-conform, attractive remuneration to its employees, as the remuneration is
combined to social contributions, which are for example an additional health insurance, a
company pension scheme and stock purchase programs.40
Variation in
Remuneration components m. EUR
percent
Wages and salaries 5,379 6.9
Social security taxes and old age provision and support 1.269 7,5
of which old-age provisions 359 25.1
Personnel expenses 6,648 7.1
Table 7.2: personnel expenses of BASF The Chemical Company41
7.1 Importance of international deployment of staff

Equal opportunities for all regardless of their personnel characteristics.42, also called
diversity, is valid for any BASF location around the world and is strongly fixed in the
companys fundamental values and guidelines. This means that all employees have equal
opportunities in the companies regardless of their sex, nationality, education or culture
group. BASF believes that diversity creates open-mindedness, for cultural as well as
demographic changes in the company as well as for customers matters and desires. Also
force of innovation is fostered this way. Different cultural backgrounds, individual
perspectives, experiences, ways of thinking and personal approaches contribute to quicker
and more creative reactions to challenges. Therefore, the worldwide best experts and
managers are recruited and the integration of employees from other countries is supported
with intercultural offers for further education. On the long run, the company BASF has the
aim to raise the percentage of international staff among the executive managers as well as the
percentage of women among them. In 2006 the international percentage of executive
managers was about 30 percent, with a female percentage of 5.6 percent. Moreover, the
company aims at rising the percentage of executive managers with international experiences
even further. In 2006, the percentage of internationally experienced executive officers was
40
Comp. BASF The Chemical Company, Mitarbeiter in den Regionen, 2007
41
Adapted from: BASF The Chemical Company, Mitarbeiter in den Regionen, 2007
42
BASF The Chemical Company, Diversity, 2007
71 percent. In comparison, in 2003 it was only 64 percent.43 This shows that deployments
abroad are becoming more important. One has to take into consideration that the
deployments abroad do not only take place from or to Germany, but also between
subsidiaries, e.g. between Great Britain and Singapore or between Belgium and Brazil.44
7.2 Structural and contractual aspects

The BASF distinguishes between four types of international staff deployment depending on
aim and duration, which is shown in the table below.45 The examples are based on the typical
employee who is delegated with his family and household from his home country to his
workplace abroad.
Type Aim Duration
Acquaintance with language and 5 weeks to 12
Informational delegation
environment months
5 weeks to 24
Deployment Fulfillment of specific tasks
months
Know-how-transfer, development of 4 to 8 years
Delegation
executive manager
unlimited (after 8
Transfer Definitive assumption of a function
years)
Table 7.3: Types of international deployment of staff of the BASF 46
In practice the BASF The Chemical Company uses three standardized contracts; the first
contract the so called delegation contract regulates the relation between the delegated
person and the home company.
In the second contract the labor relations between the receiving company and the delegated
person are set down. The third contract contains arrangements between the home company
and the receiving company which are made for the delegation. In the case of a delegation
contract the original labor contract of the delegated employee with the home company is not
43
Comp. BASF The Chemical Company, Diversity, 2007
44
45
Comp. ibid., p. 414
46
Comp. ibid., p. 414
annulled, but put at rest for the duration of the delegation. Thus, the expatriate has the right
and the duty to return.47
7.3 Salary system

There are uniform guidelines within BASF The Chemical Company for the determination
and development of the earnings abroad, which precede the explanations on the salary
system of executives for international delegations. These guidelines are handed to all
delegated employees and have the following wording:48
BASF guarantees a certain living standard in the country of delegation to the delegated
person, which is based on the net earnings of the employee in the home country and
guarantees a delegation bonus on top.
The delegated person is integrated into the salary structure of the country of delegation
as far as possible, with the corresponding job market as basis. If the net living standard
is not reached, necessary supplementary salary components are added.
The company bears the risks with regard to changes of external conditions regarding the
net living standard
This is guaranteed by
- determination of earnings abroad (before leaving)
- regulation of earnings (yearly revision/ adaption)
- analytical follow-up (after the end of the year/ of the delegation) valid within BASF
group.
The personal situation of the employee is taken into consideration under individual
aspects (e.g. family status, number of children, tax class, salary) as well as under global
assumptions (domestic circumstances, attitudes of consumption) under protection of
privacy
The components of the salary system as well as the parameters of the frame conditions
are transparent and explained. The sheets of calculation are provided to the delegated
person.
The exercised systems and parameters are uniformly valid for all delegated persons and
are not subject to negotiations.49
7.3.1 Reference salary and other payments

The starting point for determining the earnings abroad is the reference salary, also called
shadow salary, of the delegated person in the home country (comp. table 7.5).
47
48
Comp. ibid., p. 429
49
Comp. ibid., p. 429
Regular payments are added to the salary, as described in the following chapters. Variable
payments, e.g. bonuses, are only added in the context of the analysis.50 Taxes and social
contributions are deducted from the reference earnings. The personal tax characteristics, e.g.
tax class and number of children, of the income tax card are the basis for the tax calculation.
The church tax paid before the delegation is not deducted, but only displayed for
information, because this is a personal decision of the employee. This approach is not
influenced by the German peculiarity that the church tax has to be deducted by the employer.
The voluntary payment should not lead to a net cutting for the company and, thus, represent
a disadvantage of expatriates. After this, the employees contribution to employees
insurance, unemployment insurance, company old age provisions (pension fund) and general
contributions to health and long-term care insurance are deducted. Moreover the generalized
market rent of the hometown is deducted from the reference earnings after taxes. The
resulting value is the basis for the net living-standard that has to be guaranteed in the
country of delegation and is the reference figure for the increase for delegation, which is
determined afterwards.51
Home country
Reference salary EUR 177,777
+ Other earnings (fix) EUR 0
+ Bonus (variable) EUR 0
= Gross reference earnings EUR 177,777
Income tax EUR 39,040
Solidarity surcharge (Germany) EUR 2,928
= Reference earnings after taxes EUR 135,809
Employees insurance EUR 9,216
Unemployment insurance EUR 3,120
Pension fund EUR 3,556
Health insurance EUR 4,284
Long-term care insurance EUR 486
Market rent in home country (general) EUR 23,400
= Available after rent EUR 91,747
50
Comp. Brinkktter, 1997, p. 429, 431
51
Comp. ibid., p. 431 et seq.
Buying power adjustment EUR

Available before rent EUR 115,147
Of which share of consumption in country of 70 percent 80,603
delegation
Company car yes 0
= Share of consumption after rent EUR 57,203
+/ Buying power adjustment 25 percent 14,301

Delegation bonus EUR 35,400
Net change compared to year before
Available after rent compared to year before EUR 0
Balance compared to year before EUR 0
Table 7.4: Example of calculation home country52
7.3.2 Delegation and mobility bonus

In practice, the BASF The Chemical Company concedes a financial bonus to an employee
who is sent abroad by company order. This bonus is meant to encourage employees to go
abroad, which is referred to as mobility incentive. Moreover, the motivation to live and work
in another country shall be compensated with a difficulty bonus. The aspect of personal
enrichment by gaining experience is not taken into consideration in the financial regulations.
In order to determine the amount of bonuses, one has to differentiate between the different
countries of delegation and to create a ranking order. This means that a comparability of the
countries has to be guaranteed, which is assessed on the basis of certain evaluation criteria.
The company BASF evaluates countries in accordance with the following criteria:53
Safety, domestic and external politics, court system
Environment regarding health care and medical care
Climatic disadvantages, acts of God
Social and cultural isolation
Quality of housing
Infrastructure, public supply, availability of goods
52
Adapted from: Brinkktter, 1997, p. 432
53
Comp. ibid., p. 415 et seq.
Economic context, banking system

Schools, possibilities of recreation and entertainment
The single criteria have to be attributed to the countries in question. They are determined on
the basis of the circumstances in the country by international advisors and in accordance with
a point system. This way, it can be guaranteed that well-founded values are compared.54 This
is an important aspect to be able to take the different circumstances into consideration in the
case of international delegations. Delegations from a developing country to an industrial
country entail not only better living and working conditions, but also a considerable
adjustment and difficulties because of cultural differences. The balance of advantages and
disadvantages with regard to the comparison of living and working conditions in the home
country in comparison with those of the country of delegation lead to a certain value of
complication. This value is different in every case, because every executive perceives and
evaluates individual elements differently depending on age, family status and personal ideal.
E.g. a family with children puts more emphasize on the school aspect than singles. Culture
and sport enthusiast attach special importance to leisure time activities.55
Regardless of the emphasis on certain criteria, the general coherence of the individual
attributions has to be taken into account. Therefore, the BASF uses a ten-stage system, which
allows a necessary and sufficient differentiation. The countries of delegation presented in
table 7.6. which result at the end of 1996 on the basis of objective criteria and after an
examination of coherence, are differentiated in accordance with a ten-step system, with
Germany as home country basis.
Differentiation Countries of delegation
1 Austria, Switzerland
2 Belgium, Portugal, USA, Australia
3 Malaysia, Singapore, South Africa, Uruguay
4 Costa Rica, Hong Kong, Poland, Tokyo
5 Rio/Sao Paolo, Indonesia, Mexico City, Istanbul
6 Egypt, Bombay, Rumania, Beijing
7 Bogota, Mangalore, Petersburg, Nanjing
8 Banglad., Karachi, Minsk, Teheran
9 Ethiopia, Libya
10 Algeria, Nigeria
Table 7.5: Examples of the ten-step differentiation within the BASF56
54
55
Comp. ibid., p. 418
56
Adapted from: Brinkktter, 1997, p. 419
If, however, the delegated person comes from another country, as for example the USA,
other classifications would result. This means that the degree of complication of going to e.g.
Malaysia is different to the one presented above.57
For several years the aspect of differentiation with regard to family status has been discussed
in many companies. The main argument of such considerations is that today often both
partners are working and that the partner of the delegated person would give up his job or
career. Several companies disapprove this differentiation, because the delegating company
has a contractual relationship only with the expatriate and not with his husband or wife. The
BASF, on the other hand, considers it appropriate to take the family status and size of family
into consideration in many ways. This can be seen in the salary determination on net basis by
determination of the corresponding tax class and deductions, in the regulations regarding
homeward flights with tickets for all family members, in the allowances to rent and private
health insurance and the refunding of school costs and language courses.
If however, the environment in the country of delegation changes, corresponding corrections
should be made. In case of deterioration of the conditions in the country of delegation it
makes sense to concede higher allowances on the key date also to employees who have
already been sent abroad. Even if the employee has lived and worked under bad financial
conditions before, the objective new evaluation of the country should lead to higher
allowances out of fairness reasons. If the contrary is the case, i.e. if the situation of the
conditions in the country of delegation improves, the new evaluation on the key date is valid
for new delegates only. The situation improves if safety or supply aspects improve or a
school which leads to a general qualification for university is built. The question is whether
this is valid for already delegated employees. For reasons of protection of trust it seems
justifiable to maintain the delegation bonus.
In Europe, also for executive managers an international labor market with more preparedness
to move has developed because of strong economic interdependences. For that reason several
companies have renewed and reduced their allowances within Europe. Since 1994 the BASF
has paid a one time allowance, which is paid at the beginning of the delegation for four years
instead of the yearly complication bonus. Married employees receive two net salaries and for
every child coming to the country of delegation a quarter of the salary is paid.
The mobility bonus, which depends on the country of delegation and the reference salary, is
higher for executive managers than for other employees, because they usually earn higher
salaries.
The delegation bonus is the sum of mobility and complication bonus. Table 7.7 shows that
when comparing different salaries and country hierarchies the delegated executive is
relatively seen not paid too much despite the higher total bonus in absolute numbers.58
57
Comp. ibid., p. 419
58
Comp. ibid., p. 422
complication mobility delegation bonus
South Africa India South Africa India South Africa India
12 T 32 T + 5 T 6 T = 17 T 38 T
12 T 32 T + 5 T 15 T = 17 T 47 T
Table 7.6: Examples for delegation bonuses of DASF59
7.3.3 Share of rent

With regard to the share of rent often a statistical experience-based rate is employed, as for
examples 15 percent of the gross salary or 20 percent of the net salary. A further possibility
is to use the actually paid rent. A few years ago the company BASF decided to use the
approach of the so called market rent, which is kept general and graduated in lump sums.
Based on practical experience, the market rent considers both factors, salary and the
percentage of the apartment size (see table 7.8). The rent is based on market surveys of the
inland home company and can be adapted in correspondence with market developments in
appropriate time intervals. The market rent fixed when delegating the employee is generally
only adapted after four years abroad in accordance with the valid parameters at this point in
time.
Salary up to 1 person 23 persons 4 persons
80,000 600 900 1,100
100,000 700 1,000 1,200
120,000 800 1,100 1,300
140,000 950 1,250 1,450
160,000 1,100 1,400 1,600
Table 7.7:Excerpt of the BASF-market rent table (monthly rent)60
The market rent takes into account that a co-contribution for the rented apartment in the
country of delegation has to be made and sometimes a housing allowance has to be granted
by the company. The amount of housing allowances depends on a fixed rent limit, which is
59
Following: ibid., p. 422
60
Following: Brinkktter, 1997, p. 423
calculated in collaboration with the local advisors. The amount which exceeds the limit as
well as the ancillary rental receivables are paid by the delegated employee.61
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Annex
Annex I
Overview over delegation types
Business trip Secondment Delegation Relocation Transfer
Characteristics Short term Short term to Middle term Middle- to long Long term
of delegation deployment middle term delegation, term delegation, and often
types abroad, timely delegation in duration of fulfillment of a final
limited connection delegation can task in the foreign employment
journey for a with a timely usually not be company, legal abroad with
clearly limited project estimated and factual complete and
defined abroad, e.g. beforehand integration in the generally
purpose with project foreign company unlimited
maintenance management, integration
of the active market study. into the
core work foreign
place in the company
home
company.
Duration 1 day to 3 3 months to 1 1 year to 3 2 to 5 years with unlimited
months year years option of
prolongation
Contractual no further Persistence of Persistence of Contract in home Contract with
construction contract labor contract, labor contract, country is home
needed additional additional terminated or company is
contract for contract for suspended, local completely
secondment delegation labor contract with terminated,
possible possible foreign company new contract
with foreign
company
Remuneration Unchanged, Unchanged Unchanged Remuneration Remuneration
compensation basic basic agreement with agreement
of travel remuneration, remuneration, local company with foreign
expenses compensation compensation company
of business of business
trip expenses trip expenses
+ subsistence + subsistence
allowances allowances
Domicile Maintenance Maintenance Maintenance Transfer of Abroad
of domicile of domicile in of domicile in residence
and hotel or home country home country
other + 2nd domicile + 2nd domicile
accommodati in country of in country of
on abroad secondment delegation
Source: Following Mauer, 2003, pp. 3.

Annex II
Checklist for expatriates before travelling abroad
Checklist
General
Terminate or suspend memberships
Unregister with kindergarten/school
Give notice of change of residence to child benefit fund
Arrange mail forwarding (chargeable)
Unsubscribe phone/newspaper
Get certificates translated and certified
Take address lists along
Last will
Book flight tickets in coordination with HR department
Departure
Personnel documents
Visa, working and residence authorization
Passport
International Driving License
Medical Provisions
Consult GP and dentist
If necessary, examination for fitness for tropics
Vaccination certificate
First aid kit
Household
Organize relocation
Have furniture stored
Clarify regulations on import and customs
Car
Unregister or re-register car
Import limitations
Insurances/Banks
Healthcare/Long-term care/Unemployment insurance
Old age provisions
Householder and liabilities insurance
Baggage insurance
Clarify tax questions
Examine standing orders with banks
Open bank account abroad
Authorizations for withdrawals from bank accounts
Credit cards
Apartment
Terminate leasing contract or rent out apartment
Register and unregister with authorities
Terminate contracts for electricity, gas, refuse disposal
Source: Adapted from Frster/Heidenreich/Heuser, 2002, pp. 9.

Annex III
Delegation agreement in the case of further existence of labor contract at home

(Detailed example)
The [name of the delegating home company],

hereafter called the COMPANY
and
Mr. / Mrs. / Ms. hereafter called the employee conclude the following
Delegation Agreement
Commencement and Duration of the Contract

The employee is employed in the [affiliate company/branch office/office] in
as from until presumably
.
A prolongation of the contract is possible with mutual agreement by both parties. During this
time, the previous labor contract between the COMPANY and the employee persists. For the
duration of the delegation abroad the following conditions apply:
Activities
.. is disciplinary supervisor of the employee, but is his functional
supervisor.
Residence and employment permit

The employee is responsible for the possibly necessary residence and employment permit.
The COMPANY assists in this matter as far as necessary. The resulting costs will be borne
by the company.
Remuneration
The employee receives
a) a monthly basic salary of EUR
b) a delegation allowance of EUR
The basic salary is paid as fictive comparable home salary and is examined on an annual
basis. It serves at the same time as assessment base for the benefits from the company
pension scheme/contributions to the pension fund. The adaptation of the delegation
allowance depends on the development of the living costs and the foreign exchange rate.
The employee receives furthermore:

a) a one-time clothing allowance for different climatic conditions amounting to EUR ..
b) for the first two weeks of the delegation abroad a bridging allowance of EUR .. per
day.
c) from the day of departure to commence the work to the day of departure of his/her
husband/spouse/family, but not longer than for months, a separation compensation of
EUR .
Holidays
For a delegation of two years the employee has the right to weeks of holidays, of
which he/she can spend up to weeks continuously at home. The holiday is included
in the named duration of the contract.
The holiday at home starts on the day of departing from the country and ends with the day of
reentering the country. During this time the employee is available for the COMPANY for
business meetings, the time needed is not deducted from the available holidays. The duration
of the absence shall not be longer than .. weeks. The employee will coordinate the dates of
the holidays at home in due time with his supervisor and the home main department. The
holidays at home in the last year of work abroad have to be connected with the return travel
due to the termination of the delegation abroad.
During the duration of the visit to the home country including the absence due to business
matters delegation allowances continued to be are paid.
Accident insurance
For the duration of the delegation the COMPANY concludes for the employee a group
accident insurance with the following amounts of coverage:
a) in the case of death EUR ;
b) in the case of total disability EUR
In the case of partial disability the last sum is diminished in accordance with the degree of
disability.
Travel and moving expenses

The COMPANY takes over
a) the travel costs [actual commuting expenses and airfares in economy class in accordance
with the travel expense policy] for the employee and for the spouse and children up to the
age of 18 for the departure journey, travelling to the other country and back to the home
country for holidays and the journey back once the delegation is terminated.
b) the transportation costs for furniture including transportation insurance up to an
appropriate amount which arise due to the dislocation of the employee, under the
condition that the details of the dislocation and the return are coordinated with the
..[responsible specialized company department] in due time.
c) the costs of back transport in case of a life-threatening disease of the employee or their
spouse or child.
The company grants an accommodation allowance in the amount of the equivalent of EUR
. per month.
As far as the employee has school-age children during his/her work abroad, the COMPANY
pays a school fee in the amount of EUR ..
Final provisions
The employee has to abide by the tax law of [country of delegation] and to fulfill
the duties arising from it.
Source: Adapted from Schaub/Koch/Neef/Schrader/Vogelsang, 2008

Annex IV
Labor contract abroad (detailed form)
The [name of the foreign company] with its head office

in hereafter called the COMPANY,
and
Mr./Mrs./Ms. , living in ,
hereafter called the employee conclude the following
Labor Contract
Work and area of responsibility

The employee is employed as in .
He has the following functions:
The employee has to report to [e.g. Board of Directors].
The company retains the right to give the employee also another function corresponding to
his/her professional qualification and his/her capacities and to change the supervision
because of organizational reasons, without causing a unilateral termination of the contract or
individual provisions.
Commencement, duration of contract, termination

The contract commences on /with the day of departure for the
commencement of work at
The contract is concluded for an indefinite period and can be terminated during the first ..
months/ with a one months notice to the end of the month. After this period the reciprocal
termination period is . weeks/months to the end of a calendar month/a calendar year.
The labor contract ends without termination of the contract with the end of the month of the
65th birthday of the employee.
Remuneration
The employee receives as remuneration for his/her work:
a) a monthly basic salary of EUR and
b) a delegation allowance of EUR ,
payable at the end of the month. This covers the complete time of his/her work for the
company.
Furthermore, the employee receives special allowances related to the calendar year/business
year in accordance with the following principles:
This special allowance will be granted in the year of entry and departure on a pro rata
temporis basis.
The above mentioned allowances will be paid in . [corresponding currency] at
the official conversion rate of [corresponding state bank] at the due date.
Taxes
The employee is responsible for the correct payment of taxes of his/her remuneration in the
country of delegation in accordance with the tax laws.
Social security
During the delegation the legal provisions concerning social security in the home country
continue to apply for the employee. The COMPANY will pay the employer contributions to
the pension, health care, nursing and unemployment insurance.
Supplementary benefits, reimbursement of expenses

The COMPANY takes 50 percent/100 percent of the fees for a life insurance or the
corresponding fees for a state old age insurance of the employees choice over as well as for
a health insurance, but up to 50 percent/100 percent of the maximum contribution rate of the
social security of the home country of the employee.
The employee bears the total costs/pure rental costs for an appropriate housing up to an
amount of . percent of his/her monthly basic salary/up to the equivalent of EUR :. The
COMPANY takes the remaining housing costs/pure rental costs fully over up to the
equivalent of the maximum of EUR .
The company refunds the expenses which the employee incurs because of the execution of
his function, in accordance with national practice/with the travel expenses policy.
In case of termination of the labor contract and in case of life-threatening diseases and the
return of the employee to ..[home country] due to these circumstances, the
COMPANY takes over the travel expenses of the employee including transportation costs for
relocation of goods to an appropriate extent.
For the duration of the contract in the COMPANY offers the employee a car in
accordance with the company car regulations of the company. The company car can also be
privately used by the employee.
Insurance
The COMPANY insures the employee for the duration of the contract against accidents with
the following coverage:
EUR for the case of death
EUR for the case of disability.
The insurance includes work as well as private accidents and has to be paid to the employee
or his/her successor at law. It ends with the moment of termination of the contract.
Moreover, the COMPANY procures comprehensive company liability insurance for the
totality of the employees activities.
Holidays
In the case of work in other European countries:
The employee disposes over vacation for working days. The duration and the
repartition have to be coordinated with ..[e.g. the responsible supervisor].
Generally, holidays shall be combined in one continuous period. Unused holiday days can
only be transferred to the next calendar year if urgent company or personal reasons justify it.
Remaining vacation days which are not used until the 31st of March of the next calendar year
are forfeited without compensation.
In the case of work in non-European countries:

For every years of work the employee is entitled to . weeks of vacation. The employee
can spend a continuous period of up to . weeks in Europe each year. The Europe holidays
commence with the day of departure and end with the day of return. During this time, the
employee is available to the COMPANY and their business partners for business meetings.
The time needed is not deducted from the vacation.
The employee will coordinate the time of his/her holiday in Europe with his/her supervisor in
due time. The vacation in Europe during the last working year has to be combined with the
return journey due to the termination of the labor contract.
For the duration of the vacation in Europe, including the business related absence, the
delegation allowances are continued to be paid to the employee.
Employee leave benefits

In the case of disease causing incapacity to work the company pays the monthly salary for
the time of . calendar days/weeks/months to the employee.
Final provisions
Claims from this labor contract have to be asserted within one month after receipt of the last
payroll, otherwise they will be forfeited.
Taking into consideration the external position of the employee the contract is drafted in ..
and . (e.g. Spanish) language. Both versions are legally binding; in the case of
discrepancies between both versions only the . text is decisive.
The labor contract concluded and designed with this provisions is subject to the law of ..,
as far as the mandatory national law is not preceding.
Source: Adapted from Pulter, 2004, p. 13ff.

Annex V
Contents of EEC regulation N 1408/71
Country of delegation as basic rule
Insurance responsible
Countries Regulation Period Form
branch insurance
Belgium compulsory
health
Denmark Delegation: insurance in
case of
Germany art. 14 n. 1a for up to E 101 private
health
Finland EEC 12 months insurance
regulation n
France health 1408/71 responsible
old age
Greece nursing insurance
carrier
Great Britain old age
Ireland accident-
Iceland and Prolongation for responsible
carrier in
Italy unemployme of the up to a E 102 the country
nt delegation
Liechtenstein insurance art. 14 n. 1b maximum of delegation
of further
Luxemburg EEC 12 months
regulation n
Netherlands 1408/71
Norway
Austria
Portugal Special form-
Sweden agreement: diverse*- less DVKA
Switzerland Art. 17 EEC- appli-

regulation
Spain n 1408/71 cation
* Some examples: Spain/Netherlands/Belgium/Ireland 5 years, Italy 4 years, France 6
years (Comp. DVKA)
Source: Adapted from Schmeisser, 2008, p. 274.

Annex VI
Countries with social security treaties
Country of contract Insurance Branch Limitation
in time
HI NI OAI UEI AI delegation
Belgium X X X X X 12 months
Denmark X X X X X 12 months
Bosnia-Herzegovina X X X X 12 months
Bulgaria X X X X X 12 months
Chile X X 36 months
China X X 48 months
France X X X X X 12 months
Greece X X X X X 12 months
Great Britain X X X X X 12 months
Italy X X X X X 12 months
Israel X X X unlimited
Japan X X 60 months
Canada X X 60 months
Korea X X 24 months
Croatia X X X X X 24 months
Malta X X X X X 12 months
Morocco X X X X 36 months
Macedonia X X X X 24 months
Poland X X X X X 12 months
Portugal X X X X X 12 months
Rumania X X X X X 12 months
Slovakia X X X X X 12 months
Turkey X X X X unlimited
Tunisia X X X 12 months
USA X 60 months
Cyprus (Greek part) X X X X X 12 months
HI=Health Insurance; NI = Nursing Insurance; OAI = Old Age Insurance; UEI = Unemployment
Insurance, AI = Accident Insurance
Source: Adapted from Schmeisser, 2008, p. 277

III Stock-option programs as part
of the remuneration
management system
8 Basic considerations on economic
philosophy and ethics
8.1 Shareholder-Value-Approach
In the beginning of the 90s a new management concept was discussed in Germany. This
concept was published by Alfred Rappaport in his book Creating Shareholder-Value at the
end of the 1980s.62 The term value in this context means the company value in the sense of
the market value of equity.
Rappaport provided with his concept a comprehensive illustration on value-oriented
company management. The focus of this approach lies on the direction of the management
towards the interests of the shareholders of a company, pursuing mainly the aim of
increasing the company value. First German companies, as e.g. Daimler AG applied the
shareholder value approach in the mid 1990s and integrated the concept in their company
management.63
The company value can be calculated with different methods. In the context of the
shareholder value analysis often the Discounted Cashflow Method is used. Put simply, the
cashflow is calculated as difference between incoming and outgoing payments which a
company has at its disposal for e.g. investments or dividend payments. For the determination
of the current company value, however, not the future, but the current payment flows are
relevant.64
62
Comp. Werder, 1998, p. 6971
63
Comp. Frndhoff, 2009
64
Comp. Friedrichsen, 2000, p. 17
44 III Stock-option programs as part of the remuneration management system
In accordance with Rappaport the current company value can be determined with the help of
present values of the future free cash flows. The free cash flows of a company are discounted
over a certain period together with the residual value at the end of the period of prognosis.
Four discounting the free cash flow the weighted average cost of capital is used.65
By discounting the estimated cash flows with the weighted average cost of capital (WACC)
the total value of the company is obtained. By deducing the market value of the dept capital
from the calculated total value of the company, the shareholder value can be determined.
Value is added for the shareholders if the calculated yield is higher than the costs of capital.66
Therefore, the managers have to direct the company management to the interests of the
shareholders if they do not want to lose them or want to win new investors for the company.
The shareholders or potential investors will only invest into the company, if they receive an
adequate yield for their capital. If they do not receive an adequate yield, they will sell their
shares. This leads to falling market prices of the shares and potential investors will avoid an
investment into the company. This can lead to difficulties of the company to raise capital.
Because of these possible problems the managers have to direct the company management in
such a way that a lasting increase of the yields on shares can be reached. The capital markets
show positive reactions to the increase of yields on shares, which again leads to an increase
of the price of shares on the middle or long run.67 The shareholder value is influenced by so
called value contributors. In accordance with Rappaport such value contributors are all
values on which the company can have influence. The management can directly influence
the value contributors trough operational business as well as through investment and
financing decisions and thus have influence on the shareholder value.68 Only those
investment measures are carried out which achieve an appropriate yield. If a satisfactory
yield cannot be reached, the measure has to be turned down. The focus of the management
on high-yield business areas can lead to an optimization of the cash flows and thus, to an
increase of enterprise value.69
In order to avoid losses of confidence on the shareholders side it is also important for the
company to pursue a shareholder-friendly information policy. An unclear communication
could lead the shareholders or investors of the company to estimating the enterprise value too
low. This erroneous estimation would have a negative impact on the market value of the
shares.
The advantage of the shareholder-value-approach is the use of future-oriented payment flows
and the consideration of the risk of costs of capital. Balance sheet related possibilities of
65
Comp. Kramarsch, 2004, p. 22
66
Comp. Schmeisser/Hahn/Schindler, 2004, p. 5
67
Comp. Friedrichsen, 2000, p. 18 et seq.
68
Comp. Achleitner/Wichels, 2002, p. 5
69
manipulation of the company profit are avoided in the application of the shareholder-value-
approach.70
The critique of the shareholder value lies mainly in the unilateral approach to the interests of
the investors (shareholders). According to the critics, stakeholders like customers, suppliers
and employees remain disregarded. Rappaport counters:
Not only the owner benefits from a value creating company, but it serves all other
interested groups; on the other hand, all interested groups are endangered if the
management does not achieve the creation of shareholder value.71
Furthermore, Free Cash Flows used to calculate the shareholder-value are considered as easy
to manipulate. For example, the reduction of staff or cost reductions in the area of research
and development can be used to have a short-term positive influence on cash flows. Such a
short-term course of action, however, is contradictory to the shareholder value concept that
aims towards a lasting increase of the company value.
The reduction of work places can be necessary for the company in order to maintain or
optimize its competitive capacity on a national and also international level. On the middle
and long run this is good for the employees, because on a long-term basis this permits to
maintain existing work places and to create new jobs.
German companies like the DAX-30 company RWE are aware of their responsibility
towards the stakeholders and care for their interests in their company management.
Also within the context of the financial crisis, the shareholder-value-approach was reason for
controversial debates. The shareholder-value-approach is accused of promoting a short term
profit maximization and therefore, of being also responsible for the crisis. In accordance with
Rappaport, however, the concept of the shareholder-value-approach is not directed towards
short-term management decisions. Apart from the generation of increasing cash flows, a long
term increase of the company value and an adequate risk assessment are the targets of his
approach. According to Rappaport, there would not have been a crisis if these components
had been taken into consideration by top managers.72
The management can be motivated to adhere to and execute the shareholder-value concept,
by receiving apart from the common remuneration package profit oriented remuneration via
value driven incentive systems as stock-option programs.73
70
Comp. ibid, p. 6
71
Comp. Rappaport, 1999, p. 8, own translation.
72
Comp. Rickens, 2009
73
Comp. Winter, 2000, p.7
8.2 Principal-agent theory

The execution of the shareholder-value-concept in the company can lead to conflicts between
the shareholders and the management. This can be attributed to the fact that shareholders and
management partially pursue different aims. Already in the 18th century the economic
theorist and business ethicist Adam Smith recognized this problem. He wrote:74
The directors of such companies, however, being the managers rather of other
peoples money than of their own, it cannot well be expected that they should watch
over it with the same anxious vigilance with which the partners in a private
copartnery frequently watch over their own. Like the stewards of a rich man, they
are apt to consider attention to small matters as not for their masters honor, and
very easily give themselves a dispensation from having it. Negligence and profusion,
therefore, must always prevail, more or less, in the management of the affairs of
such a company.
The divergences in interest between the investors in form of the shareholders and the
employed managers are described as principle-agent-theory in business sciences. In this
theory the shareholders are called principals and the managers are called agents. The
shareholders entrust the managers with the direction of the company. The shareholders do
not need to be active themselves in the company in which they invest.75
The main interest of the shareholders is a profitable capital investment. The shareholders
pursue exclusively the monetary goal of high increase in value of the invested capital.76
Furthermore, the shareholders are more adventurous than the managers. This is expressed by
the fact that financing and investment measures are chosen from which higher profit can be
expected.77
The managers are interested in maximizing their income. Besides this monetary goal
managers can also pursue non-monetary goals. These include for example the expansion of
the personal sphere of control or the improvement of ones own reputation.78 The willingness
to take risks of the managers is generally weaker than the one of the shareholders. This is due
to the fact that their workplace depends on the economic development of the company.
Managers are rather reluctant to take risky actions.79
74
Smith, 1879, p. 254f, own translation.
75
Comp. Engelsing, 2001, p. 26
76
77
78
79
The different goals of both parties cause goal conflicts if the agents do not act in the
principals interest, but pursue mainly their own goals. This means they act in an opportunist
way. The resulting conflict of goals can be enforced by informational asymmetries.
The informational asymmetry describes the uneven repartition of information between two
contracting partners. The agent has an informational advantage over the principal, because of
his position in the company. Because of this unilateral advantage, the agent is in the position
to take decisions in his own favor and to the disadvantage of the principal.
There are different types of informational asymmetries like hidden action and hidden
information. It is typical for these forms of information asymmetries that the informational
advantage of the agent occurs only after the conclusion of the contract.
Hidden action describes the fact that the principal can observe the behavior of the agent only
with difficulties or with high costs.80 Because the agent has the choice between different
alternative actions and the principal has the observation problem, the agent can take the
decision himself how much effort he puts into the execution of the chosen action. The
principal will only know the final result.81 However, he does not know how to assess the
final result, because he does not know whether the result is due to external influences and
how far the agent has influenced the result with his own actions.
Hidden information describes the problem that the principal can observe the actions of the
agent and is aware of the options of the agents. The agent can simulate wrong facts with
regard to his characteristics and capacities before contract conclusion which the principal
knows only after the contract has come to effect. Thus, there is the risk of the agent using
existing informational asymmetries to his own advantage.
If the investors do not insist on corresponding retaliatory actions, the conflict causes that the
shareholder investment can not evolve in the best way and that the manager uses his leeway
for action to the companys and the principals disadvantage.
In order to mitigate these asymmetries the principal has two possible options: 82
1. There is the possibility to build information and controlling systems or to improve them.
They are meant to give the principal a better insight into the agents behavior.
2. The second possibility is the output oriented control, in which the agents are supervised
by the principal with respect to the desired and future results of their actions.
One of the controlling instruments which can be used for the purpose of encouraging the
agents to behave as far as possible in the principals interest is stock-option programs. With
this solution, the remuneration of the managers (agents) is linked to the increase of company
80
Comp. Dietz, 2004, p. 27
81
82
value. Only because of the increase of the market price of the shares and, thus, of the
company, the manager get paid for their work.
8.3 Goals of stock-option programs

8.3.1 Minimization of the principal-agent problem
The increase of the market price of the shares and thus, of the company-value is the preferred
goal of the shareholders. The problem is that managers do not only exclusively pursue this
target but also own opportunistic goals. By connecting the remuneration with stock-option
programs the remuneration of the manager is connected to the development of the market
price of the shares. Thereby, the managers are encouraged to direct the company in the
shareholders interest, because only by increasing the market value of the share the manager
can obtain an additional financial advantage.
The increase of the company value and of the shareholder benefits is expressed in an increase
of the stock quotation, from which the investors can finally also gain a financial advantage.83
A further reason which is named in the context of the use of stock-option programs is the so
called risk-taking-effect.84 The presumption is that managers act generally in a risk-averse
way. This means that investment decisions which would have positive capital values are
possibly not taken because the risk is too high for the managers. However, the investment
would have been in the shareholders interest. By the use of stock-option the right incentives
can be given so that the managers willingness to take risks is increased.85
As the assessment base for stock-option programs is the shareholder value, the manager is
more likely to take such investments into consideration which contribute to an increase of the
enterprise value.86 This way, an adjustment of interests between shareholders and managers
can be achieved. Thus, both stakeholders have the same aim, i.e. the increase of the company
value.
A further adjustment of aims can be reached between managers and investors if a personal
investment e.g. in the form of shares is required from the managers.87
83
84
85
86
87
Comp. ibid, p. 30
8.3.2 Personnel commitment and recruitment of top managers

Companies compete more and more for internationally mobile managers. The globalization
has reduced national barriers and enforced the international competition for top managers. A
competitive remuneration system, as provided by the stock-option program, is therefore
necessary to tie the own top managers to the company and to protect them from labor piracy
by competitors.
The existence of stock-option programs is internationally very different. In Canada and the
US the use of stock-options is at 85 and 66 percent.88 The take-over of managers of these
countries can be simplified by using stock-option programs as remuneration instrument. The
managers of these countries know the profit potential of stock-options, because they have
been used in these countries for a long time as remuneration component. Therefore, it is the
task of personnel management in German companies to create an efficient remuneration
system in order to gain these top managers interest for German companies acting on an
international basis.
A further important aspect is that stock-option programs can contribute to staff commitment
if they are structured correspondingly. It is important for this to use long-term stock-options
with lockup periods and forfeiture clauses. The lockup period means that managers can
exercise their options only after a certain time. If the manager leaves the company before the
end of the lockup period, he forfeits the right to exchange his options against company
shares. The stock-option cannot be handed on to others as this is mostly excluded by
contract. Thus, the managers are encouraged to remain in the company, because the financial
losses can be considerable in the case of a positive economic development of the company.
In the context of company mergers the different remuneration forms of the merging
companies have to be equally taken into consideration. German companies cannot exclude
themselves from internationally usual remuneration practices, but have to adjust themselves,
so that in this context stock-option programs for the remuneration of managers are used.
8.3.3 Improvement of the companys liquidity

The exclusive remuneration of managers with traditional remuneration components, as basic
salary or success related bonuses causes always a loss of liquidity or a reduction of the
company cash flow.89 This problem can be avoided by using stock-options.
If the stock-option program is exercised via an approved or conditional capital increase, the
liquidity of the company is not affected. When the capital of the company is increased the
value of the company is divided into a bigger number of shares. It is true that this leads to a
delusion of the shares of the existing shareholders, on the other side the increase in capital
strengthens the equity capital base of the company.
88
Comp. Towers, 2009
89
When the stock-option is exercised the nominal capital increases by the face amount of the
new shares. At the same time the capital reserves rise by the difference between the new
shares and the base price to be paid.90
Especially the lack of effect on company liquidity in the case of an increase of capital has to
be positively mentioned, because German companies dispose over a lower equity-ratio in
international comparison. By giving the managers of the company stock-options the
company is able to pay an appropriate remuneration in international comparison and at the
same time to preserve the companys liquidity.
8.4 Criticism of the use of stock-options

Stock-options for variable remuneration of managers also bear some disadvantages that will
be explained below:
8.4.1 Manipulation of stock quotation

The manager shall be encouraged by the remuneration via a stock-option program to increase
the shareholder value. The stock-options that the managers receive for their work are
connected with the stock quotation.
The problem is that the stock quotation of a share can be influenced by more aspects than
merely the shareholder value-oriented decisions of the managers, as for example through
company external factors. E.g. the stock quotation can be influenced by the up and
downward trends on international markets as well as by the development of interest rates and
currency exchange rates. Thus, the stock quotation can rise higher than the performance of
the management would justify. A manager who exercises his real stock-options at this
moment receives shares at reduced prices or if he exercises virtual stock-option he receives
especially high capital gains for which he has not been responsible.91
This has lead to considerations on excess remuneration of managers, discussing stock-
options as disadvantageous approach and pointing out, that if employees or managers are
responsible for losses, they should not be able to claim high compensations under labor law.
A performance orientation, as provided by the Berlin Human Capital Assessment Model and
long term bonuses have to be considered more often in the companys interest, as will be
discussed later on.
A possible solution to solve the problem within this approach is to connect the basic price
additionally to the sector or market index. Thus, not only the absolute increase of the market
value of the share, but also the development of the market value in comparison with a sector
90
Comp. ibid, p. 31
91
Comp. Zitzewitz, 2003, p. 34
is decisive for the exercise of a stock-option. In this case, the owner of a stock-option can
only exercise it if the company evolves economically better than the competitors.
A further disadvantage is that the capital market is very sensible to negative news from
within the company. Thus, there is the risk of possibilities for manipulation, when the
managers holding stock-options give certain information to the public. Rumors which are
spread at the right moment can influence the stock quotations in one or the other direction.
The result is that the basic price of stock-options which follows the stock quotation can go up
or down.92 The problem of insider knowledge of the managers can be reduced or contained
by trading windows.
8.4.2 Changes in the capital structure of the company

A further disadvantage results in the case of use of stock-option programs through a
conditional increase in capital. In this case it comes to a dilution effect of the voting right and
reduction of the share in capital of the existing shareholders if there is an exclusion of the
purchase right of the shareholders.93 However, when the stock-option program is financed by
the buyback of own shares, there is no dilution of the voting rights of the shareholders. On
the other hand there is a leverage effect of the share in capital. The dilution is caused when
the shares are handed down to the participants of the stock-option program below the cash
value of the share. 94
The question is whether these arguments disfavor the use of stock-options in companies. The
resulting dilution effects remain generally acceptable and the increase of stock quotation and
profit achieved with the help of stock-option programs compensate for this disadvantage.95
8.5 Stock-option programs in the context of modern

remuneration systems
Previously it has been shown that the remuneration of the managers should be connected to
their performance and success, in order to implement e.g. the shareholder value concept in
the company.
This chapter shows how German companies have reacted to the changed requirements with
regard to remuneration. In this context the changes of the remuneration structure and the
92
93
Comp. ibid, p. 53
94
Comp. ibid, p. 232
95
introduction of a value-oriented remuneration system in German companies are discussed

first.
After this, the legal provisions concerning shares and company law which have to be
respected in the remuneration of managers are discussed.
9 Changes in the remuneration structure

in Germany
Up to only several years ago the design of the total remuneration was little sophisticated and
it was mainly composed of small variable portion and a high basic salary. Depending on the
hierarchic level and the sector of the upper management the amount of variable remuneration
components corresponded to 10 to 20 percent of the total remuneration. In international
comparison this amount of variable remuneration components of the total remuneration is
very low. In a study from 1997 25 percent of the companies said to use revenue targets and
performance related bonuses for the remuneration of the top managers. The bonuses
generally include the participation of the members of the board of directors in the annual
profits of the company. The basic salary of the management corresponded to up to 64 percent
of the total remuneration.96
The following illustration shows the composition of the total remuneration in the mid 1990s
and today.
96
Comp. Kramarsch, 2004, p. 4 et seq.
Total remuneration
100% past future

Social and 10%
additional benefits 20%
Variable 20% Long-
Value potential
remuneration 16% Term
20% Short-
Term
Basic salary 64% 50%
Existing x Jahre Shareholer value

remuneration remuneration
structure
Fig. 9.1: Tendencies in the remuneration structure97
The formerly used remuneration structure with a high basic salary and a low share of
bonuses in the total remuneration was criticized especially against the background of calls
for a value-oriented direction of the company in the sense of the shareholder value approach.
Also the commencing internationalization in connection with the increasing globalization
and the competition for successful managers lead to a demand for a reformulation of the
German remuneration system.98
It was criticized that the basic salary does not serve as appropriate remuneration for the
performance of the top manages. Neither did this form of remuneration portray the success of
the company in an adequate way. The lack of connection between the stock quotation and the
bonuses granted to the top managers was also seen to be a problem. Bonuses are calculated
with the help of key figures from previous business years, which caused that the
development of the stock quotation was not taken into consideration for the remuneration.
The result was that the management had no incentive to direct their decisions towards the
increase of the stock quotation of the company.99
Furthermore, German accounting standards were criticized with regard to bonuses, because
they permit assessment and accounting options and make a falsification of the accumulated
equity possible. The danger was recognized that especially high bonuses could be achieved
97
Kramarsch, 2004, p. 5
98
99
Comp. ibid, p. 68 et seq.
when short-term yearly targets were pursued. This form of traditional remuneration system
also affected the liquidity of the company to a great extent.100
These points of criticism show that a reform of the traditional remuneration system was
necessary in Germany. In this context value-oriented remuneration systems were
implemented in German companies to support the introduction of the shareholder value
concept. Today it is merely unthinkable not to use them and they have become an important
strategic instrument for the process of increasing company value.101
9.1 Demands for performance-oriented remuneration

systems
If stock-option programs shall be successfully used, they have to fulfill certain requirements.
This chapter describes these requirements.
Value-oriented remuneration systems have to be designed in such a way that the decisions of
the management are controlled in the interest of the shareholders.102 Incentives shall be
created to encourage management to take decisions in the principals interest in order to
achieve an adjustment of the interests between shareholders and management.
In order to direct the behavior in the shareholders interest, value-oriented remuneration
systems have to be designed in such a way that permits to control them in a quick and
performance-oriented way in order to guarantee the connection between performance and
remuneration. Furthermore, it has to be taken care that the performance and remuneration are
in brought into an appropriate relation.103
A successful incentive system has to fulfill the following requirements:
1. Adequacy of target values: The assessment base determines which factors permit to judge
over the managements performance. It has to match the chosen aim to achieve adjusted
interests between the shareholders and the management. The management shall only
receive a higher remuneration if the desired targets of the shareholders are met or
exceeded.104
100
101
Comp. ibid, p. 69
102
Comp. Laux, 1999, p. 12
103
104
Comp. Pellens/Crassselt/Rockholtz, 1998, p. 14
2. Long-term orientation: By the use of long-term success factors the danger of

manipulation of the assessment base by short-term management decisions shall be
compensated.105
3. Transparency: The design of the incentive system has to be comprehensible and clear for
the management.106
4. Acceptance and ease of communication: The success of an implemented incentive system
for remuneration depends decisively on whether it is accepted by the management. For
this, it is important to communicate with the entitled persons and to show the reasons for
and preconditions of the introduction of a value-oriented remuneration system.107
5. Profitability: From a shareholder point of view the costs of the incentive system shall not
be higher than the benefit from it.108
The Boston Consulting Group has developed a performance-oriented remuneration system,

which is presented in the following figure:
105
106
Comp. Pellens/Crasselt/Rockholtz, 1998, p. 14
107
108
Comp. Pellens/Crasselt/Rockholtz, 1998, p. 14
Remuneration component
Basic salary Short-Term Incentive Long-Term Incentive

target: target: target:
Guarantee of a basic financial Remuneration for short-term Remuneration for long-term

security improvements internal and external creation
Basis for pension Rem. for individual successes of value
Internal assessment base External assessment base

(based on key figures) (based on shareholder value)
Value-oriented key figures

Share plans Share option plans
(e.g. EVA, CFROI/CVA, DCF)
Restricted Stocks Naked options
Bonus bank Phantom Stocks Optional and
Performance Cash Plans Performance Shares convertible bonds
(Units) Stock Appreciation
Rights (virtual
options)
109
Fig. 9.2: Classifications of value-oriented remuneration systems
The value-oriented remuneration system of the Boston Consulting Group is composed of

three remuneration components, the basic salary and the variable components, which can be
further divided into short-term and long-term remuneration components.
The basic salary is the basis for the management remuneration. Its amount is individually
negotiated.110 Usually, it is paid in 12 monthly installments. The amount of the basic salary is
determined by the remuneration policy of the company. In practice, the basic salary serves
above all to assure and preserve the managements living standard.111 The basic salary is
neither variable nor performance-related. Thus, the fix basic salary does not give any
assistance in solving the principal-agent conflict.112
109
Following: Schmeisser/Hahn/Schindler, 2004. p. 14
110
Comp. Kramarsch/Becker, 2006, p. 24
111
Comp. Lazar, 2007, p. 37
112
Comp. Pape, 2004, p. 67
The short-term variable remuneration is also called short-term incentive. It consists for
example of annual bonuses or royalties. Short-term incentives are generally based on
strategic key figures of accountancy. The strategic incentives refer to the business year of the
company and are mostly paid in a one-time payment when the target values are met at the
end of the business year. The used key figures can be divided in traditional key figures of
accountancy as profit or revenue and value-oriented key figures as the Cashflow Return on
Investment (CFROI) or the Economic Value Added (EVA).113
The long-term incentives are long-term variable remuneration components, which are
lastingly directed by the company profit.114 They can be divided with the help of the
underlying reference values, which are oriented towards the increase of company value. The
increase of company value can be classified in internal and external reference values. Long-
term incentives which are based on internal assessment values as benchmark for increase in
value, try to calculate the economic value on the basis of company internal key figures. This
value is than used as remuneration criterion. This happens under the condition that an
increase of economic value induces rising stock quotations and thus, the increase of the value
of the enterprise.115
Furthermore, long-term incentives, which are based on external assessment values, can be
divided into stock and stock-option programs. Stock quotation oriented remuneration
systems are oriented by the stock quotation and thus, directly by the development of the
shareholder-value. The participation of the management in the company via stock and stock-
options is a good method to harmonize the interests between the management and the
shareholders and to maximize the shareholder capital which is embodied by shares.116
The German Corporate Governance Codex contains enough recommendations with regard to
the composition of the total remuneration.
9.2 Company law aspects of remuneration

9.2.1 The German Corporate Governance Codex
The term Corporate Governance has received more attention in last years from the German
public and was also correspondingly discussed in specialized literature. Corporate
Governance includes especially basic rules for a good and responsible management and
control of a company. These basic rules are written down in Germany in the German
Corporate Governance Codex (GCGC).
113
Comp. Schmeisser/Dittmann, 2004, p. 40
114
115
Comp. Achleitner/Wichels, 2002, p. 7 et seq.
116
Comp. ibid, p. 9
This section deals at first with the development of the Corporate Governance Discussion and
explains then the aims and the composition of the German Corporate Governance Codex
(GCGC). After that the recommendations of the GCGC and its influence on the remuneration
structure of directors in analyzed in detail.
Furthermore, the Codex contains recommendations for the design of stock-option programs
and other variable long-term remuneration forms for management.
Development of the Corporate Governance Discussion

The Corporate Governance discussion started off in 1969 in the US. The American Institute
of Law was engaged to conceive a draft of the Federal Securities Code. After intense
discussions at the end of the 1970s, 1992 the Principles of Corporate Governance were
published.117 In the context of the spectacular accounting scandals of the US companies
WorldCom and Enron the call of shareholders and investors for more transparency grew
louder. This lead the US government to pass the Sarbanes-Oxley Act of 2002 on 30 July
2002. The Sarbanes-Oxley Act completes the regulations of the Securities and Exchange Act
(SOX) of 1934. The SOX has prominently the goal to create more transparency in the
management.118 Also the confidence of the investors in the companys accounting should be
re-established.
The passing of SOX did not only affect US companies but also German companies listed on
the US stock market, as e.g. Allianz or Siemens. These companies are also subject to the
regulations of the Sarbanes Oxley Act.
In Germany the Federal Government showed reactions after the Holzmann case with the
establishment of a Government Commission Corporate Governance company
management company control modernization of the stock corporation law. The
Government Commission war installed with a letter by the former German Chancellor
Gerhard Schrder on 29 May 2000. Theodor Baum was the head of the commission. The
task of the Government commission was to show weaknesses of the German System of
company management and control.119 The German system of Corporate Governance was
meant to be strengthened and weaknesses to be removed. The international developments
with regard to company management were thereby also considered in Germany. Suggestions
for reform should be elaborated in order to stay abreast of the new developments, so that the
financial centre Germany could assert itself in international competition and survive in the
system of international Corporate Governance.120 The commission published its final report
in July 2001 and recommended the formation of a new commission for the elaboration of the
German Corporate Governance Codex.
117
Comp. Grattenthaler, 2007, p. 172 et seq.
118
Comp. Carl, 2005, mn. 1623 et seq.
119
Comp. Bericht der Regierungskommission, 2001, p. A1
120
Comp. ibid, p. A1
Further company crises as e.g. Flowtex121 or Comroad122 proved that there were deficits with
regard to company management and control in Germany. The boards of directors of the
companies have come under criticism, besides accountancy companies, because they did not
detect the fraud. The trust of institutional investors, suppliers and other stakeholders in the
company management was decisively weakened.
The newly set up commission under the direction of Dr. Gerhard Cromme, who was the
chairman of the board of directors at that moment, commenced its work in September 2001.
The commission was composed of academics and well-known business representatives.123
The results of the Baum Commission provided the basis for the German Corporate
Governance Codex. The finished version was published on 26 February 2002 and has been
checked every year since then.
The German Corporate Governance Codex should represent a document created to re-
establish and enforce the trust of the investors and of other stakeholders in the management
of German enterprises. The German Corporate Governance Codex provides besides
recommendations also ideas for business leaders for a good and responsible business
management and control.
Targets and design of the German Corporate Governance Codex

The introduction of the German Corporate Governance shall especially deal with the
following points of critique of the German corporate constitution:124
Lack of orientation on shareholder interests,
Dual corporate constitution with Executive Committee and Supervisory Board,
Lack of transparency of German management,
Lack of independence auf German Supervisory Board
Limited independence of annual auditors
The Codex deals with points of critique and considers the shareholders and institutional
investors demand for more transparency in the management in Germany. The preamble of
the codex formulates the goals of the codex as follows:125
121
Comp. Heise, 2009, p. 7
122
Comp. N.N., 2002
123
Members of the commission are Cr. Gerhard Cromme, Dr. Gerhard Cromme, Dr. Paul Achleitner, Dr. Rolf-E.
Breuer, Dr. Hans Friedrich Gelhausen, Ulrich Hocker, Max Dietrich Kley, Professor em. Dr. Dr. h.c. Marcus
Lutter, Volker Potthoff, Heinz Putzhammer, Peer Michael Schatz, Christian Strenger, Pro et seq. Dr. Axel von
Werder, Dr. Wendelin Wiedeking.
124
DCKG, Preamble, 2008
125
DCKG, comment by the commission head Gerhard Cromme, 2002
This German Corporate Governance Codex (the Codex) shows essential legal
provisions for management and control of German stock-listed companies
(direction) and contains internationally and nationally recognized standards of
good and responsible management. The Codex shall make the system of German
Corporate Governance more transparent and comprehensible. Its aim is to boost the
confidence of international and national investors, customers, employees and of the
public in management and control of German stock listed companies.
The Codex contains so called shall recommendations and should or can proposals. Via
the declaration of compliance in accordance with s. 161 German Stock Corporation Act
(AktG) it is legally consolidated. Executive and Supervisory Board of listed companies have
the duty to give annual information on whether the recommendations of the German
Corporate Governance Codex were followed. In case of deviations from the codex it has to
be explained which recommendations had not been followed and the reasons for the
deviation should be given. This approach corresponds to the Anglo-Saxon principle:
Comply or Explain. The declaration of compliance has to be published on the homepage of
the company in accordance with s. 161 subs. 2 German Stock Corporation Act.
If the company deviates from proposals, no explanation is necessary. In this case the
deviations must not be disclosed. The Codex is mainly directed towards listed companies,
but its application is also recommended for companies that are not listed on the stock market.
The codex is divided in seven parts:
Preamble,
Shareholders and General Assembly,
Cooperation of Executive and Supervisory Board,
Executive Board,
Supervisory Board,
Transparency,
Accounting and Auditing.
The preamble contains the purpose of the Codex. The second and third section describes
provisions for the General Assembly and the Shareholders right. Besides the remuneration
structure for managers, the individual tasks and responsibilities of Executive Board and
Supervisory Board are described in the sections four and five. The sections six and seven
contain regulations with regard to transparency as well as accountancy and auditing.
The financial crisis and the upcoming criticism in print and other media of the remuneration
of the managers have lead to enacting the Act on Appropriateness of Management Board
Remuneration. Due to this, the government commission came together and duly adjusted the
German Corporate Governance Codex. Innovations become only binding for companies
when published in the German Federal Gazette. The currently valid version is now from 19
July 2009. The most important alterations are:
New regulations concerning the composition and the transition of members of the
Executive Board to the Supervisory Board126,
Regulations on the composition of the Audit Committee127,
Adjustment of remuneration structure and amount of directors128,
The principles of the social market economy have to be respected by the managers129,
Innovations with regard to the D&O insurances130.
Additions and amendments which come up because of the design of the Corporate
Governance Codex status as of 19 July 2009 are explained in more details in the next section.
Furthermore, the recommendations of the Codex concerning the remuneration structure of
the directors and their disclosure is underlined and explained in more detail.
GCGC-Recommendations for the remuneration of directors

The GCGC gives recommendations in section four as to how the remuneration of members
of the executive board is to be construed. Section 4.2.3 of the Codex says:
The total remuneration of directors shall comprehend fix and variable remuneration
components. The variable remuneration components shall contain a yearly returning
component, which is connected to the success of the company and comprehend
components with long-term incentive effects and risk character.
The GCGC recommends as components with long-term incentive effect and risk
character above all shares, stock-options and comparable remuneration programs (e.g.
phantom stocks) with long lock-up periods. For the remuneration components
challenging, relevant reference parameters shall be used and a subsequent change of the
performance targets shall not be possible. Furthermore, the Supervisory Board shall
determine a profit cap.
The chairman of the Supervisory Board shall inform the General Assembly on the
remuneration structure of the Executive Board and about potential changes.
Sections 4.2.4 and 4.2.5 give information on the disclosure of manager salaries. Thereby, the
demand by shareholders and other stakeholders for transparency in remuneration can be met.
Section 4.2.4 recommends the disclosure of management remuneration as follows:
The total remuneration of each member of the Executive Board has to be broken down
in success independent and success related remuneration components with long-term
incentive effect.
126
DCGK, section 5.4.4, section 5.4.5 sentence 2, section 5.4.1, 2009
127
DCGK, section 5.3.2 sentence 3, 2009
128
DCGK, section 4.2.2, section 4.2.3 par. 1 und 2, 2009
129
DCGK, preamble par. 2, 2009
130
DCGK, section 3.8 par. 2, 2009
The remuneration components have to be disclosed individually, unless the General

Assembly with three quarter majority decides otherwise.
The Codex recommends in section 4.2.5 where the disclosure of manager salaries has to be
made:131
The disclosure of manager remuneration shall be made in a remuneration report which
forms part of the Corporate Governance report. It has to be taken care to formulate the
disclosure in a comprehensible way.
Furthermore, the parameters of the design of stock-option programs or other
remuneration systems shall be explained by long-term incentive effects. The values for
each remuneration component equally have to be published.
Currently, 29 of the 30 DAX groups comply with the requirement to disclose the
management salaries. In 2008, Merck was the only company to deviate from the GCGC.
Thereby, the companies make their contribution to more transparency and make it much
easier for shareholders and other stakeholders to gain an insight into the remuneration policy
of the company. The shareholders and investors can make a better assessment of how their
capital was used for the remuneration of managers.
The government committee, which was set up by the Federal Ministry of Justice, has adapted
the German Corporate Governance Codex with regard to the financial crisis and the
following criticism of remuneration of Board members. Now, the recommendations with
regard to remuneration of members of the Executive Board are more closely explained.
Section 4.2.3 of the Codex has been elaborated and contains the following additions:132
The remuneration of the members of the Executive Board has to be designed in such a
way that it serves a permanent company development.
Positive and negative developments shall be considered in the design of the variable
remuneration components.
All remuneration components have to be appropriate and designed in such a way that
they do not tempt the board member to take inappropriate risks.
For example, share based or key figure based remuneration elements can be used as
variable remuneration components.
The new version of the Codex takes the changed economic situation into consideration.
Besides, the Codex tries via its addendum to achieve that the remuneration is adapted to a
long-term company development.
131
DCGK, section 4.2.5, 2008
132
DCGK, section 4.2.3, 2009
9.2.2 VorstOG Executive Board Compensation Disclosure

Act
Despite the introduction of the German Corporate Governance Codex the institutions of
stock-listed companies had refrained for a long time from individually publishing their
compensation. This was discovered in a survey of the consulting firm Towers Perrin from the
year 2008. While in 2002 only five DAX 30 companies disclosed the salaries of their
directors, 18 companies followed the recommendations of the GCGC in the business year
2004.
It could not be determined by shareholders and other stakeholders how the executive board
compensation was composed. This meant that the shareholders could not understand of
which remuneration components the total compensation of the Executive Board members
was composed.
With the Executive Board Compensation Disclosure Act the DAX-30 companies were
obliged to individually disclose the Compensation of the Executive Board from 2006 on.
This meant that it was not sufficient anymore to only publish the total remuneration paid.
They had to distinguish between success independent and success related components as
well as components with long-term incentive effects (e.g. stock-options). Since then, it has
been legally required to describe the total compensation in detail with individual components
in the business report.133 In sec. 285 Sentence 1 n 9 German Commercial Code (HGB) the
Disclosure Duties are fixed as follows:
The total compensation granted for the activities in a business year (salary, profit
participations, subscription rights, options and other stock market based
remunerations, expense compensations, insurance remunerations, commissions and
other compensations of all kinds). This total compensation also includes forms of
compensation, which are not disbursed but transformed in claims of other kind or
lead to the increase of other claims.
Beside the compensation for the business year, further compensations have to be
disclosed which have been granted in the business year, but not been published in any
annual accounts. Options and other stock market based remunerations have to be
directly disclosed with the number and the value at the point of time when they are
granted. Further developments of value which result from a change of conditions for
exercising these rights have to be taken into consideration.
In case of a stock listed incorporated company the compensation of each individual
board member with the name of the member has to be individually disclosed and
divided into success independent and success related components as well as
components with long-term incentive effect.
133
Sec. 285 sentence 1 n 9 HGB, sec. 314 subs. 1 n 6 HGB
If the company does not comply with these duties of disclosure, this can lead to a monetary
fine of up to EUR 50,000.134 However, the companies can be freed from the duty of
disclosure of compensation. This happens in the General Assembly, where a three-quarter
majority has to give their consent to the renunciation to disclosure. This legislative regulation
can be criticized as inadequate, because family owners could for example hold the majority
of the company, so that they could avoid the detailed disclosure of the remuneration. A
control by the investors with regard to the remuneration policy of the company can therefore
not take place.
The only DAX-30 company which does not individually disclose the compensation of the
Executive Board in the annual report is Merck KGaA.
In this case the general partner the E. Merck OHG has the control of personnel over the
personally reliable members of the management. For this reason the regulations of the
VorstOG does not have to be applied by the company.
9.3 Remuneration aspects under stock corporation

law
The introduction of stock-option programs and other long-term variable remuneration
components for members of the Executive Board lead to renewed criticism of adequacy of
their compensation. With regard to the adequacy of remuneration of the Executive Board
there are further legal regulations in Germany which shall be introduced in detail in the
followings sections.
9.3.1 Regulations in accordance with sec. 87 Companies Act

(AktG)
The remuneration of members of the Executive Board of German incorporated companies is
not only regulated by the GCGC but has also to be assessed in accordance with the rules of
sec. 87 Companies Act. The regulations of sec. 87 AktG have their origin in the German
Stock Companies Act of 1937 and shall harmonize the basic principles of correct
remuneration. The introduction of sec. 87 Companies Act was meant to protect incorporated
companies and their shareholders from excessively high compensations for board members.
135
134
Sec. 334 subs. 3 HGB
135
Comp. Grattenthaler, 2007, p. 323 et seq.
Sec. 87 AktG states that the total remuneration of the individual members of the Executive
board shall be in an appropriate relation to their tasks and to the companys situation.136
Provisions with regard to how far the remuneration of the members of the Executive Board is
appropriate are only generally regulated in sec. 87 AktG. The Supervisory Board has to
check the total remuneration of the Executive Board for adequacy. According to law the
following components have to be checked for adequacy:
the salary,
possible profit participation,
expense compensations,
insurance remuneration,
commissions,
other compensations of all kind.
Furthermore it is only regulated in sec. 87 subs. 2 AktG that a reduction of the remuneration
of a member of the Executive Board is possible when the companys situation has essentially
deteriorated and the companys survival is endangered.
The adequacy of the remuneration of the Executive Board came again into focus of public
discussions with the financial crisis. For example, the members of the Executive Board of the
Commerzbank had to accept a limitation of their salaries. This was a precondition so that the
predicated bank could get money from the bank rescue fund Soffin. The amount of the
remuneration of the members of the executive board should not be higher than EUR
500,000.137 In the previous few years the members of the executive board had still received
amounts of up to EUR 5.2 million.
What can be criticized with regard to sec. 87 German Stock Companies Act is the fact is that
it is hardly put into practice. Therefore, it is often called a Dead-Letter-Law.138
Because of the discussed points of critique the Federal Government of Germany has passed
the new Appropriateness of Management Remuneration Act (VorstAG) in order to reduce
the weaknesses of sec. 87 German Stock Companies Act. This act will be discussed in the
following section:
9.3.2 Appropriateness of Executive Board Remuneration Act

(VorstAG)
On 18 June 2009 the Federal Government of Germany passed the Appropriateness of
Executive Board Remuneration Act (VorstAG). This Act was meant to create more
136
Comp. Klahold, 1999, p. 46
137
Comp. N.N., 2008
138
Comp. Boecken/Dwell/Hmmerich, 2007, p. 119
incentives for companies to design the remuneration of their Executive Boards in the context
of sustainable enterprise development. With the introduction of this Act, the adaptations of
the GCGC became necessary.
For big income earners amongst the top managers harder regulations were elaborated. Above
all, stock-options are concerned by the new regulations. The new regulation now requires a
lock-up period for stock-options of four years instead of the formerly usual two years (sec.
193 subs 2 n 4 AktG new version). Only after the end of this period managers can exercise
their options.
A further point deals with the determination of manager remuneration. Up to then the
Supervisory Board had the possibility to delegate decisions on the remuneration of the
Executive Board to a Committee. Now, this possibility does not exist any more. The
remunerations of the Executive Board can now only be decided by the Supervisory Board of
a Company. The existing sec. 107 subs. 3 sentence 3 AktG has been changed in this respect.
Furthermore, the liability of the members of the Supervisory Board with regard to the
remuneration of the Executive Board has been intensified. If the Supervisory Board does not
determine an adequate remuneration of the Executive Board, it becomes liable for damages
against the company.
Additionally, there are amendments for members of the Executive Board who want to
change to the audit committee of the incorporated company. For them a cooling-off period
applies, which means that persons who have been members of the Executive Board during
the last years, may not change into the Committee (sec. 107 subs. 3 sentence 4 et seq. AktG
new version).
Furthermore, the law stipulates a cooling-off period if a member of the Executive Board
wants to change into the Supervisory Board. In controversial points as the limitation of
manager salaries it was not possible to come to an agreement. Also the Treasury Secretary
of the US is not in favor of a legal limitation of manager salaries. In an interview he said: I
dont think our government should set caps on compensation.139 Instead he supports the
Say-on-Pay-concept.140 The Say-on-Pay-concept deals with the co-determination right of
the shareholders of a company in the manager remuneration. In the US, this form of right to
say becomes more and more popular. Since the end of January 2009 more than 70
institutional investors, church groups and foundations have required from more than 100
incorporated companies to give shareholders the right to co-determine the remuneration of
the Executive Board in future.141
139
Comp. Christie/Homan, 2009
140
Comp. ibid
141
Comp. N.N., 2009
10 Categorization of Stock-option
Programs
10.1 Overview
Stock-option programs can be counted among long-term incentives. Long-term incentives
can be subdivided into programs with stock market based and key figure based management
remuneration. The stock market based management remuneration can be further divided in
real and virtual equity instruments.142 After that it can be further distinguished between
systems with an option based or a share-based character.
For the remuneration with real equity instruments the remuneration is paid via shares
(restricted stocks), stock-options or performance-oriented stock allocations (performance
shares). The remuneration via stock-options is possible via the integration of the option into
convertible bonds or exclusively via naked warrants.143
Real equity instruments are executed with the help of equity components in form of shares or
subscription rights with regard to shares. The recipients are put in the position of a
shareholder or are given the right to come into this position at a later point in time when
receiving stock-options or performance shares.
In the case of virtual equity instruments, on the other hand, money is paid. Virtual equity
instruments imitate the mode of operation of real option or share programs. This means that
the assessment of the profit is also determined by the stock quotation. Amongst often used
virtual equity instruments are Stock Appreciation Rights. They do not work like real stock-
options. The profit is not paid in shares but in cash.
Stock market based remuneration in form of real or virtual equity instruments is generally
only exercised in stock listed companies. The reason is that this form of long-term incentives
is governed by the stock quotation of the shares of the company.144 Figure 10.1 summarizes
these considerations.
Companies that are not stock-listed, on the other hand, need key figure based instruments.
Key figure based programs are also used by stock listed companies.
Key figure based instruments can be divided into phantom plans and other cash-based long
term remunerations. The focus of the following section lies on the share-based
remunerations, especially on stock-options. Phantom stocks are included in the deliberations,
because their design is quite similar to the one of the share-based management remuneration.
142
143
144
Long-term incentives
Share-based management Key figure based

remuneration management remuneration
Real equity Virtual equity Phantom-Plne Other cash

instruments instruments
based plans
Restricted Restricted Phantom

Bonus bank
Stock Stock Units stocks
Performance Performance Performance

Shares Share Units cash plans
Stock-
SAR
option
Convertible Naked
bonds warrants
Fig. 10.1: Categorization of stock-option programs145
10.1.1 Convertible bonds and warrant bonds

The convertible bond certifies besides the rights of normal bonds the right to convert the
bond after a certain period into stock. This means that it is composed of two components: the
bond and the right to conversion.146
The bond is subject to interests. The interest generally goes by the long-term Federal
Government bond. The conversion right makes it possible for the owner of the bond to
convert the bonds into company stocks after expiration of a certain period. The conversion
ratio is fixed in the terms of issue at the beginning. The price of conversion which the owner
of a convertible bond has to pay, results from the difference between conversion price and
145
Following: Kramarsch, 2004, p. 130
146
nominal value. If the owner of a bond does not use his right to conversion, the bond will be
paid back to him.147 If he uses his right to conversion, the owner becomes a shareholder and
the bond expires.
A warrant bond is similar to a convertible bond. The owner of the warrant bond is also
entitled to the subscription of company stocks. The warrant bond, however, does not expire
when used by the owner. The warrant bond continues to exist until repaid by the company.148
The provision of convertible bonds in the context of the introduction of a stock-option
program was very popular in Germany up to the introduction of the Control and
Transparency in Enterprises Act, as it was the only possible way to give stock-options to
employees and managers. Today, this solution is considered as relatively complicated and
legally too complex.149 With the introduction of the Control and Transparency in Enterprises
Act it has become possible to issue naked warrants to employees and managers.
When issuing convertible option and options, stock corporation regulations have to be
complied with as will be discussed further on.
For the incorporated company giving out options or convertible options in the context of a
stock-option plan is a way to gain foreign capital. The dilution of capital of the existing
shareholders is the disadvantage. An advantage is that when the right to conversion is used,
foreign capital is converted into equity and the repayment of the option is not necessary. On
the other hand, one has to have in mind that the purpose of stock-option programs is the
increase of enterprise value and of the stock quotation.150
A consent or authorization decision of the General Assembly is necessary to issue
convertible bonds or warrant bonds.
If warrants or convertible bonds are given out, it is necessary to have a resolution of approval
or an enabling resolution of the General Assembly in accordance with sec. 221 subs. 1
sentence 1 AktG. For the resolution at least a three-quarters majority of the authorized capital
represented at the moment of resolution is necessary. The approval or authorization is valid
for no more than a period of five years. The executive board and the chairman of the
supervisory board have to leave the resolution and a report on issue of convertible bonds
with the commercial registry in charge. The report has to contain essential information on the
bond conditions and information on the reason for exemption from subscription rights (sec.
221. subs. 4 sentence 2 in connection with sec. 186 subs. 4 sentence 2 AktG).151
147
148
149
Comp. ibid, p. 69
150
Comp. ibid, p. 67
151
10.1.2 Naked warrants

Naked warrants correspond to the general character of options. Stock-options give the right
to:
A purchase (call) or sale (put),
of a fixed number of shares (base value),
at a fixed price (base price),
at a fixed moment (European option) or
within a fixed period of time (American Option).
There are two kinds of options, the purchase option (call option) and the sales option (put
option).152 The call option gives the right to buy the share at a fixed price. The put option
gives the right to sell the share at a fixed price.
In case of call options the purchaser participates in price advances, if the stock quotation is
higher than the fixed purchase price of the option. The owner of the option can purchase the
share from the issuing party at a lower price than the current stock quotation. The difference
between the stock quotation and the previously fixed purchase price is the profit. The exact
opposite is the put option. The owner of a put option makes profit, if the fixed purchase price
is higher than the current stock quotation. The share can be purchased by the option holder
for a lower price at the stock market and be sold for the sales price which lies above the
current stock quotation. The difference is the option profit.153
The following figure shows the difference between call and put options.
152
The option types short and long will not be described in more details, because they are not important in
practice
153
Call option Verkaufsoption

Profit Profit
Base price
Base price
Stock quotation
B i i Stock quotation
Zone I II III Zone III II I
Option is not Option is Option is Option is not

exercised exercised exercised exercised
Loss Loss
Zone I: Loss is limited to option price
Zone I: Zone of loss
Zone II: Zone of reduced loss
Zone II: Zone of reduced loss
Zone III: Zone of unlimited profit
Zone III: Zone of unlimited profit
Fig. 10.2: Functionality of a stock-option154
Stock-options are differentiated in European and American options. In stock-option

programs exclusively American options are applied. In Germany, the execution of stock-
options is limited to certain periods because of insider dealing provisions of the German
Securities Trades Act. Furthermore, the stock-option programs are subject to stock-options
regulations, according to which it is only possible after expiration of a certain time to
exercise the option.
Stock-options are generally granted without payment of an option premium to the manager.
The participant in a stock-option program, however, does not receive the stock-option fully
free of charges. Firstly, he has already paid the stock-option with his work.155 Secondly,
the risk for the recipients of a naked warrant is higher than in case of a convertible option. In
case of a convertible option the participant gets his full investment with full interests back
even in case of negative price developments of the stocks. Naked options, on the other hand,
are forfeited without value, if the manager does not achieve to push the stock quotation
towards the fixed performance target during its runtime period.156
154
Following: Herrling/Schmidt/Zahner, 2008, p. 155
155
156
10.1.3 Stock Appreciation Rights

Stock Appreciation Rights (SAR) is a further form of value-oriented remuneration. They can
be considered as adapted form of stock-options, because they imitate them however
virtually. They are also called value appreciation rights, which give the managers the right to
participate in the increase in value of the company. The stock quotation serves as value for
the calculation of the increase in value. The beneficiaries receive a payment at a fixed point
in time, which corresponds to the difference between the stock quotation and the base price
at the moment of exercise.
Stock Appreciation Rights are not financed by issuing shares. Therefore, they do not induce
a dilution of the shares of the existing shareholders. Also, the administrative workload for
realizing a virtual stock-option program is smaller.
However, issuing stock appreciation rights also brings some disadvantages. The payment of
the virtual stock-option program affects the companys liquidity.157
10.2 Excursion: incentive programs

Besides stock-option programs there is a variety of other long-term incentive systems of
share-based remuneration programs which are used by companies to compensate their
managers in a performance related way. Because of the increasing use of those incentive
programs, these are explained in more detail in the following section.
10.2.1 Phantom shares

Phantom shares are often used when corporate law forbids issuing shares. For example,
companies which are not incorporated companies or partnerships limited by shares cannot
offer stock-option programs for their managers. It can be still interesting for those companies
to direct the remuneration of their managers towards the long-term growth of the company.
Phantom shares are one possible way to do so.
Starting point of this participation model is that the managers do no receive real shares, but a
virtual number of shares. These shares are a fictive part of the company value. The value of
the company does not have to be calculated via the stock quotation, but can be determined
via a procedure chosen by the company.158 After expiration of the program the recipient is
paid the sum. Furthermore, the plan can integrate the payment of a bonus to the beneficiary.
157
158
An advantage of the remuneration via phantom shares is the flexible design. Legal
provisions, which would apply in the case of stock-options, do not have to be considered.
A disadvantage is the outflow of company liquidity at the moment of outpayment. As long as
no personal investment is foreseen, the manager bears no financial risk.
10.2.2 Restricted Stocks/Restricted Stock Units

Restricted stocks are a real equity instrument which makes it possible for the manager to
fully acquire shares. The attribution of shares to the beneficiaries underlies certain time
restrictions. These restrictions are time limitations of disposal, as e.g. certain lock-up and
holding periods, which usually consist of three years.159
The use of performance targets to measure management performance is not common in this
case. At the end of the runtime of the stock program the participant either gets the right to
purchase a certain number of shares at favorable conditions or the shares are attributed.
During the holding period the participant has the voting right and the right to payment of
dividends.160
There is also the possibility of the virtual design of restricted stocks. In this case, they are
called restricted stock units. The participants do not receive an attribution of shares at the end
of the runtime, but a cash settlement.161
As in the design of restricted stock plans no performance hurdles are used, they are no
alternative to the success oriented stock-option programs. They are rather a sensible addition
to a long-term remuneration.162
10.2.3 Performance Shares/Units

In the case performance shares the participant is attributed with shares for which he generally
does not have to pay. The condition for the attribution of shares is that certain performance
goals as EBIT or return on capital are achieved. There is also the possibility of using a virtual
design. This form of share program is referred to as performance share units. At the end of
the waiting period the participant receives a cash settlement. The amount of the settlement is
calculated from the number of attributed performance shares multiplied with the stock
quotation at the end of the waiting period.163
159
Comp. Kramarsch/Schelter, 2006, p. 1
160
Comp. Kessler/Babel, 2003, p. 41
161
Comp. Meiffert, 2008, p. 192
162
Comp. Kramarsch/Schelter, 2006, p. 1
163
The following Fig. illustrates the shortly presented explanation graphically via the example
of the performance share plans of the RWE group.
Conditional attribution Performance period Final attribution
year 1 year 2 year 3
Number of conditionally
attributed performance shares Calculation of the final
Performance in number of performace
comparison to shares
competitors
Final stock quotation x
final number of
performance shares
Settlement at the end

of the scheduled term
Fig. 10.3: Performance Share Plan des RWE group164
The performance share plan Beat of the RWE group has a term of three years. It is
virtually designed and the participant does not receive shares but a cash settlement. During
the runtime of the plan the participant receives a conditional attribution of performance
shares. The final number of performance shares the participant receives is only calculated at
the end of the performance period. The amount of settlement results from the multiplication
of the final quotation of the RWE share with the final number of performance shares. RWEs
condition for the outpayment is that the TSR of the RWE share is increased by at least 25
percent as measured by the benchmark index Dow Jones Stoxx Utilities. If the performance
target is not met there is no outpayment.
10.2.4 Performance Cash-Plan

The performance cash-plan is referred to as long-term success bonus. In this case, the
beneficiary receives the promise for a cash payment which is directed by the long-term
company success. Generally a three-year performance period is fixed. After expiration of the
period certain performance targets will have to be fulfilled so that there is an outpayment to
the beneficiary. The performance targets can be based on internal or capital market oriented
key figures.165
164
RWE AG, 2005, p. 4
165
Comp. Filbert/Kramarsch, 2008, p. 9
11 Criteria for the arrangement of stock-

options programs
In order to fulfill the purpose of incentive effects and the real implementation of the
shareholder-value-thought and the acceptance by the shareholders, shareholder option
programs have to fulfill certain criteria with regard to their arrangement. Incorrectly designed
stock-option programs result in high costs without bringing the desired benefit.166 The most
important parameters for the arrangement of stock-option programs are presented in the
following sections.
The design of the stock-option programs for employees is realized by the executive board. If
the beneficiary is part of the executive board, the supervisory board (sec. 87 AktG) takes the
design over.
11.1 Circle of beneficiaries

Before a stock-option program can be installed or introduced in a company, the circle of
beneficiaries, i.e. the employees to whom the real or virtual stock-options shall be offered,
shall be determined. The determination of the circle of beneficiaries is closely connected
with the targets pursued through the stock-option program.
Stock-option programs pursue mainly the aim of creating incentives in order to increase the
company value in the sense of the shareholders and to reduce the divergence of interests
between principal and agent. Only the top management has the total responsibility for the
company and is in the situation to directly influence the company value with its decisions.167
For this reason, the circle of participants in the stock-option program has to be limited to the
top management.
If stock-options are given to the employees, anyway, who have little responsibility or little or
no influence on the stock quotation, there is the danger that stock-options do not create
additional incentives. The incentive effect of stock-option programs is then noticeably
reduced. For this reason stock-option programs are generally limited to the top management
level.168
166
Comp. Winter, 2001, p. 85 et seq.
167
Comp. Klemund, 1999, p. 70
168
Comp. Weber, 2002, p. 31 et seq.
11.2 Determination of the base price

The base price is the price to be paid for which the owner of stock-option when exercising
the option can purchase company shares. The difference between the base price and the stock
quotation at the moment of exercising the option is the profit of the option which the owner
of the option can realize through the exercise of the stock-option.169 This means that the
option profit depends largely on the base price. The realized profit is the higher the lower the
base price is.170
There are two options for the determination of the base price. One possibility is to fix the
base price at the moment of granting the stock-option, so that it remains unchanged during
the complete runtime of the option. The other possibility is to fix it during the runtime and to
align it with the stock quotation at this moment or at the moment of exercise of the option.171
The determination of the base price during the runtime of the stock-option is mostly chosen,
if a relative performance target is agreed on in the stock-option program, in which the
development of the stock quotation is connected to a reference index. In most stock-option
programs, however, the base price is determined at the moment of grant.172 Hereby, the base
price can have three different forms. The base price can be equal to the current stock
quotation (at-the-money-option), lower (in-the-money-option) or higher (out-of-the-money-
option). Granting stock-options with a base price below the current stock quotation is not
acceptable for the shareholders because the beneficiaries would already benefit at the
moment of grant of the option. From the perspective of the existing shareholders this leads to
an immediate destruction of shareholder-value and is opposed to the aims of the stock-option
program.173 This is one of the reasons why in practice mostly a base price is chosen which
corresponds to the current stock quotation or approximates the current stock quotation.174
For the determination of the base price either rates at a certain reporting date or average rates
can be used. If the rate at a reporting date is chosen, the base price corresponds to the stock
quotation of a trading day. In the case of average rates the base price corresponds to the
average value of several trading days. In practice average rates have to be preferred to
reporting day rates, because random price fluctuations can be eliminated this way.175
169
170
171
172
173
Comp. Achleitner/Wichels, 2002, S 18
174
175
Comp. Baums, 1997, p. 3
11.3 Performance targets

Performance targets, also called exercise hurdles, determine which aims have to be reached
after expiration of a lock-up period and permit the owner of the option to convert the stock-
option into shares or to receive cash from the exercise of his virtual option. It the stock-
option program is financed via a conditional capital increase or the retirement of own shares,
the determination of a performance target is obligatory in accordance with sec 193 subs. 2 n
4 German Stock Corporation Act (AktG). Additionally, the German Corporate Governance
Codex requires stock-option programs to be connected with challenging, relevant reference
parameters.176
The dilution effect for existing shareholders shall be compensated by the use of performance
targets. The dilution effect is reduced, because when performance targets are reached, the
company value is appreciated. There is the possibility in the stock-option program to
combine one or several performance targets of which at least one has to be fulfilled for the
exercise of the option. When a combination of several targets is used, it has to be determined
whether both targets (and-rule) have to be reached or whether the achievement of one of both
targets is sufficient (or-rule).
Depending on the form of the performance targets, these can be divided in absolute and
relative performance targets. While absolute performance targets are connected with the
absolute increase in stock quotation, in the case of relative performance targets, a comparison
of the share with a sector or benchmark index is undertaken.
Analysts and shareholder representatives favor relative performance targets because from
their point of view the danger of windfall profits can be avoided this way.177 Furthermore,
there is the possibility of using key figures from accountancy as targets.
The following figure shows possible forms of target design.
176
Comp. DCGK, 2008, par. 4.2.3
177
Performance targets
Stock based Key figure based
absolute performance relative performance absolute performance
Stock Total market- industry Competitive Value Key figures

quotation sharehold index index index Driver
er return DAX constructi Peergroup EVA ROCE
MDAX on CFROI ROE
banks DCF
Fig. 11.1: Variants of performance targets178
Generally, the use of relative performance targets prevails on an international level. The
design of performance targets is especially complex in Great Britain. In the US there is
hardly any performance target determined in stock-option programs. If a performance target
is determined anyway, mostly the total shareholder return in comparison to a sector index or
a peer group is used.179
The following points describe the diverse possibilities to design success fees. In this context
the different types of performance targets and the possible use in the management of stock-
option programs is examined.
Absolute performance target

When determining an absolute performance target a minimum performance of the stock
quotation is determined. This means that the stock quotation has to have increased by a
certain, previously determined percentage within a certain period between the moment of
granting and exercising the option. Mostly the base price is calculated at average rates and
not at reporting date rates.180
178
Ibid., p. 163
179
180
In practice an absolute rise in share price by at least eight percent is recommended.181 If this
minimum performance is not achieved, the owner of the option cannot exchange the option
for company shares and the option forfeits.182
The following figure represents the model of an absolute performance target
Share price
Stock quotation
Exercising profit
Exercising hurdle
Base price
Time
Grant Exercise
Fig. 11.2: Display of an absolute performance target183
The owner of the option has two possibilities in this case:

He can exercise the stock-option, i.e. he purchases shares at the previously fixed base
price and sells them at the stock market. The exercising profit results from the difference
between the base price and the current share price.
He can exercise a purchase option, i.e. he buys shares and puts them into his share
deposit account, because he hopes that the prices would rise even further.
The exclusive use of absolute success targets as was common in the first stock-option
programs applied by German companies is considered as disadvantageous.184
The most criticized aspect is the fact that the beneficiaries are remunerated for developments
which are not connected to their performance.185 This is the case, when the increase of the
181
Comp. Union Investment, 2006, p. 4
182
Comp. Schmeisser/Hahn/Schindler, 2004, p. 52 et seq.
183
Following: Brhl, 2004, p. 465
184
Comp. Weber, 2002, p. 38
185
stock quotation is caused by exogenous factors as e.g. interests, development of USD,

current situation of stock market or development of regional markets. There is the danger
that the owner of the stock-option might be remunerated for stock market developments
which are unrelated to his performance. This way he can realize so called windfall
profits.186
In the adverse case there is the risk that a baisse at the stock market can cause that the stock-
options of the beneficiary are forfeited even if the company development and his
performance are positive. This can lead to a demotivation of the beneficiary. In specialist
literature relative performance targets, which avoid windfall profits, are favored.187
Relative performance target

In the case of relative success targets the relative development of share prices is used.
Hereby, a comparison between the percentual development of prices of a share and the
percentual development of the market or sector index or a peergroup is made.188
The exercise of a stock-option is only possible, if the development of the stock quotation of
the own share exceeds the development of the sector or market index. In this case, a so called
outperformance is given, in which the management has achieved an above-average
performance and is therefore entitled to exercise the stock-option.189
For the indexation of the performance target, a national or international market index as e.g.
DAX, MDAX or Dow Jones 30 can be considered at first. The disadvantage of the use of
market indices is that the special characteristics of the sector in question are neglected. For
this reason, special sector indices as e.g. the MSCI World Chemicals Index or the Dow Jones
Euro Stoxx Bank Index seem more appropriate. The performance of the management can be
better evaluated, because companies within a sector are generally facing the same external
conditions.190
For especially highly diversified companies, the use of the sector index is not appropriate, as
they can not be assigned to any sector and no comparable index exists.191 In this case, an
individual reference group is recommendable, a so called peer group. For each business area
of the company, a group of comparable competitors is composed. By weighting of the
individual sectors, an own reference index can be calculated.192 The criteria for the
186
Comp. Klahold, 1999, p. 32 et seq.
187
Comp. Bsl, 2004, p. 110
188
Comp. ibid, p. 111
189
190
Comp. Rappaport, 1999, p. 137
191
The Deutsche Lufthansa and also Daimler AG have made an index of several competitors in their programs.
192
composition of the peergroup should be transparent for shareholders and investors in order to
avoid a possible manipulation of weighting of the peergroup created.193
The following figure shows the possible performance developments of stock quotation and
reference index in the case of rising rates.
Quotation Quotation
Stock quotation Index Underperforma

Outperforman
nce
ce
Index
Stock quotation
Time Time
Grant Exercise Grant Exercise
Fig. 11.3: Display of relative success fees in the case of rising prices194
The left graphic of Fig. 11.3 shows the exercising profit that the beneficiary can achieve if he
exercises his stock-option. An exercise is possible when the stock quotation has a better
performance than the reference index. In the right graphic the owner of the option cannot
exercise the stock-option, because the stock quotation had a worse performance than the
reference index. This is a case of underperformance of the manager.
When the relative performance target is connected to an index the stock-option can even be
exercised by the beneficiary when the share prices are falling. This possibility of exercise of
an option in times of a negative stock market situation makes it possible to adequately
remunerate above average performance of the management, as long as the stock quotation of
the company in question performs better than the market despite of the negative return.195
The following figure displays these deliberations:
193
Comp. Heitzer/Klose/Steiner, 2000, p. 351
194
195
Comp. Achleitner/Wichels, 2002, p. 17 et seq.
Quotation Quotation
Stock quotation
Index
Outperformance Underperformance
Index Stock quotation
time time
Grant Exercise Grant Exercise
Fig. 11.4: Display of a relative performance target in the case of falling share prices196
The left graphic in Fig. 11.4. shows the maximum exercising profit that the beneficiary can
obtain when exercising the option. An exercise of the stock-option is possible if the stock
quotation has dropped less than the reference index. The right graphic in the Fig. shows that
the share prices have dropped more than the reference index. In this case it is not possible to
exercise the option.
Key figure based performance targets

The performance target does not necessarily have to be connected to the stock quotation.
There is also the possibility to connect the performance target to accountancy key figures or
value-oriented figures. For the determination of performance targets often key figures from
accountancy, as e.g. the earning per share or the return on capital are used.197
However, the use of key figure related performance targets has to be considered as
disadvantageous. The main point for critique is the mentioned danger of manipulation and
the misuse of accountancy data. The connection of the performance target to the stock
quotation has the advantage of being less susceptible to such manipulations by the
management.
The most important counter argument for the use of key figures in a stock-option program
consists in the fact that with turning away from the connection of the performance target with
the stock-option means in a certain way also the renunciation of the shareholder-value-
concept.198 The use of the accountancy figures, like earnings per share, is meaningful for the
shareholders, but is not connected with the long-term increase of the company value. The
incentive effect of this type of program is not different from those of traditional remuneration
196
197
For example the programs of Fresenius and Linde have a target per share and the Daimler AG usees the capital
return as target.
198
Comp. Kallmeyer, 1999, p. 98
models. The goal of the stock-option program to create a motivation for the beneficiary to
increase the company value is not achieved.199
11.4 Time components
11.4.1 Chronology of a stock-option program

Granting and exercising stock-options is connected with different stages in time. This section
gives a first overview over the different points in time, and the following sections will
examine the different timely components in more detail.
The following fig. demonstrates the different timely components of a stock-option program.
Blocking Period/Closed
Lock-up/ Critical reporting date Dividend payment

Vesting
Period Holding term
Trading window
1 2 3 4 5 6
time
/ Granting First possible Actual exercise Last possible First Actual sale
Date of the exercise of the of option/ exercise of allowed of shares
stock- options/Vesting Exercise Date option /Expiry sale of
options Date Date shares
Option term in a narrower sense
Runtime of the option in a broader sense
Fig. 11.5: Stages of a stock-option program200
An essential element in the design of the stock-option program is the total runtime also called
option term. The runtime of the option determines the period of time from the first time
concession to the last possible exercise of the stock-option. The length of the runtime has to
199
200
Comp. Schmeisser/Hahn/Schindler, 2004
be chosen in such a way that a long-term minimization of the principal-agent-conflict can be

achieved.201 In practice, a runtime of five to ten years is mostly chosen.
In point one of the figure the beneficiary is granted his stock-options. At this moment, the
subscription rights are booked into his depot. In most cases, a lock-up period of the option
program is agreed on, with the consequence that the beneficiary is only allowed to exercise
the option after expiration of this period (point 2). Besides, it is usual to include trading
windows or previously fixed periods (closed periods) to determine the exercise of stock-
options or restrict it. The third point in time is the date of the actual exercise of the option by
the beneficiary. On this day the subscription rights cease to exist with the exercise of the
options and the beneficiary either receives his concerted stocks (real stock-options) or a cash
settlement (stock appreciation rights). If the beneficiary does not exercise his option during
the exercising period, they are forfeited.202
Furthermore, a holding period is foreseen in the stock-option programs. During this period it
is interdicted for the beneficiary to sell the shares he received. Despite this interdiction the
beneficiary is entitled to payment of dividends and to exercise his voting rights until he sells
the shares.203 The last two points in time, five and six, represent the first possible and the
actual day of sale of shares.
Lock-up period
The lock-up period is the period from the grant of the stock-options to the time of the first
possible exercise of the stock-option. During this lock-up period the option cannot be
exercised. When stock-option programs are financed through conditional increase of capital
or the retirement of stock, a lock-up period of at least two years has to be determined (sec.
193 subs. 2 n. 4 in connection with sec. 71 subs. 1 n. 8). The lock-up period should not be
longer than five years, because the members of the executive board are appointed for only
five years (sec. 84 subs. 1 sentence 1 AktG) and the executive board should have the
possibility to exercise the option within the runtime of the sock option programs. The use of
staggered lock-up periods is also possible. For example, from the point in time of the first
grant on, the participant in the option is allowed to exercise:
30 percent of the option after two years,
40 percent of the option after three years ,
30 percent of the option after four years.204
The following Fig. displays the different possibilities to use lock-up periods.
201
202
203
204
Comp. Bsl, 2004, p. 108
CLIFF VESTING RATABLE VESTING

Stock-options can be fully exercised After expiration of the lock-up period
after expiration of the lock-up period the exercise of the stock-options is
staggered in time
Exercisable volume Exercisable volume
Lock-up Exercise Exercise

Lock-up
period period period
100% 100% period
70%
30%
1 2 3 4 5 time 1 2 3 4 5 time
Fig. 11.6: Types of lock-up periods205
In Germany, the exercise of the stock-option is generally quite close to the termination of the
lock-up period. A timely staggered execution could motivate managers to a longer holding
period of the stock-options and bind the employees longer to the company.206
Exercise periods and holding periods

In order to avoid any insider suspicions against the participants, it is sensible to permit the
execution of the option only after the expiration of a certain lock-up period and within
certain periods. This limitation of exercise has two variations: The first is the possibility of
the use of trading windows and the second the use of blocking periods.
In the variation of trading windows, the exercise of stock-options is limited to certain periods
in a year. The concept emanates from the assumption that there is an informational balance
between all market participants in this period of time.
Trading windows consist mostly of five to 21 trading days after critical reporting days as
publications of quarterly reports or annual balance sheets.207 For example, the Metro AG
uses for its stock-option program a trading window. The trading window determined by the
company limits the exercise of the stock-options by the beneficiary to eight weeks after the
day of the general assembly.
205
Following Kramarsch, 2004, p. 180
206
Comp. ibid, p. 180
207
In the second option, the blocking periods, it is assumed that, in contrast to the concept of
trading windows, there is an informational disequilibrium in certain periods between all
market participants. The managers have a lead in terms of information over other market
participants because of their position in the company. The blocking periods consist in
Germany mostly of one to fours weeks before the publication of information e.g. quarterly
reports. In these periods of time, the participants of the stock-option programs may not
exercise their stock-options.208
Furthermore a holding period can be agreed in the stock-option program. The holding period
indicates the period of time during which the shares which a manager after the exercise of
the options has received may not be sold. The shares are then kept e.g. in blocked deposits.
However, the shareholder is entitled to receive dividends and to vote during this time.209
11.5 Personal investment and cap

A well designed stock-option program should in any case require a personal investment by
the participant. The design of the personal investment can be done in different variations.
The BASF AG e.g. has determined as personal investment that the employees have to make
an investment in shares of their own company. The participants in the option program have
to invest in one share in order to receive four options afterwards.
Furthermore, there is the possibility to stagger the personal investment at the different levels
of management or directors. With diminishing responsibility at the hierarchic level, generally
the amount of personal investment by the beneficiary is reduced.210 Through the investment
in shares and the holding period connected with it, the beneficiaries are affected by rising as
well as sinking share prices. The employees and managers in question are thereby also
engaged in the managerial risks.
A further criterion which may not miss in stock-option programs is the use of caps. The
Corporate Governance Codex recommends for extraordinary, unforeseeable developments
the fixation of caps.211 Hereby the amount of attribution of stock-options is limited to a
certain share price maximum of the stock-options.
208
209
210
211
Comp. DCGK, section 4.2.3., 2008
11.6 Dividend policy

Dividend payments can have a negative influence on the stock quotation. An example for
this is the dividend policy of the former DAX-30 company ALTANA. By the distribution of
a dividend of EUR 1.30, an extraordinary dividend of EUR 33.00 and a bonus dividend of
EUR 0.50 per individual share certificate entitled to dividends212, a considerable stock
market loss was caused.
The closing price of a share after one day of dividend payment was only at EUR 16.80, while
the final price on the previous day had been at EUR 46.56. The high dividend payments were
due to the fact that the company had sold its pharmaceutical sector for EUR 4.6 billion and
had decided to fully distribute the sale proceeds.213
The value of stock-option increases when the stock quotation of the company goes up. As
exemplified above, the distribution of dividends can have negative effects on the stock
quotation of the company. Besides, there is generally no dividend protection for stock-
options.214 Furthermore, the owners of stock-options do not have any right to claim for the
payment of dividends. These reasons imply that the executive board has no incentive to take
a decision in favor of the high dividends. The interest in avoiding a dividend payment on the
other hand is big.
A study by Lambert, Lanen and Larcker proved that the introduction of a stock-option
program can lead to the reduction of dividend payment. The basis for the examination was
the expected future dividend distributions. These were estimated with the help of a prognosis
model and put into relation to the factual dividend payments.215
In a study by Jolls it was discovered that the executive board could decide because of the
ownership of stock-options to use the freely disposable cashflows for a buyback of shares
instead of using them for dividend payments to the shareholders. Jolls examined the dividend
policy and undertaken buybacks of shares of 324 US companies in the year 1993. The author
came to the conclusion that the probability of a repurchase of stock is growing when the
manager is in the possession of stock-options, because the share prices rise this way.216
However, other studies come to the conclusion that dividend distributions rise when the
management has own stock-options.217 This means that the results of the individual studies
are not definite. The use of free cashflows for the buyback of shares of the company does not
212
Comp. Muler, 2007
213
Comp. ibid
214
215
Comp. Lambert/Lanen/Larcker, 1989, p. 411 et seq.
216
217
Comp. DeFusco/Zorn/Johnson, 1991, p. 36 et seq.
have to be assessed as negative for the shareholders if the achieved return of the company is
higher than the return of an alternative investment.218
In order to influence the executive board in such a way that dividend distributions are not
limited, stock-option plans can be designed so that the exercise price is adapted after the
distribution of dividends.219
11.7 Dilution effect

Shareholders participate in the companys success in double respect. The shareholder can
participate in the increase of the company value on the one hand through their shares and at
the other through the profit distributed to them. A dilution effect for the existing shareholder
is created when a capital increase is undertaken. New shares are created via capital increase
and cannot by purchased by the existing shareholders because of the exclusion of the buying
option. The company profit has therefore to be distributed to several new shareholders. This
causes that the share of the company profit for the existing shareholders is reduced.
Furthermore, the dilution effect implies also a dilution of the voting rights, which is
generally rather small.220 The dilution effect provides therefore important information on the
costs of the remuneration for the shareholders.221
12 Possibilities of financing stock-option

programs
The introduction of stock-option programs is connected to legal requirements which are set
down in the stock corporation act. If a company uses a real stock-option program it has to
provide the required shares of the own company for the participants of the stock-option
program. The company has several possibilities to do so, as will be explained in more detail.
218
219
Comp. Pellens/Crassselt/Rockholtz, 1998, p. 16
220
221
Comp. ibid, p. 120
12.1 Overview
The company has the possibility to finance the stock-option program trough an increase in
capital. For this it has three possibilities: the ordinary capital increase (sec. 182 et seq.
AktG), the authorized capital increase (sec. 202 et seq. AktG) as well as the conditional
capital increase (sec. 192 et seq. AktG). Besides the different possibilities to create new
shares with the help of an increase in capital the company has further possibilities to
underlay the stock-option program with shares. This includes the purchase of own shares and
the cooperation with third parties. The following overview gives a first insight into the
different variations.
Possibilities of financing stock-option

programs
With capital increase Without capital increase
Conditional Authorized Ordinary Purchase of Cooperation

capital capital capital increase own shares with third
increase (sec. increase (sec. (sec. 182 et (sec. 71 subs. parties
192et seq. 202 et seq. seq. AktG) 1. n 2 or n 8
AktG) AktG) AKG)
Adequacy of financing of a stock-option program diminishes
Fig. 12.1: Possibilities of financing a stock-option program222
222
Following Dietz, 2004, p. 58
12.2 Conditional increase in capital

The conditional increase in capital is carried out via resolution of the General Assembly and
is ring-fenced. Sec. 192 Subs. 2 AktG restricts the use of capital as follows:
Guarantee of purchase rights for the owners of convertible bonds,
Preparation of the merger of several companies,223
Guarantee of purchase rights to employees and members of the management board
(naked warrants).
The limitation of purchase rights to employees and members of the management board
excludes the supervisory board from the circle of beneficiaries, because members of the
supervisory board are neither employees nor management members. The legislator justifies
the exclusion with the fact that the supervisory board can not determine the conditions for
options for itself.224
With a conditional increase in capital the authorized capital is only increased to the extent in
which the owners of stock-options use their right of share purchase and conversion (sec. 192
subs. 1 AktG).225 The authorized capital increases directly with the distribution of shares.226
The conditional capital increase is considered as authorized if at least three quarter of the
authorized capital represented at the moment of resolution consents. This is only valid under
the condition that the articles of association do not provide for a higher capital majority
(sec.193 subs. 1 AktG).
Furthermore, the executive board and the chairman of the supervisory board have to register
the resolution on the conditional capital increase in the commercial registry (sec. 195 subs. 1
AktG). Once the registration of the resolution in the commercial registry is carried out, the
executive board can grant stock-options to the employees. If the beneficiary is the executive
board, the options are granted by the supervisory board. The subsequently necessary entry of
the distributed shares in the commercial registry has only declaratory meaning.227
The advantage of the conditional capital increase is that there is no timely limitation in
contrast to the authorized capital increase which is limited to five years (sections 202, 221
AktG).228 This is why this form of capital increase is especially appropriate for stock-option
programs with long runtimes. Furthermore, there is no possibility to reverse the resolution
223
sec. 192 subs. 2 n 2 AktG does not apply to stock-option programs
224
Comp. Bsl, 2004, p. 103
225
226
227
Comp. Einem/Pajunk, 2002, p. 93 et seq.
228
for the conditional capital increase at a later point in time or to change it (sec. 192 subs. 4
AktG).
In the case of conditional capital increase the existing shareholders have no right to purchase
new shares. By issuing new shares and the exclusion of existing shareholders from the
purchase right, the number of shares in circulation is increased. The result is that the share of
the voting rights of the existing shareholders diminishes. Furthermore, the property of the
existing shareholders diminishes, because the participants of the stock-option program can
subscribe the shares at a lower price at the current stock quotation (dilution effect). Because
of these reasons the existing shareholders will only consent in the general assembly when
essential information on the stock-option program, as e.g. the number of granted purchase
rights is disclosed.
The legislator distinguishes different forms of the conditional capital increase in accordance
with the purpose. There are different regulations for issuing convertible bonds or naked
warrants.229
For convertible bonds and warrants in accordance with sec. 193 subs. 2 n 13 AktG
essential corner points of the stock-option program have to be determined. This information
is:
Purpose of the conditional increase in capital,
Circle of beneficiaries,
Information on the amount issued and the foundation on which this amount is calculated
Furthermore, the exclusion of existing shareholders from share purchase rights in accordance
with sec. 3 sentence 4 AktG has to be agreed with three quarter majority of the represented
authorized capital. In this case, it has to be made sure that the exclusion of the purchase
rights is in the companys interest. The exclusion of purchase rights has to be appropriate and
necessary and be in an appropriate relation to the pursued target.230 An exclusion of the
purchase right is especially appropriate when the capital increase does not surpass 10 percent
of the authorized capital. Furthermore, it shall not be essentially lower than the base price of
the shares (sec. 186 subs. 3 sentence 4 AktG).
Moreover, the executive board has to present a written report on the reason of the purchase
right exclusion in accordance with sec. 186 subs. 4 sentence 2 AktG.231 Besides, one has to
pay attention that the amount of the conditional capital increase shall not surpass fifty
percent of the authorized capital represented at the moment of resolution in accordance with
sec. 192 subs. 3 n. 1 AktG. If the company decides to introduce its stock-option program in
connection with naked warrants, further details have to be fixed in the resolution of the
general assembly in addition to the described corner points under sec. 193 subs. 2 sentence 1-
229
Comp. Dietz, 2004, p. 59 et seq.
230
231
Comp. Winter, 2000, p.192
3 AktG. In accordance with sec. 193 Abs. 2 S. 4 AktG the resolution of the general assembly
has to contain:
the repartition of the purchase rights which are given to employees or members of the
management,
performance targets,
purchase periods,
exercise periods and
lock-up periods.
The German Stock Companies Act leaves a wide scope for the design of company
performance targets. The use of absolute and relative performance targets as well as the use
of accountancy key figures is possible.
Furthermore, the purchase and exercise periods have to be determined in the resolution, in
order to counter the insider problematic sufficiently. Moreover, the legislator requires that
the resolution contains the waiting period for the first time exercise. In accordance with stock
company law the waiting period is at least two years long. A further bill requires a longer
term.
Moreover it has to be respected that the amount of the conditional capital increase may not
be higher than ten percent of the authorized capital present when the resolution is passed in
accordance with sec. 192 subs. 3 n 1 AktG. In this case, there is no need for a special
exclusion of purchase rights for existing shareholders in contrast to the procurement of
shares through convertible bonds or warrants. For this reason, there are no reporting duties of
the executive board to the general assembly in accordance with sec. 186 subs. 4 sentence 2
AktG. In the interest of transparency and publicity one should not abandon a comprehensive
reporting policy.232
This form of capital increase is often chosen because own shares do not have to be bought
back at the market, which is positive for the companys liquidity.
The above mentioned details on the conditional capital increase in connection with naked
warrants and convertible bonds have shown that it represents an appropriate measure for
financing long-term stock-option programs. Furthermore, the introduction of naked warrants
has to be preferred to issuing convertible bonds, because no exclusion of subscription rights
is necessary which makes the procedure less complicated.
12.3 Authorized capital increase

The authorized capital increase under sec. 202 et seq. AktG is a further possibility to procure
new shares in the context of a stock-option programs. The executive board is empowered by
232
the articles of association, or a resolution of the general assembly with three-quarter-

majority, to increase the authorized capital up to a certain amount through the issue of new
shares against contributions. The empowerment requires a change of the articles of
association. The change of the articles of association requires the entry into the commercial
registry in accordance with sec. 181 AktG. The nominal amount, by which the authorized
capital is increased, shall not exceed fifty percent of the authorized capital in accordance
with sec. 202 subs. 3 sentence 1 AktG.
When the authorized capital increase is carried out, the executive board decides over the
content and the conditions of the capital increase, as long as no requirements by law or the
articles of association are opposed to the empowerment. The supervisory board needs to
consent to the decisions of the executive board in accordance with sec. 204 subs. 1 sentence
2 AktG. This shall encounter the danger of a possible insider deal by the executive board.233
The subscription right of the existing shareholders is not excluded per se. An exclusion of the
right of share purchase of existing shareholders is, however, necessary to introduce stock-
option programs in the company. In accordance with sec. 203 subs. 2 AktG the executive
board can be empowered to exclude the existing shareholders from subscription rights, which
means that the provisions of sec. 186 subs. 3 and sec. 4 AktG apply analogously.
The timely limitation of the empowerment of the executive board to a maximum of five
years is disadvantageous and problematic. The increase in capital can only be carried out in
this period of time.
This means that the lock-up period and exercising period of the option cannot be longer than
five years. However, stock-option programs should have a runtime of more than five years,
in order to have a long-term incentive effect.234
Furthermore, it is necessary for stock-option programs with a longer runtime than five years,
to have a resolution of the general assembly to decide on a new authorized capital increase
before the resolution of empowerment expires. The general assembly is not bound by former
resolutions. This means that the managers do not have absolute certainty with respect to the
procurement of the necessary amount of shares when a stock-option program is
introduced.235
Furthermore, the authorized capital increase is hardly appropriate for stock-option programs,
because only with the entry of the increase of the authorized capital in the commercial
register, the capital increase becomes effective (in accordance with sec. 189 AktG). This
implies that the new shares may only be given to the managers after the entry in the
commercial register (in accordance with sec. 191 sentence 1 AktG). All new shares which
were given out before the registration are void (in accordance with sec. 191 sentence 2
AktG). For the participants of the stock-option program, there is therefore the danger, that
233
234
235
Comp. ibid, p. 71
they might not receive new shares when exercising their options, if the increase of capital has
not been entered into the commercial register.236
The presented requirements for the execution of an authorized capital increase have shown
that this form of capital increase is basically appropriate for the introduction of stock-option
programs. The time and practical restrictions, however, make the authorized capital increase
less appropriate for financing stock-option programs.
12.4 Ordinary capital increase

A possibility to use new shares for the options issued is an ordinary capital increase against
contribution in accordance with sec. 182 et seq. AktG.
The general assembly has to decide an ordinary capital increase with three-quarter majority
of the represented authorized capital. The decision and the execution of the increase of basic
capital have to be entered into the commercial register by the executive board and the
supervisory board of the company. Moreover, the exclusion of subscription of existing
shareholders in accordance with sec. 186 AktG as well as a report in writing by the executive
board on the reason for the exclusion by the general assembly is necessary. The decision of
the general assembly on the exclusion of the prescription right does not contain special
regulations which would make the distribution to participants of the stock-option program
easier. Thereby, higher formal and material requirements are made for the decisions.237
Furthermore, it has to be seen as disadvantage that the exact amount of the capital increase
has to be fixed when the resolution is taken by the general assembly.238 However, when the
stock-option program is introduced, it is still uncertain which number of stock-options the
participant in the stock-option program will exercise at all. This means that is not clear how
many shares are needed to cover the stock-options, when the stock-option program is
introduced.
A possible solution of this problem is the fixation of a minimum and a maximum amount or
only of a maximum amount in the general assembly resolution. The resolution on the
authorized capital increase has to additionally contain a subscription period of six months in
this case.239 Via the interdiction of self-subscription in accordance with sec. 56 AktG the
takeover of new shares by the company is not permitted until a need due to the stock-option
program comes up..240 The new shares can be taken over by a fiduciary, but this is seen as
236
Comp. Kau/Leverenz, 1998, p. 2273
237
238
239
240
Comp. Engelsing, 2001, p. 69 et seq.
inappropriate in practice, because a fiduciary must take over the complete contribution in
accordance with sec. 56 subs. 3 sentence 2 AktG.241
On the ground of the above mentioned deliberations, we can say that the ordinary capital
increase is very inflexible and therefore very rarely applied in practice.242
12.5 Purchase of own shares

A further possibility to cover the stock-option program is the distribution of already existing
shares which the company would have to acquire for this purpose. The purchase of own
shares, however, is interdicted by the following regulations:243
Interdiction of self-subscription in accordance with sec. 56 subs. 1 AktG

Interdiction of reuse of reserves in accordance with sec. 57 subs. 1AktG
Interdiction of repurchase of own shares in accordance with sec. 71 subs. 1 AktG.
The general regulations on the interdiction of repurchases of own shares are based on the
emergency decree of 19 September 1931 which was passed on the grounds of the
experiences of the world economic crisis from 1929 to 1931. At that time the incorporated
companies had tried to avoid the dropdown of prices of company shares via the repurchase of
own shares. This lead in the best case to liquidity problems of the companies and in the worst
case it meant their bankruptcy.244
However, the legislator has passed exceptional regulations (sec. 71 subs. 18 AktG), which
make the purchase of own shares by the company possible. The repurchase of own shares by
the company is permitted for the purpose of distribution to employees in accordance with
sec. 71 subs. 1 n 2 AktG or to managers in accordance with sec.71 subs. 1 n 8 AktG.
12.5.1 Repurchase in accordance with sec. 71 subs. 1 n 2

AktG
The repurchase of own shares by the company is allowed if the beneficiaries have a working
contract with the company or an associate company and the shares shall be offered for
purchase (sec. 71 subs. 1 n 2 AktG). In the context of the amendment of stock company law
241
242
243
244
Comp. ibid, p. 86
of 1959 this regulation was introduced in order to make the issue of staff shares for the
employees easier.245
In accordance with sec. 71 subs. 3 sentence 2 AktG the company has to hand down the
repurchased shares to the beneficiary within one year after purchase. The amount of this
measure of coverage shall not be higher than ten percent of the share capital (sec. 71 subs. 2
S. 1 AktG). One has to keep in mind that these 10 percent comprehend the purchased shares
as well as the already purchased shares which are still in the company. For the repurchase of
own shares and the design of the conditions the executive board is the only responsible. It
can decide the repurchase of shares in accordance with the performing competence under
sec. 76 subs. 1 AktG without consent of the general assembly.246
The repurchase of own shares is appropriate for the coverage of stock-option programs,
when the stock-option program is only introduced for employees of subordinated
management levels. This method of coverage is not appropriate for members of the executive
board, because they can not be considered as employees of the company.247 Employees are
only those persons who are subject to instructions. The members of the executive board,
however, are not subject to instructions. It is rather their responsibility to direct the company.
Therefore, they do not have the characteristic of an employee and do not have the right to
receive shares under sec. 71 subs. 1 n 2 AktG.248
The purchase of own shares in accordance with sec. 71 subs. 1 n AktG is nor appropriate for
stock-option programs which entitle the executive board to purchase shares, because the
legislator has narrowed the circle of participants to employees only. Also the time limitation
to hand the purchased shares down to the beneficiaries within one year has to be regarded as
disadvantage. Because of the short period of one year this method of coverage is not
appropriate for long-term stock-option programs.
With the introduction of the KonTraG (Corporate Sector Supervision and Transparency Act)
in the year 1998 the new regulation sec. 71 subs. 1 n 8 AktG was introduced, because it
makes it possible for members of the executive board and managers to take part in stock-
option programs which are financed by the buyback of own shares. This regulation is
explained in more detail in the following section.
12.5.2 Repurchase in accordance with sec. 7 subs. 1 n 8 AktG

With the introduction of the sec. 7 subs. 1 n 8 AktG the purchase of own shares by the
company has been legally simplified. This regulation has proved to be very flexible, because
there is no need to indicate a purpose. Under sec. 7 subs. 1 n8 sentence 2 AktG the trade
245
Comp. ibid, p. 87
246
247
248
Comp. ibid, p. 88
with own shares is excluded as only purpose.249 If the purchase of own shares is undertaken
in the context of a stock-option program, sec. 71 subs. 1 n8 sentence 5 AktG points to sec.
193 subs. 2 AktG. The requirements for a conditional increase in capital mentioned in sec.
193 subs. 2 are also valid for own shares.
The permission to the executive board to buy back own shares has to be given in a resolution
of the general assembly. This resolution is limited to 18 months in accordance with sec. 7
subs. 1 n 8 AktG. This term of 18 months is only valid for the purchase of shares, but not
for holding them. This makes it possible for the company to hold its own purchased shares
for an unlimited period of time. In the authorization resolution, the minimum and maximum
price for which the own shares are bought back have to be specified. These two values can
be either determined in absolute or in relative numbers.250 Furthermore, the resolution has to
contain the volume for the purchase of own shares which must not be higher than ten percent
of the share capital (sec. 71 subs. 1 n1 AktG). It has to be reminded that the upper limit of
ten percent comprehends the purchased shares as well as the already purchased shares which
are still kept in the company (sec. 71 subs. 2 sentence 1 AktG).
In accordance with sec. 71b AktG the company is neither entitled to voting rights nor to
dividend payments from own shares. Furthermore, evasive transactions are forbidden in
accordance with sec. 71a AktG. If the company purchased own shares illegally the shares
have to be sold within one year after their purchase.251
Because of the insider problematic, the Federal Authority for the Supervision of Services
(Bundesanstalt fr Dienstleistungsaufsicht) has to be informed on the empowerment of the
executive board in accordance with sec. 71 subs.3 sentence 3 AktG. In the next general
assembly the executive board has to inform the shareholders over the following points in
accordance with sec. 71 subs. 3 sentence 1 AktG).
reasons for and purpose of the purchase of own shares
number of acquired shares and
the amount of share capital used on them,
their share in share capital
their counter value in shares
When the executive board is empowered, it may buy back own shares up to a maximum
amount of ten percent (sec. 71 subs. 1 n 8 s. 6 AktG). In practice, we can distinguish
between different procedures and moments for the repurchase of own shares. The following
points in time are possible for the repurchase of own shares:
249
250
251
Comp. ibid, p. 90
when the stock-option is granted,

during the runtime of stock-option programs
during the execution of stock-options.
The advantage of repurchase of own shares at the moment of granting the stock-options is
that the price risk is avoided if the management chooses to exercise the option at a later point
in time.252 The reason for this is that the participants in the stock-option program purchase
the shares at a base price at the moment of exercising the option which corresponds to the
purchase price of the shares by the company. If the stock-options are not exercised, the
company bears the loss of the price dropdown in the case of necessity to sell the shares. A
fact which has to be considered as disadvantage is that the shares have to be purchased at a
very early point in time. This implies that liquidity is bound in the company which is not
available for investments and payment of interests for existing credit. The positive side is
that possible dividend payments are saved during the runtime of the stock-options (sec. 71b
AktG).253
Altogether, it can be assumed that shares are bought back when stock-options are
exercised.254 The company has a lower risk for the case that stock-options are not exercised
and the liquidity is not affected during the complete runtime of the option.255
Furthermore, there are different possibilities how the share can be purchased. In practice the
following methods are distinguished:256
1. purchase of the shares on the stock market (open market purchase)
2. purchase offer by the executive boards to the shareholders (self tender offer)
3. purchase of shares by a majority shareholder (negotiated repurchase).
In the case of repurchase of own shares on the stock market, the company buys its own
shares anonymously at the stock market rate. In this case the company acts as enquirer at the
stock market.257
In the case of purchase of own shares via a self tender offer the company suggests an offer
to the shareholders to buy back own shares in a certain period. In contrast to the buyback of
shares at the stock market the repurchase is not undertaken over a longer period of time, but
is determined in time. The offer to the shareholders can have two different forms: in case of a
fixed price tender offer the offer of buyback is made at a fixed price. Hereby, the buyback
price and the period of time during which the repurchase shall be made are determined by the
252
253
254
255
256
257
company. The buyback price is composed of the stock quotation and a sales bonus. This
motivates the shareholder to sell the shares within a determined period of time.258
In contrast to the fixed price tender offer the Dutch auction tender offer only determines
a price margin for the repurchase. The shareholders make their offers for sales within this
margin. The company then determines the lowest price (market clearing price), at which it
wants to buy the desired number of shares back. If the number of sales offers is higher than
the desired number of shares that shall be bought back, the individual sales orders are carried
out proportionately.259
The third option consists in the possibility to purchase options from a majority shareholder.
This type of repurchase is generally legally prohibited in Germany, because it offends the
principle of equality in accordance with sec. 53a AktG.260 In this case only the major
shareholder receive an offer for the repurchase of own shares, while the other shareholders
do not get this offer. This means that a small circle of shareholders is favored. The unequal
treatment of the other shareholders, however, can not be justified.261
The deliberations of this section have shown that the purchase of own shares by the company
is appropriate to cover shares for a stock-option program Furthermore, this type of financing
does not lead to dilution of capital262 nor of the voting rights of the existing shareholders.263
This means that the repurchase of own shares to cover the stock-option program is an
adequate method of coverage depending on the situation of the company.
12.6 Cooperation with third parties

The financing methods described in the previous sections all have in common that the
company acquires all the shares for the coverage on its own account at the capital market and
makes them available afterwards. In the case of cooperation with third parties the company
can cooperate with a credit institute or with a financing company belonging to the group.264
The company contractually agrees the grant of stock-options with a credit institute against
one time payment of a fee. The company then hands the stock-options down to the
258
Comp. Rudolph, 2006, p. 463
259
260
Comp. Rudolph, 2006, p. 463
261
262
Friedrichsen is sceptical with regard to this practice, 2000, p. 232.
263
264
participants of the stock-option program.265 In the case of exercise of the stock-option by the
participant of the program the credit institute has to make the required number of shares
available that it had previously acquired at the stock market on its own account and in its
own name.266 There is no need of a resolution of the general assembly for the cooperation
with third parties. The reason is that the structure of the company capital is not changed.267
The disadvantage of cooperation with third parties is that the company has to pay a fee to the
credit institute. The amount of the fee depends on the type of procurement of the stock-
option program.
Furthermore, it depends on the risks that the third party takes over by purchasing the
shares.268 The payment of the fee means that the companys liquidity is reduced. The fee
must also be paid if the stock-option is not exercised because the determined conditions in
the option contract were not fulfilled by the participant of the program.269 The positive aspect
is that the transfer of options does not imply any dilution of capital and voting rights of the
present shareholders.270
12.7 Stock Appreciation Rights

If the participant of a stock-option program receives virtual options and the programs
conditions are fulfilled, the manager can exercise the virtual option and receives a cash
settlement. In contrast to the previously described financing method, no shares have to be
procured in this case for covering the stock-option program.
The cash payment to be made to the participant of the stock-option program reduces directly
and in full extent the operating results of the company. Indirectly this liquidity reduction
means lower dividend payments for the shareholders and a smaller growth of the company.
The virtual options can be basically freely designed. In the design of the SAR is has to be
avoided that the company profit is exhausted. In order to avoid this, there is the possibility to
put a cap for the maximum profit of exercise.271
265
266
Comp. Pellens/Crassselt, 1998, p. 150 et seq.
267
268
269
Comp. Kallmeyer, 1999, p. 102 et seq.
270
271
13 Execution of a stock-option program

in the company
In the previous chapter appropriate possibilities to cover stock-option programs were
presented. Now, the question is, how and by whom the introduction of the stock-option
program is carried out. It has to be clarified who has which competence in the stock-listed
company and especially the responsibilities of executive board and supervisory board have to
be examined. These questions are now looked into in more detail.
13.1 Decision on the introduction of a stock-option

program
The first phase of the implementation of stock-option program for the management of a
company commences with the decision to introduce it at all. In accordance with sec. 76 AktG
the executive board manages the company in own responsibility. The introduction of a stock-
option program as instrument of the implementation of the shareholder value concept means
amongst other things to align the complete company strategy with this concept. This means
the introduction of a stock-option program is at first a management decisions and has to be
attributed to the area of responsibility of the executive board.272 The question is whether the
executive board can also decide on the introduction of the program when it is the beneficiary
itself.
The members of the executive board are appointed by the supervisory board for five years in
according to sec. 84 subs. 1 sentence 1 AktG. On the basis of the staff competence of the
supervisory board it negotiates with the members of the executive board regarding their
salary and decides on the corresponding agreements in the articles of employment. This
means that only the supervisory board is responsible for the introduction of a stock-option
program as remuneration for the executive board members. If the regulation of sec. 84 subs.1
sentence 5 AktG, 112 AktG did not exist, the executive board could determine the conditions
of the option itself as representative of the company. The criticism of self service by the
executive board, however, would be justified. For that reason it is not possible for the
members of the executive board to have influence on the stock-option program and its
detailed design.273
The general assembly does generally not take part in the decision regarding the introduction
of a stock-option program. However it has a right of co-determination and decision
272
273
Comp. Engelsing, 2001, p.39 et seq.
competences when the stock-option program is meant to be covered through a conditional or

authorized capital increase or the repurchase of own shares.274
13.2 Preparation of the decisions of the general

assembly
The second phase includes the preparation of the resolutions of the general assembly which
are necessary for the introduction of the stock-option program.275 Depending on the type of
financial coverage of the stock-option program, different types of general assembly
resolutions are necessary. In case of stock appreciation rights and when financing the
program in cooperation with third parties no resolutions of the general assembly are needed
for the introduction of the stock-option program into the company. The decision of the
executive board is sufficient for implementation.276
In accordance with sec. 121 subs. 2 sentence 1 AktG the executive board is responsible for
the convocation of the general assembly. Specialized literature considers this as part of the
business management in the sense of sec. 77 AktG.277 The executive board is also
responsible for the preparation of the resolutions of the general assembly. Furthermore, its
area of responsibility includes the preparation and circularization of the agenda (sec. 124
subs. 1 sentence 1 AktG). However, these tasks are handed down to the supervisory board
and the general assembly. The general assembly has only certain rights to say in the
determination of the conditions of the stock-option program in accordance with sec. 118 et
seq. AktG.278
For the preparation of general assembly decisions by the supervisory board, the following
resolutions are necessary for issuing a convertible bond or warrant:
274
Comp. Holland, 2000, p. 41
275
276
277
278
Decision on the execution of a conditional capital increase (sec. 192 subs. 2 n1 AktG)
resolution of approval or authorization of the issue of the bond (sec. 221 AktG),279
which has to be presented to the general assembly (sec. 186 subs. 4 sentence 2 AktG).
exclusion of prescription rights for the existing shareholders (sec. 221 subs. 4 in
connection with sec. 186 subs. 3 and 4 AktG) as well as
a written report on the reasons for the exclusion of prescription rights which has to be
presented to the general assembly (sec. 186 subs. 4 sentence 2 AktG).
The issue of naked warrants via a conditional capital increase also makes a resolution of
approval or authorization necessary in accordance with sec. 192 subs. 3 AktG.
In the case of sourcing the stock-option program with the purchase of own options in
accordance with sec. 71 subs. 1 n AktG the following resolutions have to be prepared:
a resolution of authorization in accordance with sec. 71. subs. 1 n. 8 AktG
a corresponding exclusion of prescription rights in accordance with sec. 186 subs. 3, 4,
71 subs. 1 n. 8 sentence 5 AktG as well as
a report on the reason for exclusion of the prescription right (sec. 186 subs. 4 sentence 2
AktG).
Afterwards at least a three-quarter majority of the share capital when the resolution is made
is necessary to put the resolution into action. The supervisory board and the executive board
then announce the resolution for conditional increase in capital for entry in the commercial
register (sec. 195 subs. 1 AktG). When convertible bonds or warrants are issued, the decree
of the supervisory board and the executive board has to be entered into the commercial
register (sec. 22 subs. 2 sentence 2 AktG). In case of a resolution for purchase of own shares
the Federal Institute for the Supervision of Financial Services has to be informed (sec. 71
subs. 3 sentence 3 AktG).280
13.3 Grant of stock-options

After the necessary resolution has been procured, the next step is to grant the convertible
options or warrants. One has to be pay attention whether the members of the executive board
are also participants in the program. If employees receive convertible options or warrants, the
issue is part of the executive boards responsibility. If the members of the executive board
are beneficiaries of the program, the supervisory board is responsible to issue the convertible
bonds (sec. 84 subs. 1 sentence 5 in connection with sec. 112 AktG).281 In practice the
279
The authorization resolution gives the supervisory board the necessary freedom for the introduction and
execution of a stock-option program when stock-options are granted to the executive board. In the case of a
resolution of approval the executive board has the duty of execution. Comp. Kelle, 2002, p. 36
280
Comp. Zitzewitz, 2003, p. 95 et seq.
281
company would partially use a credit institute. The credit institute takes the convertible
bonds over and offers them to the beneficiary for purchase.282
If pure naked warrants are given to the executive board, the supervisory board is also
responsible. The grant of stock-options via conditional capital increase (sec. 192 subs. 2 n 3
AktG) or the purchase of own shares (sec. 71 subs. N 8 AktG) makes it necessary to
conclude a new employment contract with the executive board or to change the old
employment contract with the executive board.283
13.4 Assignment of shares

If the conditions for exercise as e.g. lock-up periods or performance targets for stock-options
or bonds are fulfilled, they can be exercised by the participants of stock-option programs. In
the case of exercise of real stock-options, the participants are provided with shares. For
shares which are distributed via conditional capital increase, a declaration of subscription
between the supervisory board and the participants in the stock-option program is made in
accordance with sec. 198 AktG. The issue of shares has to be entered into the commercial
register by the supervisory board within one month after the end of the business year (sec.
201 subs. 1 AktG).284
If shares are issued which are funded by the purchase of own shares in accordance with sec.
71 subs. 1 n 8 AktG, the supervisory board has to give detailed information in the next
general assembly. The information to the general assembly has to include the following
corner points in accordance with sec. 71 subs. 3 AktG:
reason and purpose of the purchase of shares,
number of shares acquired
the amount of basic capital used for the purchase of shares
the percentage of the shares acquired in basic capital
the corresponding value of shares.
If the participants of the stock-option programs receive virtual options, they do not receive
shares, but an immediate cash settlement.
282
283
Comp. ibid, p. 96, 99
284
14 Accountancy of stock-option programs

There has been much controversy for a long time whether and how to balance stock-option
programs. In 2002 there were prominent advocates, as the investment guru Warren Buffett
and the ex-head of US central bank Alan Greenspran, who were in favor of including stock-
option programs as expenses in the balance sheet. Especially technology companies in the
US had vehemently refused to include their programs in the balance sheets. However, these
were exactly the companies that had introduced especially expensive stock-option programs.
The inclusion of stock-option programs as expense would have lead to an important
reduction of the company profits in their cases.285
In the following section relevant accountancy rules for German companies for share-based
remuneration are shortly described. In Germany capital market-oriented companies with their
head office in the European Union have to design their consolidated account in accordance
with IFRS.286
14.1 Accounting under IFRS

The popularity of stock-option programs was formerly based on the fact that stock-option
programs were not recorded as personnel expenditure. This was possible for companies that
prepared their balance sheet in accordance with IFRS, because the regulation IAS 19
payments to employees does not impose principles on recognition and valuation.287
With the introduction of IFRS 2 (share-based payment) in the year 2004 the balancing
requirements for stock-option programs became clearer. IFRS came into effect on 1st January
2005. For stock-option based remunerations which were or are paid after the 7 November
2002 and for which the lock-up period has not yet expired, the new regulations are valid,
too.288
14.1.1 Field of application

IFRS 2 regulates the accounting treatment of remuneration of employees and managers by
means of shares and stock-options. The field of application of the standards, however, is not
only limited to the remuneration of employee remuneration. The standard regulates all
transactions in which company proportions (e.g. shares) or options as remuneration for
285
Comp. Schubert, 2002
286
287
Comp. Pellens, 2008, p. 502
288
Comp. IFRS 2.53
goods, work or other services are granted. Another example would be the one of a business
consultant who receives stock-options of the company instead of monetary payment.289
Moreover, IFRS has to be applied in the case of share-based remuneration, when the equity
instruments are not created by the company itself, but by the parent company in case of
affiliated companies. It has to be taken into consideration that the standard may not be used
for transaction for which the accounting is expressly regulated in other regulations of the
IFRS rules.290
The standard distinguishes between the following types of share-based remunerations:
equity-settled share-based payment transactions, like shares or stock-options
cash-settled share-based payment transactions, e.g. stock appreciation rights
share based remunerations with a choice between equity settlement or cash settlement
(combination model).291
It can be understood from the above deliberations that the standard distinguishes between
real and virtual equity settlement. This differentiation is necessary in order to recognize
whether the beneficiaries have an equity or foreign capital claim against the company.
The following table gives an overview over the different forms of design of share-based
remuneration.
Character of share Character of option
Restricted Stocks Stock-options

Real equity settlement
Phantom Shares Stock Appreciation Rights

Virtual equity settlement
Table 14.1: share-based remunerations292
The following deliberations focus the accounting of share based remuneration of employees
and managers of the company.
289
290
Comp. IFRS 2.52.6
291
Comp. IFRS 2.2
292
Following: Pellens, 2008, p. 503
14.1.2 Real equity settlement
Approach
The assessment of a share-based remuneration which is settled with equity instruments
(equity-settled share-based payment transactions) is undertaken at the fair value which is
determined at the moment of grant.293 This type of accounting is valid for shares as well as
stock-options which are sourced via conditional capital increase as well as via repurchase of
own shares.294
The problem with accountancy of employee remuneration with real equity instruments is that
the grant of shares or stock-options is a type of work remuneration. Work independent of
whether it is already performed or not may not be included in the balance sheet. The
problem with that impossibility to include work into the balance sheet is solved via an
expense entry. If the employee remuneration is solved via stock and if the employees have to
carry out an additional own investment for the shares, the following entry has to be made:295
personnel expense debited capital stock credited
cash debited capital reserve credited
The recognition of stock-options in the balance sheet on the other hand is more complex
because the moment of granting the stock-option as well as the moment of exercising it have
to be recognized. The corresponding journal entry in the case of granting a stock-option is as
follows:
Personnel expense debited capital reserves credited
If the stock-options are exercised after the lock-up period through the employees, the one-
time payments by the beneficiaries for the stock-option have to be debited on cash.
Cash debited capital stock credited

capital reserve credited
The exercising profit which the beneficiary makes by exercising his stock-option does not
lead to a retroactive adaption of the capital expense.296
The previously stated thoughts include the assumption that the work has already been
performed. This is based on the assumption that the stock and stock-options are freely
disposable and exercisable and do not depend on an employment relationship in the
293
Comp. IFRS 2.10, status 24.02.2005
294
Comp. IFRS 2 BC331
295
296
company.297 This is mostly not the case in stock-option programs. In practice, stock-options
are only granted, if there is an employment relationship. It may therefore be assumed that
stock-options which are given out under this precondition, correspond to future work
performances. The expenses must therefore be evenly distributed in the personnel expenses
with effect on the net income over the period of service. In accordance with IFRS 2.15 the
end of the performance period corresponds to the moment from which on the stock-options
are freely disposable and exercisable. In the case of stock-option programs this period
corresponds usually to the lock-up period.298 If the stock-option program is based on
performance targets, the period of performance is estimated on the day of grant.299 If capital
market related performance targets (market conditions) are set, the estimated period of
performance may not be corrected at a later point in time. If non-capital market related
performance targets (performance conditions) are set, the performance period and the
personnel expenses to be entered have to be adapted to the actual duration up to the
fulfillment of the targets, if necessary in each period.300
Assessment
Real equity capital instruments used as remuneration have to be recognized with the fair
value of the services received by the company. The fair value of the named equity
instruments (stocks and stock-options) are generally calculated from the current market
price.301
The use of current market prices is unproblematic for companies that give out employee
stock. In contrast, in the case of stock-options the use of market prices is usually not
possible. This is due to the specific design of options, like the longer run-time and the
possibility of an early exercise of the stock-option before the end of the run-time. The stock-
options distributed to the managers are therefore very different to the stock-options traded on
the stock market. For this reason a generally recognized assessment method can be used for
the calculation of stock-options:302
In the assessment of stock-options it has to be differentiated between the intrinsic value and
the fair value . The intrinsic value is determined by the value by which the current stock
quotation of the share surpasses the subscription price. Therefore, it demonstrates the
possible profit for the case of immediate exercise. The fair value includes besides the inner
value also the time value. The time value takes the positive as well as the negative price
developments into account. This means that the time value is positive at any moment before
297
Comp. IFRS 2.14
298
299
Comp. IFRS 2.15b
300
Comp. Coenenberg, p. 340
301
Comp. IFRS 2.16
302
Comp. Buschhter/Striegel, 2009, p. 260 et seq.
the end of the run-time. This means, the stock-option has a positive value even if the intrinsic
value is zero.303
IFRS name no specific option price model for the determination of the fair value. The reason
is that possible developments of option price models should be considered in the option price
assessment. Some models are admissible which take the following factors into
consideration:304
exercising price of the stock-option,
run time of the option,
current market price of underlying stock,
the expected volatility of the stock,
the expected return on dividends,
and the risk free interest factor for the run-time of the stock-option.
IFRS 2 name the Black-Scholes model as example for the assessment of stock-options.305
The advantage of the Black-Scholes model is its simple application. The disadvantage is that
it can only be applied on stock-options which are not containing complex conditions (e.g.
lock-up periods, exercising windows). An example is that the Black-Scholes model can not
display stock-options which are exercised before the end of the run-time. Furthermore, the
expected volatility is determined via a fixed value and takes not into consideration that the
volatility can change in the course of the run-time of the stock-option. But this model can
still deliver a sound value, if the stock-option program contains short contractual periods or
short exercising periods.306
A further evaluation method to be taken into consideration for the assessment of stock-
options is the binomial options pricing model by Cox, Ross and Rubinstein. The model
contains the same calculation factors as the Black-Scholes model, but is more flexible and
can be applied on almost all types of share and stock-option programs.307
To the contrary of the Black-Scholes model the binomial options pricing model can deal with
changes of the assessment parameters during the run-time of the stock-option. The binomial
model assumes that the stock quotation can have two different variations in money or out
of money within a certain period of time.
By dividing the run-time of the stock-option in the shortest possible periods, the real
distribution of the price development of the stock can be displayed via the binomial model.
303
304
Comp. IFRS 2.B6
305
Comp. IFRS 2.B5
306
Comp. Buschhter/Striegel, 2009, p. 262
307
The disadvantage is that the complexity of the model increases the shorter the examined
periods become.308
Furthermore, simulation procedures as the Monte-Carlo simulation can be used for the
evaluation of the option price. In this procedure a multitude of random paths is generated
which represent the conduct of the relevant factors of influence. On these random paths the
discounted value of the payment is calculated. The average of the discounted values equals
the value of the stock-option as well as the random error. This random error can be
diminished with a high number of simulations.309
Furthermore the IFRS 2 contains regulations on the record of performance targets. While in
Germany under sec. 193 AktG success targets are obligatory for stock-option plans which
are financed via a conditional increase in capital, the IFRS 2 divides them in market
conditions and performance conditions.310 Market conditions are stock market oriented
targets , as the absolute increase of the share price or outperformance of a peergroup.
Performance conditions on the other hand are key figure based targets as the increase of
profit per share by 10 percent etc.
Only the market conditions are used for the determination of the fair value in the evaluation
of the option. The expense remains the same in case of not achieving the aim. Performance
conditions are not taken into consideration in the option assessment, but are considered in the
determination of the number of shares which are likely to be exercised. In the case of not
reaching the performance conditions, no personnel expense results and the accruals can be
dissolved in cash in case of an application.311 This type of assessment applies also to a
combination of market and performance conditions.312
In exceptional cases it is possible to deviate from the fair value assessment. The stock-
options are then assessed at their intrinsic value. One may recur to this type of evaluation, if
it is not possible for the company to determine the fair value in a reliable way. The
assessment of stock-option at their intrinsic value at the day of grant of the stock-option is
not final. Each change of intrinsic value has to be considered in each reporting period up to
the end of the run-time of the stock-option. It is not possible to change from the assessment
at the intrinsic value to the assessment at the fair value.313
308
Comp. Buschhter/Striegel, 2009, p. 262
309
310
Comp. IFRS 2.15b
311
Comp. IFRS 2.19
312
313
14.1.3 Virtual own capital instruments
Approach
The accounting of virtual equity instruments deviates in very few points from real equity
instruments. The accounting of virtual stock-options, however, is less time consuming,
because the equity is not affected in this case.314
Virtual equity instruments, as e.g. stock appreciation rights are recorded just like real equity
instruments in the personnel expenses. In contrast to the real equity instruments no capital
accrual is made as counter-entry, but a liability in form of an accrual is made.315
At the moment when the work of the employee is fully done, the company has to record the
personnel expense and the accrual. Some value increasing rights are e.g. exercisable at once,
with the effect that at this moment the services by the employee are fully rendered.
Therefore, the stock appreciation rights have to be recorded at the moment of grant to full
extent.316
If the services of the employees have not been completed, the personnel expense and the
accruals have to be recorded otherwise. The services by the employee are generally not
completed when certain exercising conditions, as e.g. lock-up periods were agreed on in the
stock-option program. In this case, the personnel expense has to be assessed and recorded
anew at any accounting date during the lock-up period. This type of assessment is carried out
up to the moment when the services of the employee are completed.317
Assessment
Share-based remuneration instruments, which are paid in cash, as e.g. stock appreciation
rights, are also assessed at the fair value. Like in the case of real stock-options the
assessment of the virtual stock-options has to be carried out with the help of appropriate
assessment models. In contrast to the real stock-options the first time assessment is not
carried out at the moment of grant. The evaluation has to be updated at each accounting date
during the run-time.318 This means that personnel expenses and accruals have to be adapted
with effect to net income to the changes in value.
314
Comp. ibid, p. 513
315
Comp. IFRS 2.7
316
Comp. IFRS 2.32
317
Comp. IFRS 2.32, 2.33
318
Comp. Pellens, 2008, p. 518 et seq.
The corresponding accounting records at the end of the corresponding reporting period are
formulated as follows:319
Personnel expense debited accruals credited
Through the regular adaptation of the assessment of virtual options, the exercising profit of
the beneficiary affects net income in contrast to real stock-option programs. The exercising
profit can be higher or lower depending on the situation of the stock markets. This induces a
high volatility of the personnel expenses.320
14.1.4 Combination models

In practice often share-based remuneration models can be found in which real and virtual
equity instruments are combined. In the case of share-based remunerations, in which the
company or the beneficiaries have to chose between cash settlement and the exercise of the
equity instruments, there is a difference depending on who has the choice of settlement.321
If the company has the right to choose the settlement type, it has to be examined whether
there is a payment duty. A payment duty arises when corporate limitations restrict the
distribution of equity capital instruments (e.g. there is a legal prohibition for the company to
give out shares) or if the company often chose the cash settlement in the past.322 Because of
the named reason one can presume that the company will also chose the settlement type of
cash payment in future.
Depending on underlying payment duties, the combination models have to be recorded as

follows:323
If there is a payment duty, the balancing has to be carried out in accordance with the
regulations for virtual equity instruments. If, later, equity instruments are distributed anyway,
the accrual has to be assessed anew at the moment of exercise. The value has to be recorded
in the equity without effect on net income.
If no payment duty is to be expected, the expense has to be recorded under the balancing
regulations for real equity instruments.324 One can distinguish between the following
recording possibilities:325
319
Comp. ibid, p. 520
320
321
Comp. ibid, p. 522
322
Comp. ibid, p. 522
323
Comp. ibid, p. 522
1. The company chooses cash settlement: The cash settlement has to be recorded like the
buyback of real equity instruments in this case; it has to be deducted from equity without
effect on net income.
2. The company chooses settlement via equity instruments. No further record in equity is
necessary.
Furthermore, there are combination models in which the beneficiary (employee) has the right
to choose the settlement type. This is a so called compound financial instrument, composed
off an equity and a foreign capital component.326 Because its existence is rather seldom in
practice it will not be examined in more detail.
14.1.5 Disclosures
IFRS 2 contains extensive regulations on the disclosure of share-based remuneration. With
the requirements in IFRS 2, it shall be made possible for those interested in the annual
accountancy to comprehend information on kind and extent of share-based remuneration and
to assess it. Furthermore, information on the assessment and the effects of share-based
remuneration on the financial circumstances and revenue situation have to be published.327
These three principles contain minimum standards which have to be fulfilled by the
companies. With regard to the information on type and extent of relevant transactions the
following information has to be given under IFRS 2.445:
1. A presentation of all share-based remuneration systems used in the recording period. All
important parameters of each program have to be displayed, as e.g. exercising conditions,
lock-up period and run-time.
2. The number and the weighted average exercise price for all real stock-options:
stock-options outstanding at the start of the recording period,
stock-options granted in the reporting period,
stock-options forfeited in the recording period, because of unfulfilled exercising
conditions,
stock-options exercised in the reporting period,
stock-options forfeited in the recording period,
stock-options outstanding at the end of the reporting period as well as
exercisable stock-options at the end of the reporting period.
324
Comp. IFRS 2.41 bis 2.43
325
Comp. IFRS 2.43
326
Comp. IFRS 2.35
327
3. Furthermore, information has to be given on all stock-options which have been exercised
in the period, the average stock quotation at the day of exercise and the weighed average
price of the recording period in the case of regularly exercised options.
4. The fluctuation margin in exercise prices and the contract run-time for the end of
outstanding stock-options have to be equally published.
With regard to the assessment of share-based remuneration, the following information has to
be given under IFRS 2.47 to 2.49.
1. The weighted average fair value for the stock-options granted in the recording period on
the record date as well as information on the option price model including the following
influencing factors:
the average stock quotation, exercise price, expected volatility, run-time of the option,
expected dividends, risk-free interest rate, as well as further assumptions included in
the option model;
a description on how the expected volatility was determined;
information on whether and how other factors (e.g. market conditions) were included
in the calculation of the fair value.
2. For other share-based remuneration instruments (other than stock-options) the number
and the average fair value at the record date have to be published as well as information
on how the fair value was calculated.
3. In the case of changes of the conditions in the granted share-based remuneration
instruments, information has to be given why these changes were made and information
on the changed fair value and its determination has to be given.
With relation to the third principle the following information has to be published:
4. A display of the effects of the distribution of share-based remuneration on the income
statement as well as on the capital and finance situation of the company.328 In this context
the following information has to be given:329
the total expenses recorded which have arisen in the recording period because of
share-based remuneration
the total expenses which were recorded as accruals at the end of the reporting period
because of share-based remuneration
in case of accruals which have arisen from share-based remuneration, the intrinsic
value of the accrual at the end of the period.
The companies may give further details in the annual balance sheet when the three named
principles are not fulfilled with the minimum requirements.
328
Comp. IFRS 2.50
329
Comp. IFRS 2.51
14.2 Balancing in accordance with US-GAAP

Since 1948 there has been detailed regulations on balancing of stock-options in the US. The
basis for balancing stock-options under US-GAAP was provided by the regulations of the
APB 25330 up to the year 2004 and by the newer regulations of the SFAS 123331. For a long
time, there had been the right to choose between both regulations. This choice included the
possibility to record stock-options either under APB 25 or under SFAS 123. It was possible
to change from APB 25 to SFAS 123 at any time. If, however, the stock-options had been
recorded under SFAS 123, it was not possible anymore to return to APB 25.
With the upcoming of different company crises (e.g. Enron) the assessment method under
APB 25 was more and more criticized,332 with the result that in December 2004 a renewed
version of the SFAS 123 Share-Based Payment was published by the FASB. This new
version was referred to as SFAS 123(R). One of the most important new regulations of SFAS
123(R) was that the choice for all stock-options plans which were introduced after the 15
June 2005 was abolished. Companies which had started to record under APB 25 at this
moment were not affected by this regulation. Now the regulations of the SFAS 123(R) are
examined in more details:333
14.3 Regulations under SFAS 123(R)

SFAS 123 Share-Based Payment regulates the balancing of stock-options and similar
rights. With the renewal of SFAS 123 into SFAS(R) the possibility to record new stock-
option programs under APB 25 was abolished. The only method for assessment of stock-
options and similar values is now based on the fair value.334 The FASB gives the following
reasons for this:335
1. Continuous criticism of the choice between balancing in accordance with APB 25
and SFAS 123.
2. By the elimination of choices the comparison of annual balance sheets is simplified.
3. The US-GAAP regulations are simplified by the abolition of parallel regulations.
330
Comp. Accounting Principles Board, Accounting Principles Board Opinion No. 25: Accounting for Stock
Issued to Employees, 1972.
331
Comp. Statement of Financial Accounting Standards No. 123, published by FASB, 1995.
332
It was critizised that the APB determined only the intrinsic value of the option. This had generally the result,
that the base price was set at the current stock quotation which meant that the intrinsic value often had the
unrealistic value zero.
333
Comp. Coenenberg, 2005, p. 346
334
Comp. KPMG, 2007, p. 283
335
Comp. Coenenberg, 2005, p. 349
4. Many analogies between SFAS 123(R) and IFRS 2 and comparability between
company balance sheets under IFRS and US-GAAP.
The SFAS 123(R) was developed in close collaboration with the IASB. The IASB published
the standard IFRS (which was described above) almost at the same moment.336
Area of application
SFAS 123(R) regulates the accountancy for all variants of share-based remunerations which
are spent by a company for received goods and services. This means that also non-employed
parties as suppliers are included in the area of application. In practice, however, share-based
remuneration paid to suppliers plays only a minor role.337 For this reason the standards
focuse share-based remuneration granted to employees.
Approach
SFAS 123 (R) distinguishes between two variants of share-based remuneration: equity
classified awards and liability classified awards. The separation of share-based remuneration
in two different types is crucial because there are important differences in the recognition of
both forms in the balance sheet.338
Share-based remuneration which provide for a cash settlement, as e.g. stock appreciation
rights are classified as liability classified awards. Share-based remuneration which do not
provide for cash settlement as shares or real stock-options are classified as equity classified
awards.339
If the company has the right to choose a form of settlement, i.e. if the exercise of the share-
based remuneration is settled either in cash or in company shares, the intent of the company
is decisive. If the company had already chosen the cash settlement in the past, one may
assume that this type of settlement will be chosen in future. The result is that the company
has to classify the chosen share-based remuneration as liability classified award.340
Assessment
Under SFAS 123(R) all transactions, in which the company has granted share-based
remuneration as e.g. stock-options and similar rights for received goods and services to the
employees, have to the assessed at fair value.341 The Fair Value of share-based remuneration
336
Comp. KPMG, 2007, p. 283
337
Comp. ibid, p. 283
338
Comp. ibid, p. 284
339
340
Comp. KPMG, 2007, p. 285
341
Comp. SFAS 123(R). par. 7
has to be calculated with an accepted assessment model like for example the Black-Scholes-
model or the binomial model.
The value of the share-based remuneration is to be assessed at the moment when the
employees can exercise their stock-options or similar rights for the first time. This moment,
however, lies in the future, with the result that the fair value has to be estimated on the grant
day.342
The following parameters are integrated into the assessment model:343
subscription price of the shares,
expected volatility of the share,
expected dividend of the share as well as
risk free interest rate for the expected run-time of the stock-options.
Further changes of the parameters, which lead to a change of fair value, are not taken into
consideration in equity classified awards.344 The distribution of the fair value has to be linear
over the lock-up period and the fair value has to be recorded as personnel expense and
capital accrual. The following accounting record applies:345
Personnel expenses debited capital accruals credited

In case of liability classified awards, the assessment of the fair value, as in the case of equity
classified awards, is made at the moment of grant. In contrast, the fair value has to be
determined anew on each accounting date and to be recorded in the personnel expenses. The
following accounting record applies in this case:346
Personnel expenses debited accruals credited
The recorded accrual at the moment of exercise of the share-based remuneration has to
correspond to the amount which the company has to pay to the employee in form of cash
settlement. In contrast to the equity classified awards, this form of assessment leads to higher
income volatility.347
342
343
344
Comp. KPMG, 2007, p. 287
345
346
Comp. KPMG, 2007, p. 292
347
Comp. KPMG, 2007, p. 292 et seq.
Disclosures
For companies that balance their share-based remuneration in accordance with US-GAAP,
the disclosure regulations are set down in SFAS 123(R) par. A240 and A241. These new
regulations replace the regulations under SFAS 123, par. 45-48.
In the annex a description of the share-based remuneration and the most important conditions
as lock-up period, performance targets, run-time etc. has to be made.348
Furthermore, the following detailed information on share-based remuneration has to be
provided in accordance with 123(R). par. A240:
1. For each business year information on the number and the average exercise price of
options has to be provided:
stock-options outstanding at the beginning of the business year,
stock-options outstanding at the end of the business year,
stock-options exercisable at the end of the business year
stock-options granted, exercised, forfeited of expired during the business year.
2. The average fair value at the moment of grant of the equity instruments has to be
provided separately for each of the following groups:
not invested equity instruments at the beginning and the end of the year as well as
equity instruments granted, acquired or forfeited during the business year.
3. The average fair value at the moment of grant for all real stock-options granted in this
year and other equity instruments.
4. A description of the assessment method for the evaluation of the fair value with the
following parameters:
risk-free interest rate,
expected volatility of the share,
run-time of the stock-options as well as
expected payment of dividends.
5. The total expenses for remuneration of the business year in question for the recorded
personnel expenses have to be displayed in the income statement.
6. Important modifications of existing option plans.
If a company has introduced several stock-option plans, the information has to be given in
the group or annual consolidated financial statement or annual balance sheet separately for
each stock-option program.
348
Comp. SFAS 123(R). par. A240
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Zitzewitz, J. v.: SOP. 2003.
IV Delegations and their
consequences for labor, tax and
social security law aspects
15 Aspects concerning labor contracts
15.1 Contents of labor contracts

A labor contract is a mutual exchange contract under private law and the law of
obligations349 between the employer and the employee that creates mutual rights and
obligations. The employee is obliged to perform his/her work; the employer on the other
hand is obliged to pay the salary. The following table shows the principal and subsidiary
obligations of employer and employee.
employer employee
Duty to pay salary Duty to perform work
Principal
Duty of equal treatment
obligations Prohibition of victimizations
Duty to provide work Obligation of confidentiality
Duty to grant holidays Omission of notices and information
Fiduciary duties damaging reputation or
Duty to protect the employees health creditworthiness of employer
and life Restraint on competition
Subsidiary
Duty to protect the employees Duty to inform, to render accounts
obligations personal rights and make restitution
Duty to protect the employees Duty to give notice of impending
property damage
Duty to protect the employee against Fiduciary duty
sexual harassment at work
Table 15.1: Main and ancillary duties from employment relationship350
349
Comp. Schaub, 2004, p. 119
350
Following Schmeisser, 2008, p. 256
128 IV Delegations and their consequences
The labor contract is not subject to particular formal requirements. However, under the Law
of Proof of Substantial Conditions Applicable to the Employment Relationship
(Nachweisgesetz), the employer is obliged to put the essential terms of the contract in writing
and to deliver the document to the employee within four weeks after the start of the labor
relationship.351
The documents have to comprise the following minimum contents
name and address of the parties of the contract,
starting point of the labor contract,
in the case of a temporary work contract the estimated duration of the labor relationship,
place of work or notice that the employees shall work in different places,
characterization/description of work,
composition and amount of remuneration and due-date,
contractual hours of work,
annual vacation,
notice period,
notice of existing collective agreements, company and operating agreements.
If these points are not put down in writing, a valid labor relationship results anyway352 and
both parties are obliged to fulfill the underlying duties. Should the document not contain
individual regulations, the legal regulations come into effect (e.g. vacation).
The employee has an authority to give instructions resulting from the labor contract, i.e. he
may determine the working hours and the place of work for the employee.353
However, this authority is not sufficient to send the employee for a limited or unlimited
period abroad.354 In this case, the employees interests have to be taken into consideration
and no unreasonable burdens shall be caused by the change of job location.
Because the authority to give directives is a unilateral right of performance determination, it
has to correspond to reasonable discretion in accordance with s. 106 GeWO (German Trade,
Commerce and Industry Regulation Act). However, the employer has the possibility to
expressly agree on a possible delegation abroad in the labor contract already. Also a very
short period abroad, in the sense of a business travel, does not cause problems in the sense of
the unilateral authority to give directives of the employer.
351
Comp. Schaub, 2004, p. 120
352
Comp. ibid, p. 121
353
354
15.2 Possibilities to design contracts in the case

of delegations abroad
If an employee is sent abroad, the existing labor contract with the employer in the home
country has to be adapted to the new situation. Basically, there are two possibilities to
achieve this: Firstly, a supplementary contract can be concluded in addition to the existing
contract. Secondly, a local labor contract can be concluded with the host company abroad in
connection with a dislocation agreement with the home company.355 Both possibilities will
be examined in more details in the following paragraphs.
15.2.1 Supplementary contract as addition to the labor contract

If an employee in the context of a labor relation at home is sent abroad and if the focus lies
on the employer in the delegating company, mostly a supplementary contract in addition to
the existing labor contract is concluded. This supplementary contract contains all essential
regulations concerning the job abroad. Thus, the labor contract is maintained without
changes and the home company remains the only contract partner of the employee.
Commonly, the authority to give directives remains with the company at home. These
circumstances mean that the contractual main and supplementary duties of the labor contract
remain unchanged and, therefore, the employee continues to be obliged to work for the home
company and the employer has to remunerate this work.
Home Company Host Company
Labor contract between Supplementary contract to Work of the

employer and employee the labor contract employee
Fig. 15.1: Relations in the case of a supplementary contract in addition to the labor contract
It is thinkable to organize delegations abroad this way, if the control of the foreign company
units or market research for managerial decisions is aimed at. Also for delegations abroad for
355
Comp. Schmeisser, p. 257
the purpose of human resource development, especially for the promotion of young staff and
for project related delegations, this type of contract is common.356
15.2.2 Dislocation agreement and local labor contract

As far as the employee does most of the work for the host company abroad in the context of
the delegation, it is common to conclude a labor contract with the hosting company and a
dislocation agreement with the delegating company. Therefore, it is also important, whether
the employee fills a job in the host company which belongs as permanent job to its business
organization.357
Both contracts regulate the correspondent relation to the home and the host company, as will
be shown in more details:
Home company Host company
Dislocation agreement Local labor contract
Fig. 15.2: Relations in the case of dislocation agreement and local labor contract
Relation to the host company

The employee concludes a local labor contract with the host company abroad, which is the
basis for an active work relationship. All main and supplementary duties of a work
relationship for the employee and employer result from this. In this local labor contract all
essential topics of an employment relationship are regulated. Among those are the duration
of the relationship, the type of work and working hours. Normally the contract conditions
take the local circumstances into consideration.358
Relation to the home company

The relation to the home company is defined by the conclusion of a dislocation agreement
with the delegating employer in addition to the existing labor contract and an additional local
356
357
Comp. ibid, p. 258
358
labor contract with the host company. This dislocation agreement regulates the inactive work
as well as further additional payments and bonuses, if applicable.359
This way the employee can be sure that he can re-enter into his original labor contract after
returning from his delegation abroad or at least to be re-employed under the former
conditions. Under certain circumstances also the continuance of German social security is
possible. This, however, will be described later in more details. Furthermore, the
employment affiliation with the delegating society is not interrupted because of the design of
the contract. This contract design bears also advantages for the delegating company: In case
of need it can get a qualified employee back into the head office. Usually, a call-back right is
therefore regulated, which permits the employer to call the employee back at an early point
in time. Furthermore, the head office can represent certain interests in the branch offices
abroad via the integration of the employee.360
Agreement on inactive work
Through the agreement on inactive work the existing labor contract with the delegating
company is transformed in a so called passive contract.361 This is due to the fact that the
contractual main duties for the employee the duty to deliver the work and for the employer
the duty to pay the remuneration for the work do not apply for the duration of the
delegation. The supplementary duties, however, continue to exist, as for example fiduciary
duties. In this form of contractual design the employee remains in a legal connection with the
home company.
Return Guarantee
The return guarantee or resettlement commitment is the employers promise towards the
delegated employee to re-employ him in the home company after the termination of the
delegation. The conditions under which the labor contract is carried out can be negotiated in
variable ways. Essentially, there are three possibilities: The employer can assure an
employment under comparable conditions as before the delegation for the employees return.
A further possibility is to consent an employment under consideration of the experience
gained abroad without concretizing the exact job after return. Finally, the employer can
promise a concrete position to the employee. However, this last type of return guarantee is
rather seldom used.362
Additional remuneration and provisions
The delegated shall be integrated as far as possible into the salary structure of the host
company during his time abroad in order to avoid a negative impact on the atmosphere
between the employees based on the often big differences between the salaries and to evade
359
Comp. ibid, p. 258
360
Comp. ibid, p. 258
361
Comp. ibid, p. 258
362
tensions. It is common for the delegating company to pay additional salary and make
additional provisions to the delegated employee, despite the fact that there is no proper
payment duty on its side.363
16 Tax law aspects

Besides labor law questions also tax law consequences are caused by the delegation
concerning the employer as well as the employee. It has to be clarified in which state under
which conditions and to which extent taxes have to be paid and whether tax duties arise in
both states and which consequences a possibly existing double tax agreement has.
16.1 Income tax liability

The extent of tax liability depends on the place of residence. A person is said to have the
residency in the Federal Republic of Germany, if he is domiciled or has his habitual
residence in this country. In accordance with the German General Fiscal Code domicile and
habitual residence are defined as follows: The domicile is where someone has a habitation
under circumstances that point to the fact that the habitation is to be maintained and used.364
The residence which is always and from the beginning timely continuous during more than
six months has to be considered as habitual residence.365
If an employee is resident in Germany he underlies the unlimited tax duty of this country. In
the other countries he has only the duty to pay taxes for the revenues that he obtains from the
other countrys sources.
The following table shows under which conditions the employee is subject to which tax duty.
363
Comp. ibid, p. 259
364
sec. 8 AO
365
sec. 9 AO
Unlimited tax duty Limited tax duty

if domicile/habitual residence in the No residence/habitual residence in the
country country
all domestic and foreign revenues in accordance with sec. 1 IV EStG in
subject to unlimited tax connection with sec. 49 EStG limited tax
duty
only duty to pay domestic taxes
Table 16.1: Unlimited and limited tax duty
According to this, the employee has to pay taxes on all revenues in Germany, if he has his
domicile or habitual residence in Germany and has unlimited duty to pay taxes.366
If, however, the employee does not have his domicile or habitual residence in Germany, he
has limited duty to pay taxes and has only the duty to pay taxes on domestic revenues.367
16.2 International tax law

In order to identify a possible tax duty of a person, it is common in many countries to
examine the residency of the employee (residence principle) as well as the performance and
utilization of the labor on its territory (source or origin principle).
If a residency results from this examination, it leads to unlimited duty to pay taxes on all
domestic and foreign revenues. If, however, the source or origin principle is used, the tax
duty is limited. Then, the employee has only the duty to pay taxes on domestic revenues.
With regard to the residency of an employee who is sent abroad the following situations can
arise:
1. resident in Germany,
2. resident in the host country,
3. resident in Germany and in the host country (so called dual residency).
In the last case a double taxation can be the result, i.e. the same taxpayer has to pay the same
or similar taxes in at least two countries.368
366
367
Comp. ibid, p. 262
368
Comp. Schmeisser, 2008, p. 262 et seq.
16.3 Double tax agreement
16.3.1 General explanations

Double tax agreements are agreements under international law which are concluded to avoid
multiple taxation with similar taxes for the same taxpayer. The following possibilities exist:
on the one hand, the country where the revenues accrue (country of source) can take the
taxation back or limit it. On the other hand the country of source can offset the revenues
which have accrued and been charged with taxes against the foreign tax.369 Double taxation
agreements are normally bilateral, i.e. they are concluded between two countries. Only in
exceptional cases multilateral treaties are concluded.370 The Organization for Economic
Cooperation and Development (OECD) has created a sample agreement, which serves as
orientation for the agreements concluded between the Federal Republic of Germany and
other countries.
There are the following principles with regard to double taxation:
In accordance with the residency country principle, a person is subject to taxation in the
country where he has his domicile or habitual abode.
In accordance with the source country principle, a person is subject to taxation in the
country where the revenues are originated.
Following the world revenue principle, the total world income of the taxpayer is subject
to taxation.
Under the territoriality principle, all revenues are subject to taxation that have been
generated on the territory of the country in question.371
16.3.2 General allocation criterion: residency

Under article 4 OECD-MA (OECD model agreement) a person is considered as having its
residency in the contracting country, as far as he is subject to taxation due to his residence,
habitual abode, place of management or a similar taxation characteristic. In the case of dual
residency, the person is deemed to be resident in the country where he has his permanent
residency. If the person has his permanent residency in both countries, the residency is
determined on the basis of personal and economic relationships to the countries. The person
is deemed to be resident in the country to which he has closer connections where the centre
of his vital interests lies. If the person is married, this is where he has his family. If the centre
of vital interests cannot be determined, the habitual abode is taken as starting point. Only if
this cannot be determined, then the nationality of the person is decisive for his residency.
369
Bundesfinanzministerium, status: 03 May 2009, 21:12h
370
Schmeisser, 2008, p. 263
371
Bundesfinanzministerium, status: 03 May 2009, 21:26h
Finally, the model agreement provides that the contracting states shall communicate between
each other if the residency cannot be determined on the basis of the named criteria.372
The following fig. represents a short examination schedule of the considered characteristics:
1. permanent domicile in a country
2. centre of vital interests
3. habitual residency
4. nationality
5. communication between authorities of the contracting

states
Fig. 16.1: examination scheme for residency373
If on the basis of the named examination scheme in the case of dual residency one of the
contracting states is determined as country of residency, the taxpayer is taxed under the
double taxation agreement as if he would reside only in this country. In principle, the
unlimited duty to pay taxes continues to exist in both states.374
372
373
374
Comp. ibid, p. 263
16.3.3 Domestic tax law
Unlimited duty to pay taxes

Article 15 of the model agreement of the OECD determines after the clarification of the
residency, which country has the right to charge taxes for income on employed work. The
system described in this article for the allocation of the right to charge taxes is shortly
displayed in the following fig.
Country of residency Country of work
Territory principle: Workplace principle:

Taxation of remuneration in the Taxation of the remuneration in
country of residency the country of work in case of
exemption with progression
proviso in country of residency
Delegation
Taxation of income in country exemption:

of residency
183-day-rule
Fig. 16.2: System of Art. 15 OECD-MA375
According to this, the workplace principle under Art. 15 subs. 1 OECD-MA is considered as
basic rule under which all remunerations as wages and salaries etc. are charged with taxes in
the country in which the work is performed and in which the employee is physically located
to perform this work.376 This means for an employee who has been sent abroad that his
income in Germany has to be exempt under consideration of the progression proviso. This
means that all other domestic revenues, as e.g. revenues from capital assets are charged with
375
376
Comp. ibid, p. 265
the tax rate, which was calculated taking the foreign revenues into consideration. Therefore,
the employee has to file a tax return.
The 183-day-rule sets a limit to the workplace principle. The right to charge taxes remains in
Germany if the following conditions are fulfilled:
1. Residency in the country of work not longer than 183 days in twelve months,
2. Remuneration is paid by or on behalf of employer who is not resident in the country of
work
3. Remuneration is not paid by the branch office the employer holds in the workplace
country.
If these three conditions apply cumulatively, the income is subject to German taxation;
otherwise the workplace principle is still applicable.377
Limited duty to pay taxes

If an employee has only limited duty to pay taxes in Germany, he will be subject to taxation
in the country of work from the moment of moving into that country.378 The 183-day-rule
may not be applied because the model agreement assumes in article 15 section 2 that the
employee resides in Germany. Besides, the income from employed work may not be subject
to tax.379
17 Social security aspects

As up to now, aspects of labor law and tax law relating to the delegation of an employee
were examined, the focus lies now on social security aspects. Before an employee takes his
work in another country up, it has to be examined whether the social protection remains
existent in Germany or whether it is expanded to the work abroad. Highest priority should
have the aim to remain in the German social security system, in order to make sure that the
delegated party can return into the German security system without problems. Without the
maintenance of social security protections, gaps in old age insurance and loss of entitlement
to benefits for unemployment would be the result.380 The social protection of employees sent
abroad by German companies is covered either through cross-national treaties or the so
377
378
Comp. Art. 15 Abs. 1 OECD-MA
379
380
Comp. ibid, p. 267
called transmission. Through this, the delegated employee has social security protection
under domestic regulations.381
17.1 Employment abroad
17.1.1 Territory principle

The regulations on the compulsory insurance in health insurance, nursing insurance, old-age
insurance and unemployment insurance are valid for all employees who work in the field of
application of the Social Code (=Federal Republic of Germany) (sec. 3 SGB IV). With the
exception of special cases, this territory principle applies also to foreigners occupied in
Germany.382 The duty to have social insurance originates from an employed labor
relationship in Germany. This means that any person who is employed and receives salary, is
a person with dependent employment in Germany under sec. 7 (1) SGB IV.383
17.1.2 Existence of a so-called Ausstrahlung (transmission)

In order to avoid that the continuity of the social protection is interrupted in the case of
delegation of a German employee abroad, sec. 4 SGB IV determines that the regulations of
social security apply also to the case of an assignment abroad if the delegation is limited in
time due to the characteristic of the employment or previously by contract (so-called
Ausstrahlung). Furthermore, the social security of German citizens abroad is guaranteed by
transnational agreements and/ or socials security agreements under certain circumstances.384
The German social security law defines the term Ausstrahlung as the effect of a domestic
employment relationship on another country.385
This exemption from the territory principle is valid for any place of work in the world.
Finally, sec. 4 BGB IV is only valid in Germany and not binding for other countries. Because
next to the territory principle also the regulations of other states may apply, the Ausstrahlung
(transmission) can lead to dual insurance.386
381
Comp. Haufe Personal Office Online, Haufe Index 1564333, status: 26 April 2009, 14:38h
382
383
384
385
Comp. BfA., n 24/2002, p. 4
386
Sec. 4 SGB IV: Ausstrahlung

(1) As far as the regulations on the obligation of social security and the right to social security require an
occupation, they are also valid for persons, who are assigned to an area outside this application area in the context
of an existing labor relationship within the application area of this code, if the delegation is limited due to the
characteristic of the occupation or previously by contract.
387
(2) Sec. I applies correspondingly to persons who execute independent work.
Therefore, the following conditions are required for the Ausstrahlung under sec. 4 SGB IV:
The delegation has to be made into an area outside the area of application of the German
Social Security Code (outside of Germany).
The delegation is made in the context of an existing labor relationship in Germany.
The delegation has to be timely limited in advance either by contract or by the
characteristic of the occupation (e.g. for a certain project).
It is possible for the employer to get the employee back from the other country at any
moment. By this, it is guaranteed that the employee is integrated in the German
organizational structure for the complete duration of the assignment abroad.
The employer is entitled to give directives to the employees.
The remuneration for work is paid by the employer in Germany, i.e. it is not handed
down to the foreign company.388
If one of these conditions is not fulfilled, there is no duty to have social security protection in
Germany in accordance with sec. 4 SGB IV. This result is achieved by the following
examination scheme:389
387
Juris, status: 26 April 2009, 15:35h
388
Wikipedia, status: 26 April 2009, 16:04h
389
Is the employee sent abroad in the no no transmission

context of a domestic labor
relationship?

yes

Is there a timely limitation (by No No transmission
contract or characteristic of the
work)?

yes

Does the employee remain integrated No No transmission
in the domestic company structure?

yes

Transmission applies Transmission does not apply

The German law continues to apply; German law does not apply.
consideration of agreement
regulations if necessary.
Fig. 17.1: examination scheme for obligatory social security
For a better understanding the described conditions are explained in more detail in the
following paragraphs.
17.2 Domestic labor relation

The labor relationship must be with an employer based in Germany. If the employer is based
in another country, the Ausstrahlung does not apply.390 This means that the condition is that
there had been a previous legal relation to the employer in the Federal Republic of Germany
and the centre of vital interests had been Germany before the delegation. These limitations
are necessary, because the regulations on the transmission have the effect that the employee
does not lose his social protection in Germany and has no gaps in the course of insurance.
Example: delegation also in case of lack of duty to pay income taxes:
An employer based in Germany delegated two employees (A to Egypt, B to Paraguay) and
their salary is paid by the German company (disclosure in the pay role). For employer A no
390
income tax is deducted under the German-Egyptian Agreement for Double Taxation
Avoidance. This difference when paying remuneration changes nothing for the delegation in
the sense of Ausstrahlung. For this, all other conditions have to be fulfilled.391
Also the occupation in other countries in representations is seen as Ausstrahlung, because
those are considered as independent branches of the domestic company and the employees
remain to full extent employees of the domestic employer.392
17.3 Limitation in time of delegations

An employer, who is working abroad for a domestic employee is deemed to be subject to
social security in the sense of transmission under the following circumstances: The
occupation in the foreign country (=delegation) has to be temporarily limited by its
characteristics or by contract.393 A delegation is considered to be limited in time when from
the beginning it is determined that there is a significant limitation.394 There are no fixed time
limitations and there is no danger if the delegation is restricted to several years.395 What
counts is whether there is any limitation at all. In 1994 the Federal Social Court of Germany
has decided that the maximum duration of the limitation cannot be derived from legal texts,
because such presumption would run couther the economic interests in a flexible, temporary
assignment abroad of employees.396 If an employee reaches a certain age limit, it is not
considered as a timely limitation in this sense. Also if in advance, a contractual agreement
for a further limited period is made, this prolongation can be regarded as contractually timely
limited in advance.397
Example: timely limitation in advance
An employee is sent to Brazil for two years and the contract foresees that a prolongation of
the delegation for further two years is possible. This is a case of a delegation limited in time
in advance.398
It is important to consider: if the limitation in time is only arising in the course of the
delegation and not under the named circumstances, then the transmission in the sense of sec.
4 SGB IV does not apply.
391
Comp. ibid, Haufe Index 1564347, status: 26 April 2009, 17:21h
392
393
394
395
396
Comp. BSG, decision of 4 May 1994, 11 file 55/93
397
398
Haufe Personal Office Online, Haufe Index 1564354, status: 26 April 2009, 19:10h
Example: contractually agreed limitation in time of the delegation

A domestic employer delegates A and B in the context of their labor relationship to Pakistan.
The duration of the delegation of employee A is restricted to three years from the beginning.
The employer B is at first delegated for an unknown period of time. After one year however,
it comes out contrary to expectations that the delegation will come to an end in the next
year.
The delegation of the employee A is timely limited in advance; therefore, it is a case of a
delegation in the sense of transmission. Because the timely limitation of the delegation of
employee B had not existed in advance, but only arisen in the course of the delegation, it is
not a case of delegation in the sense of transmission.399
Limitations on the basis of the characteristics of the delegation have to be presumed for
certain work relationships which in accordance with general experience are no long-term
relationships. This is the case in project work, installation work and briefings as well as in
the case of construction of buildings and industrial installations.400
Example: timely limitation due to job characteristics
A domestic company has the obligation to build an embankment dam in India in a period of
no longer than five years and delegates employees in the context of their existing labor
relationship to this company. There is no written agreement in the labor contract on the
duration of the delegation.
These are delegations which are timely limited by their characteristics. Therefore the
regulation on transmission has to be applied.401
17.4 Trans- and international agreements with

Germany
Besides the above mentioned conditions for the existence of a transmission in the sense of
sec. 4 SGB IV (domestic labor relation, time limitation of the delegation), there are so calls
trans- and international agreements of individual countries with the Federal Republic of
Germany.
These agreements prevail over the Social Security Code and have influence on all or
individual areas of social security.402 The argument for the conclusion of such agreements
was that the delegated person may have social insurance in Germany on the basis of the
399
400
401
402
territory principle as well as at the place of occupation. This can lead to double payment of
contributions.403
The EEC agreements count among these agreements as transnational law and bilateral
agreement count among them as international law. This shall prevent that the delegated
person has to change the insurance system for the time of his occupation abroad and has to
pay double contributions.404
EEC regulations
For countries belonging to the European Economic area it is assured through regulations that
in the case of delegations the social insurance is to be carried out in accordance with
domestic law.405 Among these countries are Belgium, Bulgaria, Denmark, Germany, Estonia,
Finland, France, Greece, Great Britain and Northern Ireland, Iceland, Italy, Latvia,
Liechtenstein, Latonia, Luxembourg, Malta, Netherland, Norway, Austria, Poland, Portugal,
Rumania, Sweden, Slovakia, Slovenia, Czech Republic, Hungary and Cyprus.406 For this, the
delegated person has to work in a member state of the European Economic Area. The core of
the regulation EEC regulation n 1408/71 applies here and is valid for all member states of
the European Union. The area of application was expanded to Iceland, Norway and
Liechtenstein and is also applied to Swiss citizens.407 Under Art. 2 sec. 1 EEC-Regulation
N1408/71 the personal scope of application includes employees, independent workers,
students and refugees. For this reason, an employee who is citizen of a third country does not
fall under the area of application of the EEC regulations.408 In this case the regulations on
transmission apply, as long as no regulations on competences from agreements on social
security between the EU members state exist.409 The factual area of application is regulated
in Art. 4 sect. 1 of the EEC Regulation 1408/71 and includes insurance branches that offer
the following benefits:
Benefits in case of illness and maternity,
Benefits in case of disability, including benefits determined for maintenance or
improvement of the employment capacity,
benefits in old-age,
benefits to surviving dependants,
benefits in case of working accidents and professional diseases,
burial allowances,
403
404
Ibid, p. 271 et seq.
405
406
407
408
Ibid, p. 272
409
benefits for unemployment and

family benefits.410
Via the enumeration of the above mentioned benefits it becomes clear that the German
Social Security (health, old-age, accident and unemployment insurance) is subject of the
factual area of application of the agreement. It includes also the nursing insurance, whose
benefits have to be counted among the health care benefits in the context of the EEC
regulations.411
A duration of twelve months is considered as limit in accordance with Art. 14 Sect.1a of the
EEC Regulation 1408/71 if the employee does not replace another employee for whom the
delegation time has expired. If the work is longer than twelve years, the German legal
provisions still apply until the end of the work. At the longest, however, for further twelve
months, as far as the responsible authority in an EU state or the designated authority has
consented to it before expiration of the time.412 For this, the German employer has to apply
for the approval declaration before the end of the 12-months deadline.
17.5 Bilateral social security agreements

Because the EEC regulations have joint regulations for the member states, there are
additional agreements between Germany and the other country in question.413 Through these
agreements with countries outside the European Union it is guaranteed that the German
Social Security is still covering the delegated person. The duration can vary in the individual
agreements.414 In the following table415 the individual contracting states with the contained
insurance branches for each country are listed:
410
411
Ibid, p. 273
412
413
414
415
Ibid, Haufe Index 1564341, status: 27 April 2009, 21:06h
Country Insurance branch
Australia only pension and unemployment insurance
Bosnia-Herzegovina without nursing insurance
Chile only pension and unemployment insurance
China only pension and unemployment insurance
Israel without nursing and unemployment insurance
Japan only pension and unemployment insurance
Canada excluding Quebec only pension and unemployment insurance
Korea only pension and unemployment insurance
Croatia only health and pension insurance
Morocco without nursing insurance
Macedonia without nursing insurance
Quebec only pension and unemployment insurance
Republic Montenegro and without nursing insurance

Republic Serbia
Turkey without nursing insurance
Tunisia without nursing and unemployment insurance
USA only pension insurance
Table 17.1: Contracting states and the included insurance branches
The individual agreements can be separated into closed and open agreements. Closed
agreements (as e.g. Tunisia and Morocco) are restricted to the citizens of the contracting
states as well as refugees and stateless persons. In open agreements all persons are integrated
which have a connection to the social security law of one of the two contracting states.416
416
The factual application area is very different for all agreements, because hardly any
contracting country includes all insurance branches. Many agreements with contracting
countries offer only limited possibilities. It is striking that all social security agreements
include the legal pension insurance.417
17.6 Payment of contributions during the assignment

abroad
There are no effects on the contributions to the social security carriers, if the German social
security duty continues to exist during the delegation. The health, nursing, pension and
unemployment contributions are deducted to the social security carrier by the employer.418
The difficulty is that it may pose problems to calculate the amount of the salary paid in order
to be able to calculate the contributions. In order to avoid disadvantages for the employee
with regard to the later claims for pension benefits, there is a peculiarity for the calculation of
contributions to the pension insurance. Between the real salary and a fictive remuneration a
so called favorability comparison is made. If the fictive salary is higher than the real
remuneration, the benefits have to be calculated on the basis of the fictive salary (sec. 166
subs. 1 n 1 SGB IV). The aim of this procedure is to do justice to the changing income
situation.419 It has to be considered that only for the pension insurance contributions shall be
calculated on the basis of a fictive salary. This calculation cannot be applied for health,
nursing and pension insurance.
For the determination of the fictive salary an amount is taken as basis which can be
calculated by multiplying the contribution assessment ceiling of the current calendar year
with a ratio.420
The sum of the income of the employee during the last three calendar months fully subject to
obligatory contributions before the start of the occupation abroad is divided by the sum of the
amounts of the contribution assessment ceilings for this period.421 The ratio obtained from
this procedure has to be published with four decimal digits. The monthly assessment
remuneration is calculated by multiplication of the contribution assessment ceiling relevant
for the month of contribution with the ratio whereby at least a ratio of 0.6667 has to be
used.422
417
Comp. ibid, p. 276
418
419
420
421
422
The ratio determined once at the beginning of the assignment abroad remains valid for the
whole duration of the delegation for the determination of the fictive work remuneration.423
Example: Calculation of the fictive remuneration

Labor remuneration for the last three calendar months fully subject to the obligatory
contributions.
Month Remuneration Contribution assessment ceiling
July 2009 EUR 3,800 EUR 5,400
August 2009 EUR 3,800 EUR 5,400
September 2009 EUR 3,800 EUR 5,400
EUR 11,400 EUR 16,200
Table 17.2: Work remuneration including obligatory contributions
From the sum of the remunerations (EUR 11,400) and the sum of the contribution
assessment ceilings (EUR 16,200) the ratio of (EUR 11,400/EUR 16,200 =) 0.7037 can be
obtained. This ratio is higher than the required minimum ratio of 0,6667 and is therefore
valid. The fictive remuneration for the year 2009 amounts to (5,400 x 0.7037 =) EUR
3,700.98. 424
Because the calculation is based on the actually paid remuneration for the last three calendar
years fully subject to social security contribution before taking up the occupation abroad, one
time revenues (as e.g. Christmas allowances) can be fully taken into account.425
Example 2: calculation of the fictive salary in the case of exceeding the contribution
assessment ceiling
Last three months fully subject to social security contributions
423
424
425
month remuneration contribution assessment ceiling

November 2008 EUR 2,600 EUR 5,300
December 2008 EUR 5,400 EUR 5,300
January 2009 EUR 2,700 EUR 5,400
EUR 10,700 EUR EUR 16,000
ratio (EUR 10,700 :EUR 16,000 =) 0,6688
Table 17.3: work remuneration with contribution assessment margin
For the calendar year 2009 a monthly assessment remuneration of EUR 5,400 x 0.668 = EUR
3,611.52 can be obtained.426
If only two calendar months are subject with two fully obligatory contribution duties, the
ratio has be calculated from the sum of the remuneration and the sum of the contribution
assessment ceiling of these two months.427
17.7 Provisions in the case of lack of insurance

obligation
However, it can happen that the delegated person is neither subject to section 4 SGB IV nor
to transnational or international law and therefore cannot remain in the German social
security system. Under certain circumstances the delegated person can still retain his
protection. For this, national rules can be important, especially for persons working in
countries without agreements.428
17.7.1 Pension insurance

The continuity of the pension insurance is an important aspect for the delegated person,
because otherwise it comes to insurance gaps. In accordance with sec. 4 subs. 1 n 2 SGB IV
the delegated person can obtain a pension insurance obligation upon application. The
condition is that the employee works only for a limited time abroad and the insurance duty is
applied for by an institution based in Germany.429
426
427
428
429
17.7.2 Health insurance

In accordance with sec. 9 subs. 1 n SGB V an employee can get insurance on his own free
will, if he dropped out of the insurance obligation and has been either insured by more than
24 months during the last five years before dropping out or has been continuously insured for
at least 12 months before dropping out. In accordance with sec. 17 SBG V the contributions
will be compensated by the employer. The employer has to compensate the healthcare
contributions up to the amount which would have arisen in Germany. The potentially
resulting difference has to be paid by the employee. In most cases, however, a private foreign
health insurance is contracted, because the employer wants to avoid the difference of cost
compensation and the extensive burocracy connected with it.430
If an employee had been voluntarily insured in the legal health insurance, there is the
possibility of a health insurance with an on-hold position under section 240 sect. 4a SGB V.
In order to be able to use the health insurance with on-hold position, the delegated person
may not have co-insured family members who stay in Germany, and has to work abroad for
professional reasons. The employee should avoid the termination of the voluntary legal
health insurance in order to be able to return into this insurance after coming back to
Germany.431
17.7.3 Nursing insurance

It is also possible to continue the nursing insurance on a voluntary basis. During the
delegation the employee cannot claim for benefits, but the time of insurance is counted. In
accordance with section 26 subs. 2 sentence 2 SBG XI the application has to be made one
month after the end of the insurance duty.
17.7.4 Accident insurance

In the case of the legal accident insurance the delegated person has no possibility to remain
insured on a voluntary basis. On application of the employee he can contract a foreign
accident insurance with the responsible mutual insurance association of employees (in
accordance with section 140 subs. 2 and 3 SGB VII).
17.7.5 Unemployment insurance

The delegated person cannot remain insured on a voluntary basis in the legal unemployment
insurance. The result is that he can loose his right to unemployment benefits after his return.
Generally, it has to be considered, that unemployment benefits can be obtained, if the
430
Comp. ibid, p. 278
431
Comp. ibid, p. 279
employee in period of three years had had a work relationship under social security law for at
least 12 months. Therefore, the delegated person is entitled to receive unemployment
benefits, if the assignment abroad was no longer than 24 months.432
17.8 Termination of transmission

The Ausstrahlung is terminated under the three conditions below:
1. The foreign place of employment remains the same, but the employer at home is
exchanged. Not always when the employer at home is replaced, the delegation is
terminated. If the change of employer is characterized by the fact that the former
company is taken over by another national company, the change has not to be considered
and the delegation is continued.433
Example: Delegation and change of employee
The employees A and B work due to delegation in the sense of an Ausstrahlung under
sec. 4 SGB IV in Saudi-Arabia. The employer of employee A changes in the context of
this employment, because the company is taken over by another national company. The
employer B accepts a position in another German company in Saudi-Arabia, because the
employment relation with the first German company is terminated.
For employee A there are no changes with regard to his delegation in the sense of the
Ausstrahlung in the context of the replacement of his employer. For employee B, a new
work relation is taken up in a foreign country which is not based on the delegation, with
the result, that he is not subject to the German insurance obligation in the sense of
Ausstrahlung and therefore to German social security.434
2. The workplace is temporarily dislocated from the foreign country to the home
country.
If however the delegated person is temporarily in his home country during the delegation
period (e.g. for holidays or because of part-time employment), the delegation itself is not
interrupted. In sec. 8 subs. 1 n 2 SGB IV it is determined that a duration of two month in
the course of a calendar year is acceptable. If, however, it is contractually agreed that the
period named in sec. 8 subs. 1 n 2 SGB IV shall be exceeded, a new delegation would
commence when the occupation abroad is taken up again.435
432
Comp. Schmeisser, p. 280
433
434
435
18 Conclusion 151
Example: Delegation with temporary return to the home country

Employee D has been sent to Norway by his national employer, employee has been sent
to Panama. The delegation of employee D has no timely limitation, but the employer
returns from time to time for holidays or reporting purposes to his home country for a
short period of time. This means that there is no timely limitation of the activity abroad.
As this is a case of unlimited delegation, there is no obligation of insurance by means of
Ausstrahlung in the sense of sec. 4 SGB IV.
Employee E has the contractual obligation to return every three years to Germany for
reporting purposes and the introduction into new techniques for a temporary national
occupation during a period of time which exceed the duration of two months in the
course of a calendar year under sec. 8 subs. 1 n 2 SGB IV. The national activities
discontinue the foreign occupation with the effect that it is a case of limited delegation in
the sense of the Ausstrahlung. This means each occupation abroad is subject to the
insurance duty under the German Social Security.436
3. A limited delegation is turned into an unlimited delegation.
18 Conclusion
The individual design of the labor contract has essential influence on labor, tax and social
security aspects. It is important to know the contractual connections with the national
employer, the timely limitation or the duration of the delegation as well as the employees
organizational integration, in order to make a competent judgment over the individual case of
the delegated person. In some cases, and when the employer does not dispose over the
necessary know-how, advice should be obtained from competent legal experts, consultants or
authorities, because delegation issues are highly complex.437 Especially for small and
medium-sized companies a delegation is always a financial and personnel burden. Therefore,
alternatives should be taken into consideration, like e.g. cooperations with other companies,
company pool memberships in the chambers of foreign trades etc.438 However, even in times
of worldwide economic crisis the following trend can be observed: even if the delegation of
employees is connected with high expenses, also in future many employees will be sent
abroad by their companies.439 40 percent of interviewed companies assumed to send more
employees to positions in foreign offices in future. 51 internationally active companies took
436
437
438
IHK-Nordwestfalen, status: 26 April 2009, 22:47h
439
Haufe , status: 27 April 2009, 22:32h
part in the study. 25 percent had between 100 and 500 German employees in foreign offices,
10 percent disposed over more than 500 expatriates.440
Therefore, it will be unavoidable for the companies in question to deal with the issues of
delegation with regard to labor, social and tax law aspects.
Literature
Bundesfinanzministerium: URL: http://www.bundesfinanzministerium.de
http://www.bundesfinanzministerium.de/nn_39818/DE/BMF__Startseite/Service/Glo
ssar/D/004__Doppelbesteuerungsabkommen.html
status: 03 May 2009, 21:12h.
http://www.bundesfinanzministerium.de/nn_39818/DE/BMF__Startseite/Service/Glo
ssar/D/004__Doppelbesteuerungsabkommen.html
status: 03 May 2009, 21:26h.
Haufe Personal Office Online: Haufe Index. Version 13.4.22.0, 2009.
Haufe: URL: https://www.haufe.de
https://www.haufe.de/SID61.Xq1OL0n2FSo/personal/newsDetails?newsID=1240419
184.52
status: 27 April 2009, 22:32h.
https://www.haufe.de/SID61.Xq1OL0n2FSo/personal/newsDetails?newsID=1240419
184.52
IHK-Nordwestfalen: URL: http://www.ihk-nordwestfalen.de
http://www.ihk-nordwestfalen.de/marktkontakt/Auslandsentsendung.cfm
Juris: URL: http://bundesrecht.juris.de
http://bundesrecht.juris.de/sgb_4/__4.html
Kfner-Schmitt, I.: Arbeitsrecht. 5th edition, Planegg, 2007.
Schaub, G.: Arbeitsrecht von A-Z. 17th edition, dtv, Munich, 2004.
Munich, 2008.
Wikipedia: URL: http://www.wikipedia.de
http://de.wikipedia.org/wiki/Entsendung
440
Ibid, status: 27 April 2009, 22:41h
V International remuneration
systems for companies listed
on stock exchange in flux
The German industry and banks are currently up in arms against the German legislative
initiative regarding the regulation and adequacy of manager remuneration, which is
connected with the multiple regulatory attempts on EU-level.
Questions on how and whether manager remuneration should be limited and designed in a
more performance related and transparent way on a long term basis, whether stock option
programs because of their short term, capital market-oriented deliberations are the wrong
incentives, how the staffing of boards of directors as supervisors of manager remuneration
systems should be undertaken etc. are only some aspects which should be re-discussed under
the Corporate Governance and Compliance standard, with the individual parts of a variable
remuneration system.
The reason for these legislative initiatives is the dimensions at which managers had received
golden handshakes, even though they were losers. The following questions are now open for
discussion:
1. Is there a managerial and human resources related basic logic, which can suffice the
demands of listed companies? The finance-oriented personnel management logic can be
discussed as possible process in this context. Among the aspects to be discussed is e.g.
the question regarding who should be responsible for the remuneration of senior
managers and managing directors and whether this would be comprehensible at the stock-
market and for the investors.
2. Substance: This term means the adequacy of variable parts of the remuneration of the
manager performance, so that some sort of positive sustainability of manager conduct
for the company can be instrumentally guaranteed, without providing wrong incentives
with e.g. stock option programs. A negative form sanction has to exist, e.g. via human
capital assessment or shareholding in the company, if managers fail. There is the question
which other and complementary instruments apart from stock option programs could be
used in the context of a four-pillar-remuneration-management to punish management
failure. Could this be the Berlin Human Capital Assessment Model?
3. Transparency: There must be an (individual) disclosure on the performance assessment
of managers, risk management, remuneration systems for senior management and
154 V International remuneration systems for companies listed on stock exchange in flux
(executive) directors from quarterly reports, business reports, information from financial
public relations for the stock market and other stakeholders.
The finance-oriented personnel management provides approaches for all three fields of
discussion and shows with its basic logic the process for listed companies regarding how for
branches, business units, managers and directors of a company the performance
measurement can be logically deducted and how variable parts for the remuneration
management system in the context of the Berlin Balanced Scorecard Approach and the
Berlin Human Capital Assessment Model can be obtained.
accountancy (IFRS)
consolidadet balance sheet (IFRS)

payroll accounting
annual balance sheet
annual balance sheet analysis

via individual instruments/techniques of finances oriented
key figures
human ressource management (free cash flows, value
added statement, cash flow statement, ROI, etc.)
value oriented company

personnel controlling management/performance
calculation (shareholder value)
employee contribution Berlin Balanced Scorecard

margin; employee cash flow Approach (Strategy Calculation)
remunerationsystems, stock options human capital

programs, company pension scheme
behavior control of Intangibles (IFRS 38)

managers and Accountancy data is
employees used for best future
innovation decisions
consolidadet balance sheet (IFRS)
Fig. V.1: Logic of finance oriented human resource management441
441
Schmeisser, 2008 and Schmeisser/Clausen, 2009.
V International remuneration systems for companies listed on stock exchange in flux 155
The logic of finance-oriented personnel management is based on the trend towards

internationalization of accountancy (International Financial Report standards), because
internal and external accountancy are ideally integrated in such a way, as is expected and
demanded by the stock markets in quarterly statements.
Thus, the accountancy, but also the finance-oriented personnel management, has to satisfy
two concrete informational requests of stock markets, investors and stakeholders:
To give account for economic actions, in this case for actions concerning personnel
management.
To make sure information is available which makes it possible to assess the economic
development of the company especially personnel management values, with the help of
selected controlling techniques and key figures.
There are two types of corporate information problems for accountancy in this context:
1. For the recognition or the formulation of decision problems (regarding personnel
management) accounting information in accordance with IFRS is needed, e.g. social plan,
decisions with respect to company pension schemes, stock option programs, Berlin
Human Capital Assessment Model etc.
2. Furthermore, information for the personnel management assessment regarding the
consequences resulting from the decision alternatives is necessary, e.g. strategy
calculation via innovation success calculation and the Berlin Balanced Scorecard
Approach, Human capital assessment and its consequences for the research and
development team (e.g. patent assessment), staff assignment, cash flow calculation, value
added statements and their consequences for pursuing the strategy etc.
Groups and listed capital companies, which use IFRS, tend to use a finance-oriented
personnel management without knowing the name of the concept. With the help of the
following financial indicators, the personnel management instruments, activities and key
figures of such companies can be attributed to different types:
They have a personnel controlling that deduces key figures from the IFRS consolidated
accounts or IFRS annual balance sheets, the payroll etc. and use the information again as
figures for quarterly reports to the stock market, rating and annual balances.
Up to now they have a type of stock option program for managers, directors, executive
managers and out-of-tariff staff etc. which is based on the result of the ordinary activities
as orientation.
They have a company pension scheme and/or employee involvement models, which are
permanently scrutinized under financial aspects.
Finance oriented personnel management looks into financial burdens caused by staff
which can then be found in the profit and loss statement and the annual balance sheet.
Companies that employ at least implicitly an advanced finance-oriented personnel

management, recognize that
1. Group, company and business unit strategies can be better handled and controlled with
the help of financed-oriented personnel strategies. This can be achieved via the Berlin
Balanced Scorecard Approach, the Berlin Human Capital Assessment Model or
intangible value drivers (patents, licenses, human capital etc.).
2. Also a merger, the closure of a plant, a partial relocation of a plant, outplacements etc.
have to be assessed and calculated under finance-oriented personnel management aspects.
Thus, finance oriented personnel management supports the fulfillment of the duty to inform
the investors via market reports:
As a help to decide over investments, in order to assess a current research program with
relevant and reliable information with regard to its success prospects. In order to take a
decision over an investment, the investor e.g. of the pharmaceutical industry has to be
able to assess the development of medicine and the human capital potential of researchers
with key figures via their patents and the resulting cash flows and EBITs.
A further aim is to control the manager behavior in the sense of a shareholder-value-

philosophy via the instruments of the Berlin Human Capital Assessment Model.
Owners/Shareholders give relatively far reaching decision making rights and demand in
return to be regularly informed about the development of the business and reserve the
right to withdraw the managers from their position at the next board meeting or general
assembly. In order to make sure that managers behave in the interest of the shareholders,
they have the possibility to contractually guarantee a certain part of the shareholder value
to the managers in the context of a management remuneration system with variable
components. More precisely, these are accretions that can be deducted from a human
capital assessment calculation and are reflected in the employee participation e.g. in stock
option programs.
Because of the close link between finance-oriented personnel management and accountancy,
this approach is especially adequate for practical use. In a four pillar remuneration system a
new combination of management remuneration is suggested:
V International remuneration systems for companies listed on stock exchange in flux 157
1st pillar 2nd pillar 3rd pillar 4th pillar
Composition of the Timely Instruments for Weighting of

total remuneration orientation execution remuneration
(remuneration menu) components
Result-based strategy Long term SOP as well as other

bonus (3 to 10 employee
years) participation Risk salary
programs Up to 20 percent
SOP,
Personal, operative Short term BBSC, Risk- up to 30 percent
Berlin Human Capital or middle Management, human capital and
Assessment, term Compliance establishment
performance bonus, (1 to 2 assessment
efficiency pay years)
Company social Short term Company pension

security contribution and partially scheme and social Fixed salary
long term security contribution Weighting with 50
to 80 percent of
Guaranteed Short term Management by annual salary
management bonuses (several Objectives (MbO), depending on
fixed special payments times per Compliance position and
year) country
Fixed basic salary Short term Agreement on the

(continuousl basis of wage
y, mostly spectrums depending
monthly) on country of location
SOP = Stock option program

BBSC = Berliner Balanced Scorecard
Table 0. : Four pillars of international remuneration management442
442
Adapted from: Schmeisser, 2008.
Literature
Schmeisser, W.: Finanzorientierte Personalwirtschaft. Oldenbourg Wissenschaftsverlag.
Munich 2008.
Oldenbourg Wissenschaftsverlag. ; Munich 2009.
Schmeisser, W. / Mohnkopf, H. / Hartmann, M. / Metze, G (ed.): Innovationserfolgs-
rechnung. Springer Verlag, Berlin 2008.
VI Application of the Berlin Human
Capital Assessment Model
in an international bank
for the control of its branches
Now it will be attempted to undertake a human capital assessment of branches via benefit
analysis for an international bank on the basis of existing data from controlling and with the
use of planning, control and deviation analyses. The Berlin Human Capital Assessment
Model443 has the advantage of a flexible usage of instruments of internal and external
accountancy and should therefore not be understood as inflexible construct. This means the
model can be individually adapted to the company, in order to do justice to the changing
demands of assessment. The starting point is always the existing data within the company,
which is prepared in a way that guarantees the measurement of the employee performance
depending on the company performance.
19 Bank internal controlling data as basis

The bank is structured in divisions and can be separated in two big areas: branch office and
central office. The strategic planning and controlling is undertaken in the central office;
there, the company aims are defined, planned and controlled. The operative execution of the
strategic aims is done in the individual branches, which can be seen as almost autonomously
acting part banks in other countries within the whole bank.
They are defined by the responsibility for success of the branch director and their operative
freedom for actions, which strongly supports a close to market company management. As
they have their own responsibility with regard to costs and revenues, they are basically profit
centers within the overall group.
443
Comp. Schmeisser/Clausen, 2009.
160 VI Application of the Berlin Human Capital Assessment Model
The following four characteristics allow considering the branch offices as profit centers:
1. market performance as goal,
2. personal responsibility,
3. individual formulation of goals
4. contribution margin calculation (sometimes also cash flow or EBIT) as center
performance calculation.
The central office of the group assesses the market performance of the branches via profit
center calculations, which are taken as data basis for the human capital assessment. The
resulting key figures are measurable criteria for the assessment of human capital in the
branches. These data are completed with figures regarding staff structure and costs resulting
from the reports of the personnel development area. Under 37 branches 15 branches are
taken into consideration for human capital assessment. The lack of assessment of the other
branches is due to the fact that they are responsible for a transregional market area, which
would distort the results of the rest of the branches.
Additionally, it must be underlined, that the data used in this model has to be seen fictively,
because a uniform period of data collection does not exist and no conclusion can be made for
an existing bank.
20 Selected key figures and their

weighting
In order to undertake an adequate assessment of the branches, informative key figures have
to be determined in advance. Special attention is paid to the fact whether the key figures
permit to measure what is supposed to be measured, i.e. the performance of the branch taking
the strategic goals into consideration. Furthermore, they should be little prone to assessment
mistakes. In order to make the origin and the influence of key figures clear, they are bundled
and divided in three perspectives on the basis of the Berlin Balanced Scorecard.
That makes it possible to discover cause-effect-relations in the target perspective and
simplifies the deduction of actions. By different weighting of criteria their significance is
influenced and the goals on the banks side underlined. Below selected key figures and their
weighting are presented, which are shown in table 20.1.
Criteria Weighting
Profit oriented perspective Active business volume per branch 15 percent
Deposit business volume per branch 5 percent
Existing customers 2 percent
New customers 4 percent
Lending business volume per customer 2 percent
Deposit business volume per customer 2 percent
Income/cost ratio 20 percent
Profit center
calculations
Risk profitability 20 percent

Contribution margin 1 10 percent
Lending business volume per employee
capacity 6 percent
Deposit business volume per employee capacity 2 percent
HR standards
Personnel costs per employee capacity per

month 3 percent
Labor turnover rate 3 percent
Rate of further training 2 percent
Absence rate 4 percent
Percentage 100 percent
Table 20.1: Weighting of target criteria
The achieved business volume per branch is chosen to clarify that a profit oriented
perspective is used. For this, the division into lending and deposit business volume is made.
The lending business is understood as collective term for bank business having an effect on
the asset side of the bank balance sheet, as demands against customers, companies, banks as
e.g. loans, time loans and overdraft facilities. I.e. it consists mainly of granting credits. The
deposit business is synonymous for bank business, which is displayed at the liabilities side of
the balance sheet of the bank, i.e. liabilities against customers and banks, e.g. demand
deposits, time deposits and saving deposits or loans for refinancing credits. To make profit,
the asset side as well as the liabilities side is important, because in order to grant credits in
the lending business, foreign capital on the liabilities side is needed. The core business of the
bank is still the lending business, so that it has a higher significance in the model. The
achieved lending business volume per branch has a weight of 15 percent in the assessment
and the deposit business per branch has a weight of 5 percent.
In order to generate lending and deposit business volume customers are needed. Therefore,
the capability to identify, to acquire and to bind the right customers on a long term basis
belongs to the central profitability factors. To do so, new customers are distinguished from
existing customers. Nowadays, the efforts of the banks are rather concentrated on winning
new customers instead of reinforcing existing customer relationships. But also a large pool of
existing customers is an important leverage for revenues and at the same time an indicator
for customer satisfaction and the banks potential to bind customers on a long term. Because
winning new customers demands more sales efforts and the accretion of new customers can
be regarded as key figure for the growth potential of the bank, winning new customers is
with 4 percent higher weighted than holding existing customers with 2 percent.
The presentation of the business volume per customer shows the size and economic strength
of the customer and provides information on the quality of the customer portfolio. Also in
this case, there is a differentiation between lending and deposit part of customer business
volume. Both figures are valued with 2 percent each.
For the controlling of the branches the determination of objective success criteria is
necessary. For this, the bank has defined two central control criteria, which are seen as
essential key figures for the performance measurement of individual branches and which are
subject to regular analysis in the monthly profit center calculation. The first control criterion
is the income/cost ratio444. It informs about the ratio of administration expenses and
operative revenues and is a key figure for efficiency measurement of a company or a branch:
gross revenues
income/cost ratio =
costs
The gross revenue of a branch is determined by adding the conditional interest rate
contributions445 and the commissions/fees446. The costs subsume due staff and material costs.
The conditional interest contributions, as result of the multiplication of the average volume
and the interest margin, occur on the asset as well as on the liability side of the bank. A
minimum income/cost ratio is defined which has to be fulfilled by each branch depending on
its staff and material costs. As aggregation of all branches the benefits resulting from the
income/costs ratios lead to a minimum benefit for the overall bank.
444
The cost/income ratio is the inverse value of the income-to-cost ratio.
445
Conditional interest rate contributions result for example from interest surpluses of granted loans, overdraft
credits, acceptances, demand deposits or overnight and time deposits.
446
The commissions/fees include commissions for guarantees, bonds, credits and fees as costs from value
assessment experts or agency commissions to third parties.
The second central controlling key figure is the risk profitability. Through this risk adjusted
performance key figure it shall be made sure that the risk involving business transaction
creates the expected revenues and only those business transactions are concluded whose
benefit expectancies justify taking the risks over. It has the advantage that especially for
banks an important link between profitability and risk within the financial perspective can be
covered. The risk profitability is determined as ratio of the expected revenues and the risk of
the branch in question.447
gross revenues (per year)
Risk profitability =
weighed risk assets
When banks are granting loans they have the general risk that the liquidity of the lender gets
worse in the course of time and the interest payments cannot be effected anymore. This risk,
which is only involved in the lending business, has to be taken into consideration for each
loan as additional cost component. The volume of the loan sums is called risk assets. The
risk weighting of the existing assets is realized in accordance with the credit risk-standard
approach.448 Depending on the liquidity of the lenders, different weightings are undertaken to
classify the risks, which is why finally they are called weighted risk assets.449
As the income/cost ratio as well as the risk profitability of the bank is seen as central
controlling key figure, the Human Capital Assessment Model attaches special meaning to
them, so that both key figures are integrated into the assessment with a weight of 20 percent.
A further target criterion of the profit center calculation is the Contribution Margin I, which
is calculated by subtracting all costs which can be directly attributed to the branch from the
gross revenues.
The Contribution Margin I sheds light on the question to which extent the variable costs are
covered by the revenues. The goal should be to achieve a high contribution margin; declining
contribution margins can be caused by lower revenues and/or higher costs. They indicate a
deterioration of the company situation. Therefore, the Assessment Model attributes a weight
of 10 percent to the Contribution Margin I.
In the third perspective, which is here called Human Resources standard, the employee
specific key figures are bundled. The key figure business volume per employee capacity
gives information on how much business volume an employee has achieved in the
corresponding branch office.
447
For the calculation of the risk profitability in the forecasting period the gross revenue has to be calculated for
one year (e.g. as forecasted quarterly value*4).
448
In this approach the credit risk evaluation is supported by external rating agencies, in accordance with the
requirements of Basel II.
449
Weighted risk assets = risk weighted balance sheet assets + risk weighted traditional off-balance sheet
transactions + risk weighted innovative off-balance sheet transactions.
Furthermore, it is used for the assessment of the company labor productivity, which shows
the capacity to perform in a branch office. The number of employees is calculated in the unit
employee capacity (1.0 EC), in order to get a more exact image of the labor performance
in relation to the working time. A full employee capacity (1.0 EC) corresponds to an
employee with a weekly working time of 39 hours. A part-time employee with a regular
weekly working time of 20 hours corresponds to 0.5 EC. The business volume per employee
capacity is calculated by dividing the business volume by the number of employee
capacities. Also in this case, a separation into lending and deposit business volume is
undertaken in accordance with its origin. Because the lending business is regarded as more
attendance demanding, it is integrated with a weight of 6 percent, while the attendance
demanding deposit business volume is assessed with 2 percent.
Staff costs are a further criterion for human capital assessment. Staff costs are any costs,
which a bank incurs by the deployment of employees in a branch. These are largely fix costs,
which regularly account for a large proportion of the costs of operation. They consist of
salaries and wages, social contributions and expenses for pensions and support. Also in this
case, the number of employees corresponds to the number of available employee capacities.
The key figure Staff Costs per EC has a weight of 3 percent and is calculated as ratio of staff
costs by number of employee capacities. If the Staff Costs per EC surpass the average, the
cause could be an excessive remuneration of the employees as well as surplus.
The sum of employee entries and departs is, also in the branch offices of a bank, an indicator
for employee satisfaction and engagement. Especially in times of acute lack of experts on the
labor market, a high turnover rate means rising staff costs, because newly negotiated
contracts are generally more cost intensive than the former contracts. The goal of the bank is
therefore to keep the turnover rate low with the help of specific employee engagement
measures. For the right interpretation, it is important to keep in mind that the ratio is also
subject to fluctuations of the economic and labor situation. Thus, a low turnover rate can
indicate staff expansions in an economically strong period.
The turnover rate shown in the model is calculated with the help of the Schlter-formula and
is taken into consideration with a weight of 3 percent.
It is important for the bank to show professional perspectives to the employees and to
support their further advancement in the company in a target-oriented way, not least in order
to intensify the employee engagement. The training measures are carried out by a
management school that takes care of the employees with a network of selected experts and
cooperation partners for the internal and external further training. In order to examine the
intensity of further training of the employees, the key figure Rate of Further Training is
calculated and given a weight of 2 percent. This key figure is calculated from the ratio total
number of days of further training divided by total number of employees and shows the
average time of further education per employee in the selected inquiry period (of one year
chosen for this case).
Only healthy, motivated and qualified employees are able to achieve extraordinary
performance. In order to gain information on the health structure of the staff and the
effectiveness of the initiated health supporting measures, the key figure Absence Rate has
21 On the calculability of the bank human capital assessment model 165
been integrated into the model. The key figure takes exclusively the absence hours due to
illness and the due labor time in hours per branch into consideration. Because absence time
due to illness causes a large amount of costs this key figure is integrated with a weight of 4
percent into the model.
21 On the calculability of the bank human

capital assessment model
When the specific target criteria for the human capital assessment have been chosen and
prioritized with the help of their weighting, in the further course, the assessment of the
branch offices via benefit analyses is undertaken, in order to allow an attribution of the
special contributions to the company benefits. The benefit analysis is a non-monetary
assessment method from the area of cost accountancy and contains the previously defined,
performance related target criteria, which are of subjective nature in their weighting and
specification categories (see table 21.1). The identification is undertaken with the help of
objective criteria for each branch office separately. Via the benefit analysis, the branch
offices shall be measured in relation to the fulfillment of the target criteria, in order to give
information on their benefit. In this context, the achievement of the employees is measured
in relation to revenues gained. In accordance with this approach, the employee is useful for
the branch office by raising the performance capacity of human capital. The higher the total
performance of the branch office is, the higher is the generated benefit and the more human
capital is deployed.
Three specification categories (SC) are defined for the individual criteria, to which each
branch office, depending on its specification, is attributed. The specification criteria are
scaled with point values which reflect the degree of fulfillment of the target criterion. The
specifications in the SC 2 result from the weighted average value of all branch offices and
represent the degree of target achievement. The criteria income/cost ratio and risk
profitability represent a peculiarity with respect to the degree of target achievement. The
pursued income/cost ratio is currently at 5 for any branch office and the aspired risk
profitability per branch office has been fixed at 2.2. percent.
Criteria Weighting EC 1 EC 2 EC 3
asset-side business volume
of the branch office 15 percent lower EUR 1.502m higher
revenue related perspective
liability-side business
volume of the branch office 5 percent lower EUR 536 m higher
existing customers 2 percent lower 2,934 higher
new customers 4 percent lower 110 higher
per customer 2 percent lower EUR 524 higher
volume per customer 2 percent lower EUR 189k higher
income/cost ratio 20 percent lower 5.0 higher
profit center
calculations
risk profitability 20 percent lower 2.2 percent higher

contribution margin 1 10 percent lower EUR 2.605k higher
per EC 6 percent lower EUR 50 m higher
volume per EC 2 percent lower EUR 18m higher
HR-standard
staff costs per EC per month 3 percent higher EUR 6.0k lower
turnover rate 3 percent higher 6 percent lower
further training rate 2 percent lower 2.0 higher
absence rate 4 Percent higher 2.43 percent lower
02
point value 100 percent points 3 points 46 points
Table 21.1: Specification categories of the criteria in the benefit analysis
If the result of a branch office is worse than demanded in the SC 2, it is attributed to SC 1 or

SC 3 depending on the specification. In these two specification categories the point values
are even further categorized in order to be able to make a more differentiated assessment of
the over-fulfillment of the target value. The opposite case occurs in SC 1, with a result which
lies far below the target fulfillment where no point is given. By the multiplication of the
weighting of criteria with the achieved point value of the specification category, a partial
benefit value in the target criterion can be calculated. The sum of the assessed part benefit
values corresponds to the total benefit value of the branch.
22 Results of the bank human capital

assessment
For each of the 15 branch offices of the bank via benefit analysis an individual benefit was
calculated. The results are illustrated in Fig. 1 with a Box-and-Whisker-Plot450, which allows
gaining an overview over the frequency of the calculated benefit values per branch.
Result of the bank human capital assessment

5
Maximum
4,5
3,5
upper quartile
3
median
2,5
lower quartile
2
1,5
1
Maximum
0,5
0
Assessed branch offices
Fig. 22.1: Result comparison between the branches
The illustrated maximum in the diagram shows the branch with the highest point value of 4.3
points, whereas the minimum represents the branch with the lowest points (1.42). The so
called box is divided in two by the median, which divides the totality of the branch offices at
a value of 2.73 in two parts. This means that 50 percent of all branches, which are located
between the median and the maximum, have a higher benefit value and 50 percent of all
branches which are located between the minimum and the median have a lower benefit
value. Between the minimum and the lower quartile and the maximum and the upper quartile
450
The Box-and-Whisker-Plot is a graphic method of explorative data analysis in order to illustrate the frequency
distribution of the calculated date.
are 25 percent of the branches at each side, which have reached the non-fulfillment or over
fulfillment of the previously defined target values.
In order to exemplify the existing results, three branches are introduced which have achieved
a benefit value over, under and corresponding to the average. Table 22.1. gives an example
for a branch with a benefit value under average.
Bene
Criteria Weighting SC 1 SC 2 SC 3 Pt.
fit
asset-side business
volume of the branch EUR
office 15 percent 1,502 m 3 0.45
office 5 percent 536 m 3 0.15
existing customers 2 percent 2.495 2 0.04
new customers 4 percent 168 5 0.2
asset-side business
volume per customer 2 percent EUR 602k 5 0.1
volume per customer 2 percent EUR 215k 4 0.08
income/cost ratio 20 percent 3.10 0 0
profit center
calculations
1.43
risk profitability 20 percent percent 0 0
EUR
contribution margin 1 10 percent 1,798 1 0.1
asset-side business EUR
volume per EC 6 percent 37 m 0 0
liability-side business EUR 13
volume per EC 2 percent m 0 0
HR-standard
staff costs per EC per

month 3 percent 5,9k EUR 4 0-12
turnover rate 3 percent 6 percent 3 0.09
further training rate 2 percent 1.62 0 0
1.67
absence rate 4 percent Percent 5 0.2
100 02 46
3 points
point value percent points points 35 1.53
Table 22.1: Example of a branch with a benefit value below average

In the assessment of the benefit related perspective, the branch achieves the target values
with the asset-side as well as with the liability-side business volume and achieves three
points for each in the SC 2. In the customer development, it has a below average number of
existing customers, so that only 2 points in the SC 1 are given.
It can be observed that the branch attempts to get a wider customer pool by higher sales
activities for new customers. Therefore, the acquisition of new customers is much higher
than the requested target value and receives five points. The same can be said about the
asset-side and liability-side business volume per customer. The branch disposes over
economically strong customers and is classified in SC 3 with both values. The number in the
profit center calculation is below average. Especially the weakness regarding the benefit/cost
ratio and the high risk in the customer portfolio with an unsatisfactory contribution margin
are reasons for the bad result. This is made worse by weak employee productivity in the
lending as well as in the deposit business. A further considerable flaw of the branch is the
low rate of further training, because the employee does not receive the requested two days of
further training per year. A positive value is the staff costs per employee capacity which are
slightly below average. The reason can be the low absence rate, which accounts for healthy
employees and an agreeable working atmosphere, which keeps the turnover value at a
constant value of 6 percent. However, it is also possible that there is not enough satisfactorily
qualified staff available and that therefore the staff costs are below average.
The branch office quantified in table 22.2 has with a value of 2.73 an average benefit value.
The over-fulfillment of the targets in the revenue oriented perspective as well as the
fulfillment of the target of the risk profitability is sign of a customer pool with strong
liquidity. However, neither the targets for the income/cost ratio nor for the required
contribution margin are met, which can be explained by a disproportional growth of the
costs, which is not satisfactorily covered with net revenues. The staff costs can be reason for
this: with EUR 6,300 per employee per month they are above the average staff costs of all
branch offices. A positive factor is the performance of the branch with regard of the
generated business volume per employee capacity. The turnover rate and absence rate is
average and has little influence on the labor productivity. The completed days of further
training per employee completely correspond to the requirements.
Bene
fit
asset-side business
office 15 percent 1,662 m 4 0.6
liability-side
business volume of EUR
the branch office 5 percent 670 m 4 0.2
existing customers 2 percent 3,109 5 0.1
volume per customer 2 percent 535 T 3 0.06
liability-side
business volume per EUR
customer 2 percent 216 T 4 0.08
income/cost ratio 20 percent 4.13 1 0.2
profit center
calculations
2.13
risk profitability 20 percent percent 3 0.6
contribution margin EUR
1 10 percent 2,417 T 2 0.2
asset-side business EUR 50
volume per EC 6 percent m 3 0.18
liability-side
business volume per EUR
EC 2 percent 20 m 4 0.08
HR-standard
staff costs per EC per EUR

month 3 percent 6.3 T 0 0
5.56
turnover rate 3 percent percent 3 0.09
further training rate 2 percent 2.11 3 0.06
2.49
absence rate 4 percent percent 3 0.12
100 02 46
point value percent points 3 points points 46 2.73
Table 22.2: Example of a branch office with average benefit
The last branch offices illustrated as example in table 22.3 has a benefit value above average.
It is especially characterized by the quality of the customer portfolio, which is shown by the
risk profitability. With regard to the income/cost ratio and the achieved contribution margin
this branch achieves values above average, too. This is also proved by the low staff costs per
employee capacity with high labor capacity in the lending and deposit business activities.
This high earning power of the branch, however, is at the expense of employees, which can
be discovered with the help of the absence rate. The high turnover rate can be explained with
the strategic orientation of the branch, which wants to achieve a better customer attendance
in new target markets through specialists. In order to do justice to the risings demands on the
target markets, the customers are trained at an above average rate. This means that the human
capital is increased in a quantitative way by the employment of new staff and qualitatively by
further training measures.
Benefit
value
asset-side business
office 15 percent 1.557 m 3 0.45

office 5 percent 834 m 5 0.25
existing customers 2 percent 3.166 5 0.1
volume per customer 2 percent 492T 2 0.04
liability-side business EUR
volume per customer 2 percent 263 T 5 0.1
income/cost ratio 20 percent 5.54 5 1
profit center
calculations
2.59
risk profitability 20 percent percent 5 1
EUR
contribution margin 1 10 percent 2,791 T 5 0.5
asset-side business
volume per EC 6 percent EUR 55 m 4 0.24
volume per EC 2 percent EUR 29 m 6 0.12
HR-standard
staff costs per EC per EUR

month 3 percent 5.6 T 6 0.18
13.51
turnover rate 3 percent percent 0 0
further training rate 2 percent 2.97 6 0.12
5.06
absence rate 4 percent percent 0 0
100 02 3 46
point value percent points points points 62 4.3
Table 22.3: Example of a branch with above average benefit
23 Bank-Human Capital Assessment

Model in the context of remuneration
management
With the help of the presented results it could be proved that the developed bank human
capital analysis with the help of the benefit analysis is appropriate to assess the performance
potential of a branch or of a manager in dependence of the available human capital.
Furthermore, the weaknesses of the branches were discovered. These flaws should be a
central component for further future directed measures of control in order to increase the
benefit in branches with low benefit values. The human capital assessment includes the
strategic goals to be achieved on branch office level. The lower the assessment level is, the
more concrete the targets are formulated, until they consist of actions on employee level
which can be applied in daily business. The successful execution of strategies and aims is
essentially determined by the behavior and the motivation of the branch manager. The
current dynamic competitive situation requires creativity and eagerness for innovation by the
employees.
By granting performance related remuneration components, it becomes easier to achieve
targets for the individual branches. A bonus depending on the earnings of a branch can be of
more relevance for the behavior than a bonus that depends from a variable that can neither be
influenced by the branch manager nor by his employees at 100 percent.
Therefore, the remuneration system should be geared by the value creation processes or the
results which can be influenced. The value contribution of an employee is measured by the
bank human capital assessment. The connection to remuneration creates the necessary
incentives. This way, the interests of the manager with regard to the increase of company
value can be connected to the achievement of strategic goals, when the bonuses for the
branch managers depend for example to 50 percent on the achievement of the requested
goals and on the results of human capital assessment. This type of remuneration management
corresponds especially in the expansion of the traditional, primarily capital oriented view of
the factors humans and customers to an integrated, value driven control of the overall
bank. It is even more important to quantify the performance of the employees to underline
the relevance of human capital as significant value driver of a company and, thus, also of the
shareholder value. As can be seen from the example of a bank, many promising approaches
on the assessment of human capital are inclosed the presented Berlin Bank Human Capital
Assessment Model.
As studies show remuneration systems and target achievement are rather badly linked. In
accordance with the empiric research of Gilles at the level of upper and middle management,
only half of the companies made this connection; at the lower management and on operative
23 Bank-Human Capital Assessment Model in the context of remuneration management 173
level the percentage was with 20 percent even lower.451 New forms of remuneration,
however, can increase the cost efficiency and performance of the company. The introduction
of market-adjusted, performance-oriented remuneration systems increases the employee
motivation and the personnel costs can be more efficiently directed towards the market.
Through a comprehensive human capital assessment on the level of employees and on
branch level, the additive, variable payments can not only be connected to the individual
performances, but also to the overall performance of the company and to the business
development. There are already suggestions for a new monetary incentive system in finance
oriented personnel management, which contributes to the behavior control of managers in the
sense of shareholder value. In a four-pillar-remuneration system a new organization of the
remuneration composition is suggested, which fulfills the requirements of owners and
shareholders of a variable, long-term and value-oriented manager remuneration.452
451
Gilles, 2002, p. 198
452
VII Development of a human
resource information system
of international personnel
controlling
Internationally active companies need in the context of their merger and acquisition activities
as well as for their internationalization strategies international personnel controlling. This is
necessary in order to adjust to permanently changing customer needs and to meet the
shareholder requirements in the sense of shareholder value on global capital markets.
Consequently, since more than a decade the globalization brings the requirement along to
instrumentally lead such companies in accordance with the shareholder-value-approach.
This requirement and its acceptance in Germany are reinforced by the Law on Control and
Transparency in Enterprises (KonTraG), which permits the introduction of an international
early warning system and of stock option programs and thereby provides a material incentive
and control system for managers and employees in the sense of the shareholder value
approach to (German) international companies.
There are, however, still many misunderstandings and problems with regard to the concrete
procedure for a value-oriented controlling. The question on the kind and specialty of
international personal controlling causes the same diffuse problems.453 Whoever hopes for an
answer to the complex international personnel controlling from specialist literature is
mostly deceived, because this topic is mostly fully avoided or only marginally touched, for
example in the are of international missing hours development, the development of the labor
efficiency, the international remuneration management system or the evaluation of the
international personnel assignment with local cultural problems in the countries of
assignment.
453
Comp. Schmeisser/Clermont/Kriener, 1997, p. 529 et seq.; Schmeisser/Clermont, 1999; Schmeisser/Cler-
mont/Protz, 1999 and DGFP, 2001, p. 188
176 VII Development of a human resource information system
The demand for practicable concepts for international personnel controlling exists regardless
of whether this situation is connected with a substantial realization deficit of international
personnel management or not.454 Therefore, the question has to be discussed how the
managerial contents of a human resource information system should be structured to do
justice to the possible needs in personnel controlling.
24 About the description and definition

of international personnel controlling
The condition for the recognition of international personnel controlling as own management
discipline is the identification of an individual problem that can be transformed into an own
object of knowledge and practical application field. Correspondingly, it is necessary to base
the international personnel controlling concept on a clearly defined international and
personnel management problem for which there cannot exist any alternative solution. With
the problem directed to personnel management and international issues, the following
diverse company targets can be pursued.
In this context, an international personnel controlling concept is understood as a theoretical
approach towards a target oriented solution of a specific problem of international personnel
controlling.
International personnel controlling includes the totality of international personnel
management tasks serving for a target-oriented coordination of management decisions with
international effects on a company group guaranteeing trough their execution of coordination
concepts an international orientation of the group as well as the provision of information for
the management on international level.
In this context the controlling concept of Management Control is suitable, because it largely
conforms to the intentions of the KonTraG, which will be described further below. The
Management Control is a partial field of Management Accounting455, whose specific
problematic includes amongst other things the coordination of international management
decisions as well as target oriented influence on the behavior/actions of international
managers on subordinated company group levels of the worldwide management
organization.
The solution of this specific problem of International Controlling is partially limited to the
provision of international company management with information. Management Control,
however, is also connected with the execution and the utilization of international
454
Comp. DGFP, 2001, p. 188 et seq.
455
Comp. Atkinson, 1997
25 Targets of international personnel controlling 177
coordination concepts. Management Control also provides information for international

reporting to company external interested persons (e.g. shareholders, shareholder value
concept) and international internal auditing. This means that the KonTraG offers a legal and
managerial base for International Personnel Controlling.
25 Targets of international personnel

controlling
The approach for the solution of the problem of an International Controlling Concept with
international decision coordination as specific controlling problematic is seen in the
implementation of international concepts of decision coordination and the organization in the
company group as well as in the certainty of provision of information to international
management.
Tasks of international personnel controlling

Personnel management tasks can be attributed to two different areas depending on the
reference of an international personnel decision:
System design
Process support
The system designing, international personnel tasks do not refer to a concrete operative or
strategic decision, but to decisions which will be regularly made in foreign branches in
future. For these international personnel decisions, coordination systems are created in order
to guarantee the application of appropriate coordination concepts and of their effects from
the point of view of the parent company in the company group.
An international coordination system in the human resource area is the totality of personnel
management methods, models, technical support (hardware, personnel information
software), international personnel processes as well as the application of international
coordination concepts.
In the design of international coordination systems, target oriented company group
regulations on the distribution and execution of international personnel management tasks in
the application of coordination concepts are formulated and put down in writing. Personnel
planning and controlling systems in worldwide groups, budgeting as well as control and
transfer price systems in the group of companies as well as international incentives and
flexible remuneration management systems are some examples for international coordination
systems.
The design of such an international coordination system should therefore always be

connected to the installation and development of an international personnel information
system, which facilitates the personnel information regularly needed in the application of this
coordination concept.
Personnel information systems include the processes of information gathering, interpretation
and transfer, personnel carriers of these processes as well as information and communication
equipment, instruments, methods and models for the routine facilitation of exactly defined
personnel information for international management in the group.
This means that among the system designing tasks of international personnel controlling are:
system designing and controlling of coordination systems,
personnel information systems as well as
international project management with special focus on international team building.
Among the process supporting tasks of personnel controlling are coordinating and
information facilitating personnel tasks in concrete decision situations. Among those
process-supporting controlling tasks are
management of coordination processes in the group as well as
problem specific facilitation of information.
26 Use of personnel information systems

Personnel information systems are socio-technical systems, consisting of human and
mechanical components. A totally automated, group-wide (personnel) information system
cannot be realized yet, because not all information processes in an internationally acting
company are programmable and therefore automatable yet. The background of this
problematic is on the one hand the content of personnel information which shall be
controlling-wise recorded and, on the other hand, the language information of possibly 50 or
more (foreign) languages, which cause translation, comparability and cost problems.
It is therefore necessary to introduce assumptions for further deliberations on international
personnel controlling and to approach the concrete managerial contents with the help of well
selected examples which are fit to contribute to an effective and efficient international
personnel controlling.
1. For reasons of simplification we make the assumption of a German, stock-listed group
that is internationally active, understands direct investments abroad not only as portfolio
management, uses an own international personnel management in order to actively
intervene as global player in the implementation of its strategies in the subsidiaries
abroad.
26 Use of personnel information systems 179
2. In the context of international personnel controlling also foreign activities are examined,
which have a connection with regard to their content to the activities of the head office. It
will be assumed that persons, products, money, know-how and information between head
office and foreign subsidiaries are transferred. Only if activities are carried out by the
foreign company units which have a connection to the business of the head office or the
whole group of companies, a support via corresponding personnel economic measures is
important. If the foreign direct investments, however, are only portfolio investments,
made only for reasons of profit-making, they have generally no consequences on the
personnel functions of the company.456
3. Among other things, these foreign activities of the mother company can be explained
with the fact that the purchase, sale, foundation and installation of subsidiaries abroad
pursues the target to dislocate the group activities of the value added chain, which in
accordance with Porter need supporting measures in the area of Human Resource
Management.
4. The aim of the parent company is to control the management via strategies,
organizational structures, managers and a (personnel) controlling system.
5. International personnel controlling should use application systems as SAP457 or
PeopleSoft458 via the use of a working language, i.e. English or German, in order to
detect, determine, process and interpret the effectiveness, efficiency and risk factors of
foreign activities with the help of external and internal (international) accountancy.
6. International Personnel Controlling helps to construe an accepted, appropriate and cost-
efficient international remuneration system for middle and top management worldwide
and permanently controls the individual parts.459
7. Agreeing with the practice-based recommendations of the DGFP working group that the
International Personnel Controlling is a special form of National Personnel Controlling
460
means that individual functions can be pursued via benchmarking as well as cost
effectiveness and profitability considerations. These are the personnel functions:
Personnel recruitment and selection

Personnel development with culture and language training
Compensation and incentive design in the context of a remuneration management
system
Management and (company) culture as well as
International labor relations.
456
Weber/Festing/Dowling/Schuler, 1998, p. 3
457
Comp. Mlder, 2001, p. 457 et seq.
458
Comp. Krawinkel, 2001, p. 447 et seq.
459
Comp. Brinkktter, 1997, p.413 et seq. and 429 et seq.; Beynio/Krieger, 1998, p. 353 et seq.; Rosen, 1998,
p. 341 et seq. and Brinkktter, 2000, p. 663 et seq.
460
Comp. DGFP, 2001, p. 108 et seq.
Only through this persecution of personnel functions the assignments abroad can be
supported and recognition of potential and personnel development of (top) potential
managers in the group is possible on the long run.
27 Obtaining personnel information

Constructing personnel information systems means to imitate information processes of
international group activities, especially of international personnel activities, and to organize
them (in a computer processing suitable way). Personnel information processes serve to
transform raw data into meaningful, decision-oriented, company political information or in
other words: they serve to build the bridge between an (original) information offer in the
foreign company units of the group world-wide and need of information of the head branch
or the investors of the officially stock-listed group, i.e. the requirements of (international)
accountancy.
Especially the Act for Control and Transparency in the Corporate Sector (KonTraG)461 can
provide a formal context and first framework for international personnel controlling.
The target of the law is to improve control and transparency in the area of officially stock-
listed corporations. The scope of examination in the legal annual statement is completely
renewed in sec. 317 HGB which was reformulated by the KonTraG including the individual
company closing as well as the audit of consolidated financial statements. The essential
reforms are:
Focus of the examination on incorrectness and violations against legal regulations and
completing regulations or the bylaws or the articles of association (sec. 317 subs. 1
sentence 3 HGB),
Extension of the examination duties in connection with the position report (sec. 317
subs. 2 HGB) as well as
Examination duty with regard to the supervisory system to be installed in accordance
with sec. 91 subs. 2 AktG for officially stock-listed corporations (sec. 317 subs. 4 HGB).
1. In accordance with sec. 317 subs. 1 sentence 3 HGB the examination has to be performed
in such a way that incorrectness or violations against legal provisions, bylaws or articles
of association can be recognized. This includes only those violations which essentially
affect the image of the situation of assets, finances and revenues of the company under
sec. 264 subs. 2 HGB.
461
Comp. Schmeisser, 2001, p. 811 et seq.
Violations are deliberate deviations from accounting principles in the sense of sec. 317
subs. 1 sentence 2 HGB applicable for the preparation of the annual statement or the
position report.
The following violation have an essential influence on the (consolidated) annual
statement: violations of managers of regulations of the foreign company unit which
question the business activities in the host country, but also violations of regulations
which violate permits and licenses, violations of rules concerning form and content of the
annual statement and violations of environment protection regulations which implicate a
duty of removal and therefore a duty of accruals under commercial law.
Further typical examples are balance sheet adulterations, irregularities or legal violations
by managers, also in foreign company branches, in the area of stocks: statement of stocks
in the balance sheet even if they are not or not any more owned by the company,
statement of non-existing stocks, empty containers, addition of water to oil-containers
and transfer of costs which have arisen in already concluded orders to new orders.
In the case of signs of mistakes, frauds, property impairments and other violations of the
law, the annual auditor has to assess which circumstances have lead to this and how the
annual statement is affected, but also the international personnel controller has to decide
which report he has to present to the management of the national company unit or the
group top management on personnel wrongdoings.
2. In accordance with sec. 317 subs. 2 HGB the examination of the position report has to
include the following reports:
Consistency of the position report with the annual statement and the findings of the
examination
Generally applicable presentation of the position of the company,
Correct presentation of risks of future developments.462
The reform in connection with the examination of the position report which underlies the
highest requirements is the examination whether risks of the future development of the
group, influenced by the foreign revenues which can often account for between 40 and 90
percent of the total revenues, are correctly presented. Thereby the legislator clarifies that the
prognosis of the company development in the position report does not only imply
opportunities but also risks. This requirement makes clear that companies had not totally
complied with the requirements of reporting and displaying the actual situation of the
company from the legislators point of view.
Thereby, the legislator increases the requirements for the position report with regard to the
provision of decision relevant information, which also has to be contributed by the
(international) personnel controlling, if it is endangering growth. The position report of the
group is therefore more complex than the annual statement because future oriented facts
462
Comp. Schindler/Rabenhorst, 1998, p. 1986 et seq.
which can be connected to foreign activities as well as human resources have to be taken into
consideration. An example to remember is the Greencard discussion in the information and
communication technology area.
For the going concern assumption, a period of 12 months has to be taken as basis, starting
from the reporting date of annual statement. For all other essential risks, like the expected
development of essential foreign activities, a period of prognosis of two years is appropriate.
It can be necessary to determine a correspondingly longer period of prognosis for foreign
business which causes risks for the company over a longer period of time.463
The legislator does not substantiate the risk term neither in the legal wording nor in the
explanatory memorandum. In the business management literature the risk term is not
uniformly used either.464 Risk in the sense of sec. 289 HGB means the possibility of
unfavorable, future developments which can be expected with a considerable likelihood.
Risks are understood as the possibility of danger of losses in the context of business
activities. This implies a negative deviation of the company development from the planned
variables. This results from the general uncertainty of future events which are connected with
an incomplete information status.465
In the broadest sense the term risk can be described as insecurity. Insecurities, i.e. possible
deviations from expected values exist on all levels of business activities as well as in
international personnel management and the related foreign activities. Among the possible
uncertainties are e.g. changes of political or economic factors in individual countries where
the company is active, as e.g. exchange rates, inflation rates and taxes, changes of the
structure of the sector by new competitors, new technologies and unexpected legal dispute,
complaints and claims which have to be tackled by employees or managers or have been
caused by them.
463
Comp. Arbeitskreis Schmalenbach-Gesellschaft fr Betriebswirtschaft e.V., 2000, p. 7
464
Comp. Baetge/Schulze, 1998, p. 937 et seq.
465
Comp. Bitz, 2000, p. 13
design of a controlling system
Internal
Internal
controllingsystem
controlling system
Organizational
Organiz ational Control
Control Internalaudit
Internal audit
protection
pro measures
tecti on meas ures
Permanent supervision Process dependent Process in dependent

supervision supervision
Functiona l separ ation
C omputing
Work instructions Integrated in work process Ex-post
C ompany internal Carr ied out by staff Carried out by internal,
a ccounting involve d in work process ne utral, objec tive staff
Continuous contr ol In appr opria te time inter va ls
466
Fig. 27.1: Design of a controlling system
In accordance with sec. 91 subs. 2 AktG the executive board has to install a supervisory
system. The executive board has to take care of an appropriate risk management and an
appropriate internal audit. The target of risk management and supervisory system is the early
detection of risks. The responsible company institutions shall be enabled in due time to
introduce measure to keep the company safe.
466
Following Lck (a), 1998, p. 9
Normal circuit of the risk management system
Formulation/
revision of risk strategy
Comparison of risk
Determination of risk
situation with strategy
management measures
Internal requirement
supervision system
Organizational
Risk identification safeguarding Presentation of risk
(early warning systems measures situation of the
etc.) Control and company
internal auditing
Risk-controlling
Risk analysis Risk management
Risk assessment
467
Fig. 27.2: General circuit of a risk management system
In accordance with sec. 91 subs. 2 AktG the executive board has to take appropriate
measures and to install a supervisory system in order to allow the detection of developments
which might endanger the existence of the corporation. The application of this regulation is
part of the examination of the business auditor in accordance with sec. 317 subs. 4 HGB.468
Because in accordance with sec. 91 subs. 2 AktG the risk detection system, that has to be
installed and continued by the executive board, has to be directed to the early detection of
existing endangering developments, only this aspect of the total risk management system is
part of the audit. This aspect is defined by determination by the company of risk areas which
can imply existence endangering developments.
As internationally active companies gain an essential part of their revenues abroad, the
international personnel work and management is a risk area per se, which entails the need to
take a closer look on the international personnel controlling as risk field in its aggregated and
disaggregated form.
467
Following Lck, 1998, p. 1926
468
Comp. Scharf, 1999, p. 180
The risk management system has to make sure that existing risk (risky foreign activities in
connection with staff activities) are determined, analyzed and assessed and that the risk
related information are forwarded to the decision makers. Part of the risk management is a
supervisory system (e.g. international personnel controlling) which supervises the
compliance with the requirements. The risk detection system in the sense of sec. 91 subs. 2
AktG has to make sure that those risks which could endanger the further existence of the
company are recognized at an early point in time. The auditor has to state whether the
executive board fulfills its requirements.
The auditor examines the existence of measures taken by the executive board with the help
of related documentations, organizational instructions and own deliberation in the context of
the examination of the internal controlling system.469 The documentation is crucial. Without
these documents the auditor can only determine whether the legal regulations ware complied
with by means of an organizational examination. However, such an examination is complex.
The documentation should display general procedure, measure for risk identification, risk
measurement, risk controlling, determined responsibilities as well as training measures for
the employees. The examination of the documentation is carried out by inspecting the
documents, via analysis of the reports as well as by interviewing leading staff members.
The documentation fulfills the following tasks:
The subordinated leaders can prove a dutiful behavior in the case of appearance of a
company crisis (accountability function).
The documentation is necessary to ensure the compliance of risk management with the
(legal) requirements in the course of time (maintenance function).
The documentation is basis and condition for the examination of the supervisory system
(examination function). 470
The auditor has to tell whether the taken measures are fit for their purpose by assessing
whether they are appropriate in relation to the corresponding risk situation of the company as
well as the size and complexity of company structure. In sum, the measures have to be
appropriate to recognize the risks of further developments at an early point in time and to
internally discuss them in order to give the executive board the possibility to react. The
suitability is checked by examining whether the supervisory system does justice to the
company goals and strategy. Furthermore, it is important how the reporting of risk potential,
e.g. frequency, assessment of risks through sensitivity analyses of worst case considerations
is carried out. The suitability of the system, its aptness and appropriateness are determined
by the size, structure and environment of the company.
469
Comp. Adler/Dring/Schmaltz, 2000, Vol. 7, p. 123 et seq.
470
Comp. Kromschrder/Lck, 1998, p. 1573 et seq.
Surveillance of the risk management process by the internal

supervision system
Continuousanalysis
Continuous analysisof
of the
therisk
riskmanagement
managementprocess
process
Prevention function
Part
Partof
ofall
allsegments
segmentsofofthe
theinternal
internalsupervisory
supervisorysystem
system
Avoidance of potential risks
Avoidance of potential risks
Minimization
Minimization of ofthe
thepossible
possibleamount
amountofofdamage
dama geof
ofthe
theexisting
existingrisks
risks
Correction function
IsIsabove
aboveall
allpart
partof
of the
theinternal
internalaudit
audit
Development and installation phase: Examination of
Development and installation phase: Examination of execution
executionandand
effectiveness of the system
effectiveness of the system
After
After implementation:
implementation: examination of
examination of functionality
functionality
Fig. 27.3: Surveillance of the risk management process by the internal supervisory system
If the requirements of the KonTraG are transferred to the risk area international personnel
controlling, there still many creative ideas, e.g. what does an internal supervisory system
international personnel controlling look like? How are the risks identified and determined?
What are early indicators in this risk area? Which typical key figures are appropriate to make
direct and indirect measurement appropriate? What does a regular report to the management
look like? How far can the aspects of international personnel controlling be adjusted to
internal and external accountancy in order to comply with the KonTraG?
28 Design of personnel information

systems
For Scherm/Pietsch/S471 there are three different conceptions of controlling, which are the
accountancy oriented, information oriented and the coordination oriented conception from
which the targets and tasks and instruments of an international personnel controlling can be
deducted. Unfortunately their approach was so general that no concrete key figures could be
deduced.
28.1 Targets of an international personnel information

system
On the management level, in the context of the functions planning, organization and
provision of staff and personnel management, the selection task is perceived. The controlling
function on the other hand contains comprehensive reflection tasks.
Controlling as management function can be characterized as reflection on decisions which
in the context of other management functions are taken against the background of the
complete target system of a company.472
Management, in a functional sense, means to take decisions, to execute them and to question
them, as well as to take responsibility for the decisions taken. These decisions do not have to
be made on the basis of rational calculations but can also result from intuition. To fulfill the
management tasks, information is needed either way. The gathering, preparation and
provision of this information can be regarded as leader or management support (in the sense
of a controlling function.).473 The authors do not write which information they refer to and
they do not further concretize them with the help of qualitative or quantitative key figures
etc.
However, some considerations are interesting for the context of international personnel
controlling, i.e. that besides the still important perspective of the individual national
company unit a not less important international perspective on the whole company group
has to exist. It is true that in international companies, there is still a competition on the
individual, national markets, but specific competitive advantages have to be created and used
on an international level, in order to stand up against national and international competition
on these markets on the long run. It is therefore not possible, even in the case of intense
471
Comp. Scherm/Pietsch/S, 2000, p. 396 et seq.
472
Comp. Scherm/S, 2001, p. 360
473
Comp. ibid., p. 358
decentralization and differentiation to completely abstain from a central controlling of the

company activities, because only in this way economies of scale and economies of scope and
national differences can be used, which allows to generate competitive advantages. It is,
however, possible that partially considerable differences between the targets related to
the company as a whole (the head office) and the country market related targets of the
company units exist. If these differences lead to different assessments of situation,
alternatives concerning possible measures and results of measures, there are bound to be
conflicts, at the same time these differences in perspective underline the need of reflection in
these decisions. In any case, it has to be made sure that in these decisions related to the
company as a whole, the relevant information from the relevant decisions of the foreign
branches is available.474
If one deducts from the above deliberations the contents of international personnel
controlling for delegated leading positions more concretely, the following targets result:
1. Examination of leaders on all levels of the group at home as well as abroad with regard of
whether they can be taken into consideration for further management tasks on the next
level, especially in the case of management needs in the parent company.
2. Proof that the manager can balance functional interests as marketing, research and
development, production and country interests and international interests of the parent
company in the context of operative and strategic competition strategies and value adding
processes.
3. The primary reasons for failures in multinational operations can be attributed to deficits
in understanding essential differences on all levels of personnel management in a foreign
environment.475 It has to be questioned how many individual functions of International
Personnel Management have not been executed and how they could help to develop the
manager.
4. In contrast to Scherms understanding the international personnel controlling has to be
integrated into an accounting, world wide controlling conception, e.g. in accordance with
US-GAAP for stock listed companies, because otherwise the KonTraG with risk
detection as criterion for the parent company would be questioned.
5. The international personnel (information) controlling is only possible in connection with
individual national personnel information controlling systems, i.e. that these have to
superpose each other and should not be managed and considered as two separated
systems. The best way to demonstrate this is by means of international management
remuneration systems, because the remuneration justice shall be reached nationally and
internationally/worldwide in the group.
6. The international personnel controlling shall examine to which extent PeopleSoftware,
SAP-Software etc. as personnel information systems can help on a world-wide basis and
to which extent own company solutions are necessary.
In other words: There is much creative work to be done by companies and economic science.
474
Comp. Scherm/S, 2001, p. 362
475
Comp. Destanick/Bennett, 1978; comp. Weber/Festing et al., p. 11
28.2 Functional design of an international personnel

controlling system
This means that international personnel controlling is a network of (national) personnel
controlling in the narrower sense and of other functional and project oriented controlling
types as R&D controlling, production controlling, logistics controlling and marketing
controlling worldwide, which provides risks and opportunities in the coordination concept of
company management. Only this way international competition strategies and competitive
advantages of the group are not compromised. The target in research and development
controlling with a national/international personnel controlling has to be to obtain complete
transparency in national/international technology management regarding the question
whether the company disposes over enough high professionals with corresponding abilities
to secure future profit potentials for the company. This is necessary with regard to project
oriented R&D activities, employees, regarding (remuneration/personnel) costs, degree of
target achievement measured e.g. in patents and in order to control deviations if necessary.
Net work structures of internationally active companies are new challenges for international
personnel management, as Perlitz476 shows by the examples of General Motors with the
corresponding production and logistic network. When components of a car are fabricated and
assembled on a worldwide basis, this means that technology-oriented companies are
especially in need of differentiated production controlling in connection with personnel
controlling. One should only think about the target variable (personnel) costs and their
compositions, efficiency, which is influenced by illness, absence hours, turn-over rates, use
of technology with different qualifications of the staff, quantity of production with different
labor time models and limitations with regard to culture, society, politics and legal
regulations as well as quality assurance with different total quality management models and
instruments in connection to approaches of personnel training or development.
The logistics performance is closely connected with international network structures. It can
be measured by the achievement of the following targets, which at the same time underline
the personnel service character of the logistics function. These aims are service time, service
reliability and readiness for delivery in the planned service time all around the world.
The following question can be asked about (international) marketing controlling in
connection with the (international) personnel controlling: to which extent can the manager
systematically put the world wide company management concept into practice in the
individual countries in order to be successful as global player for the group in the automobile
sector, telecommunication sector or aviation sector? Quantitative targets of marketing
controlling and target adaptation in the context of performance assessment of personnel
controlling can be company growth, market shares or contribution margins. Qualitative key
figures include high brand awareness, positive image and high levels of repurchases which
476
Comp. Perlitz, 1997, p. 231 et seq.
the delegated managers can only achieve with the help of knowledge and understanding of
culture.
About the national/international personnel controlling it can be asked, among other things,
how a personnel development strategy for non-tariff employees and top managers should be
executed nationally and internationally in the group or how a target adjustment concept for
upper and top managers should be standardized nationally and on a world-wide basis in the
group and how this would affect their careers. In this respect, the personnel development
strategy concept can certainly be well connected with the strategy concept of personnel
assessment. From this point departs the strategy concept of personnel remuneration
management in the group. All concepts can be connected to the functional concepts in the
research and development area, the marketing area, of national subsidiaries etc.
28.3 Process supporting tasks of international

personnel controlling
Targets and tasks of process supporting personnel controlling refer to all innovative cases of
functional international personnel controlling, i.e. when they are project-wise introduced in
the worldwide group for the first time or reformed after several years.
In 1996, the BASF has developed a remuneration system for international delegations of
upper managers. It created the following criteria or requirements for a corresponding
material system of international delegations:
Acceptance by the delegated managers who can understand all calculation steps in their
remuneration statement because of its transparency and plausibility;
Adequacy which is ensured by the flexibility of remuneration systems which make an
appropriate adjustment to individually different cases possible.
Economic efficiency, which is achieved by the fact that on the basis of its easy
handling, quick, immediately understandable results allow to take actions in individual
and group-related matters on an international as well as international basis. In this context
e.g. components of the remuneration management system are permanently gathered,
updated, examined and adjusted, in order to guarantee the highest possible justice of
upper managers in the group and in comparison to worldwide labor markets.477
477
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1999.
VIII Design, functionality and
application fields of information
systems in HR478
29 International personnel information

systems
29.1 Definition of information systems

In the case of an information system in the HR context this is a person-computer-system.
The system consists of human and technical components and describes a systematically
ordered network of informational relations which is developed between human and
information processing machines, data and methods. This means that the personnel
information systems serve to satisfy the purposeful informational needs of the participants of
the worldwide company organization.
An informational system serves as instrument for companies in order to be able to act in a
quicker, better and more precise way in HR work.479 Furthermore, it helps to secure and
expand strategic competitive advantages which are created through human capital.
A personnel information system is part of the organization system, in which information and
communication relations between individual positions count among the central
organizational appearances. By connecting them with other parts of the system, an electronic
478
This chapter, including illustrations, is largely based on the book: Strohmeier, St.: Informationssysteme im
Personalmanagement: Architektur -Funktionalitt Anwendung. Vieweg und Teubner Verlag, Wiesbaden
2008. Strohmeier is nearly the only author dealing with this topic in Germany.
479
Comp. Jung, 2005
194 VIII Design, functionality and application fields of information systems in HR
mutual data transfer is made possible. This should involve a unification of the data base and
thus make adjustment actions between the individual system components superfluous. The
advantage of the connection is the higher informative value through combination of different
areas of the system.
A personnel information system is open to its environment, because it freely interacts with it.
Besides, it is dynamic because parts of the information system might change due to this
interaction.480
29.2 Tasks
An information system contributes to the best possible provision with information to
employees and managers. Its tasks include the processing, analysis and transfer of data and
information which are different from system to system. Therefore, each system has its own
tasks which are shown in more detail chapter 31.4.
29.3 Reasons for introduction of personnel

information systems
Two essential reasons which make the introduction of a personnel information system
necessary are (1) the standardization of comparable information, e.g. in the remuneration
system problematic and in the international assignment of personnel as well as (2) the
context of globalization and of company internal decentralization, which makes it easier to
operate an information system for international companies.
The company guideline is thereby conveyed in a unified way. However, the regional
individuality and culture still have to be accepted by all groups.
Furthermore, processes have to be unified. Via the personnel information system a process
becomes more structured, which saves time. The personnel information system makes it
possible to save costs and to simplify processes. Via these tasks information are provided in
much shorter time and are more up-to-date and more comprehensive, e.g. to answer the
question whether the introduction of a personnel information system is useful, the application
of a cost-benefit-analysis is suitable.
The costs can be considered in two different ways: on the one hand in accordance with
Weimair who structures the cost elements in accordance with activities and development
phases. He distinguishes the planning phase, implementation phase and operation phase.
Domsch on the other hand differentiates one-time and running costs.
480
Wirtschaftslexikon24, status: 2009
29 International personnel information systems 195
The benefit is segmented along the individual application fields of personnel work. Among
the application areas are the personnel administration where the question is asked how to
avoid the frequency of errors in the calculation of salaries, the personnel planning which
makes it possible to create an enlarged and improved information flow for planning purposes
on the basis of higher data consistency, and the personnel controlling which renders a
quicker and more exact deviation control in relation to performance and personnel flow
possible via the Berlin Balanced Scorecard Approach.481
29.4 Personnel information systems as condition for

process optimization
An information system in the personnel department is condition for the total process
optimization.
Via Business Process Reengineering processes are reformed to be able to work in a more
economic and customer-oriented way. With the help of computer aided personnel
information systems there is the possibility to fundamentally reform out-of-date, cost-
intensive personnel processes.
Human resource processes have to be analyzed for this purpose. In the case of a business
process analysis, mistakes and weaknesses are found out and documented. Examples for
these weaknesses are wrong data entries, double work or long waiting times and downtimes.
The target of process optimization is the improvement, optimization and unification of future
business processes. By this, it shall be achieved to reduce the time and costs needed and
improve the quality at the same time.
Via the utilization of IT systems in human resource area, rationalization and automation
measures of routine work can be carried out. One example of an application field is the
remuneration calculation. Besides, it serves to support administrative tasks, e.g. the
administration of applicants and seminars and the preparation of statistics.
The personnel recruiting process is optimized via e-recruiting. Hereby measures as personnel
marketing, search for applicants and qualification examination are winded up via the
internet. The publication of free positions or the maintenance of the candidate pool, i.e. of the
platforms where applicants can register for jobs and internships, are winded up via internet.
With the help of e-administration, administrative HR processes are optimized. There is a
shift of the data collection and maintenance from the human resources resort to the
employees and managers. The maintenance of and the access to information is realized via
the browser. Data misuse can be avoided through cryptographic techniques and security can
be achieved via error checking and authorizations by supervisors. By the entry of routine
481
Comp. Jung, 2005
processes directly per web-based form, for example changes of address and bank details,
they can be quickly registered.
In the e-relationship management customer satisfaction and the increase of customer benefits
are focused. This means that more awareness of the human resource customer processes shall
be created. Internal customers including employees and managers but also external
customers as e.g. applicants and public institutions require from the human resource
department a variation of services. Examples are the creation of personnel statistics or the
calculation of company pension. Via automation, routine work is transferred from the human
resource department to the customer. The remuneration certification for example can be
printed out by the employee himself.
With regard to opportunities of personnel information systems one can distinguish qualitative
and quantitative benefits.
The qualitative benefits include the acceleration and simplification of human resource
processes. Through quantitative benefits more statistics are possible. This can mean that the
service quality in the human resource department can be improved, because via web the
virtual human resource department is available around the clock. In case of standard
questions, the human resource department can be relieved and rationalization effects can be
obtained. Furthermore, cost savings can be the result of process optimization.
Among other things, there are two basic problems: processes can only be estimated at the
beginning and cost-benefit-assessment can often not be carried out after implementation.482
30 Basics
30.1 Architectonic basics

30.1.1 Architecture
The architecture has to be construed for hardware, software and processes. These
components have to be connected on a joint data basis to the architecture as cutting point.
There is also a connection to the backup systems usually common in business to ensure data
security.
482
Comp. Schmeisser/Grothe/Hummel, 2003
30 Basics 197
30.1.2 System architecture

The system architecture describes the structure of software systems. It consists of individual
software components and their relations. These are basic resources which can be accessed
via the operating system, as well as basic characteristics and the organizational structure of
these resources. Thereby, the internal structure of an individual system, which is also
referred to as micro architecture, and the structure of a portfolio of different individual
systems, which is also called macro architecture, are described.
A system is referred to as individual, if the software unit is independently loadable and if it
can be individually purchased from other companies on the market. In case of portfolios of
several individual systems the components depend on each other.
30.1.3 Layer model

The layer model serves as support for structuring the description of real system architectures.
The individual systems are in correspondence between each other with the layers built up on
each other. The basis is the data management layer. The upper layer uses services and results
of the corresponding underlying layer.
Data maintenance systems are responsible for saving, administration and facilitation of
persistent data of the system. These consist of encoded data, e.g. letters, numbers, special
characters and not encoded data as e.g. illustrations, audio and video documents.
Application systems realize all functions of specialist functionalities of a system, e.g. the
processing logic, the application core and the business logic. In this context the systems use
services of the data maintenance systems. Thereby, at first a data recall from the data
maintenance layer is undertaken, then data processing and finally result saving in the data
maintenance layer is carried out.
The presentation systems serve as user interface. This is the place where an interaction
between users and applications takes place. The user receives all necessary functionalities to
work with the system.
Integration systems render services of communication between otherwise isolated individual
systems or components of the application layer as for example function calls in the system.
Furthermore, integration systems take over the direction of data transport. They also
adequately describe heterogeneous macro architectures and form the facultative layer
between the application and presentation systems.483
483
Comp. Strohmeier, 2008
30.1.4 Implementation
The implementation can be achieved in an individual system. The separation in layers makes
it possible to distribute individual services to different systems.
horizontal structure
presentation layer
(integration layer)
vertical
system architecture
structure
application layer
data maintenance layer
484
Fig. 30.1: Logic layer and physical structures of system architecture
Personnel information systems can be structured and arranged from two basic points of view,
the horizontal and the vertical point of view. The vertical structure shows how one or several
systems are ordered over several architectonic layers. They are subdivided in layer
overlapping systems and layer specific systems. The layer overlapping systems offer services
from several architectonic layers. Services of data maintenance, application and presentation
are regularly offered from such systems via corresponding components.
The layer specific system offers exclusively services from one single architectonic layer.
Here, outsourcing data maintenance services to independent data base systems is very
common. The data base system works in this architecture as layer specific data maintenance
system while services of application and presentation remain in the corresponding personnel
system.
There is, however, also the possibility of combining layer overlapping systems and layer
specific systems. The attribution of a system to an architectonic layer can also depend from
the form of application.
The horizontal structure displays the organization of one or more systems by relations to the
architectonic layer in question. Services can be rendered via one or several systems. If in the
data maintenance of the application layer several individual systems are used in parallel,
these can be integrated. If there is no integration, an additional integration layer is necessary
or useful.485
484
Source: Strohmeier, 2008, p. 5
485
30 Basics 199
30.2 Organizational basics

Information systems in personnel management have to be planned, made available,
implemented and applied in order to lead to the desired results. These functions are
understood as processes which can be executed in different ways. A typical process can be
recognized in the following figure. It starts with system planning. This includes the
theoretical picturing of future information systems. The system appropriation includes the
necessary activities of development and/or purchase of the planned systems. In the context of
system implementation the mutual adaptation of organization and information systems takes
place. After this, the activities for the implementation and maintenance of applicability of the
system are carried out in the context of system operation. The last step is the system
application in which diverse users take over system aided functions of personnel
management.
Planning
TS (portfolio)
planned
Appropriation
IS (portfolio)
made available
Implementation
IS (portfolio)
applicable
Application Operation
results
1-n
486
Fig. 30.2: information system related activities
486
30.3 Legal basics

The following paragraphs describe the governing legal regulations on the application of
information systems in personnel management.
30.3.1 Data protection

In the context of data protection, information systems in personnel management are targeted
on the collection, saving and processing of data concerning areas especially worthy of
protection from potential for misuse. The central data protection law is the German Data
Protection Act (BDSG). The goal is to protect the rights of individuals being affected by the
use of their personal data (sec. 1 subs. 1 BDSG). This way, personal rights of the affected
individuals shall be protected and misuse shall be avoided.
Because of the sensitivity of personnel data there are high demands regarding the security for
accessing, saving and transferring these data. The measures concern especially the
confidentiality of personnel data for protection against unauthorized reading, the integrity of
data for protection against fraud, authenticity of the communication partner for protection
against masquerade, proof of data entry for non-repudiation and the regular saving of data for
protection against loss of data. In order to fulfill these requirements, a preventive control by
the assignment of user rights has to take place and all activities have to be recorded.487
30.3.2 Co-determination
The co-determination is regulated by the Industrial Constitution Law (BetrVG). These
regulations are relevant for the implementation and application of information systems.
Among other things the regulations are targeted on the participation of the works council.
The German Act on the Speakers Committee (SprAuG) on the other hand governs the
participation of Speakers Committees.
30.3.3 Equal treatment

Through equal treatment of all employees discrimination shall be avoided. The General
Equal Treatment Act (AGG) distinguishes eight discrimination factors which shall be
protected against discrimination and harassment. Those factors are race, ethnic origin,
disability, sexual identity, religion, ideology and sex.
487
30.3.4 Data transfer

The ordinance on the collection and transmission of data for social insurers (DEV) obliges
the employee to make concretely defined reports to the social insurance institutions. Hereby
data have to be electronically transferred and measures for data security and data protection
have to be taken.
30.3.5 Remuneration accounting

For remuneration accounting the principles of Generally Accepted Data Processing Aided
Accounting Systems and the principles for Data Access and Verifiability of Digital Data
apply. The system categories involved are the personnel accounting systems and document
management systems, in case the wage accounting receipts are archived.
31 Structure, functionality and application

area
31.1 Structure
A personnel information system is composed of the components human resource database,
work place database, methods and model database, electronic data processing systems and
system users. These components can be understood as follows:
The human resource database administrates the human resource master data. It is needed for
the payroll. Examples of basic data of the human resource database are personal data,
employment data as well as remuneration master data. These basic data are completed with
dynamic data, e.g. data from time tickets, commission accounts and travel expense reports.
The workplace database is targeted towards saving workplace related data, e.g. the tasks of
the position, the requirements of training and education and the workplace number.
The method and model database is responsible for procedures and algorithms for further
processing of the saved data. It can be understood as computer programs to solve the
problems in the human resource area, e.g. remuneration accounting systems or calculations
of absence periods and turnover rates.
The core of a personnel information system is the electronic data processing system. They
are the central processing unit. Further peripheral devices are attached to allow data input,
saving and output. The totality of the technical equipment is called hardware.
Among the system users active users can be distinguished from passive users. Active users
are employees who directly correspond with the data and change and connect them via use of
methods. Passive users are employees who only take notice of the available information and
may use them as basis for decisions.488
31.2 Functionality
The personnel information system can be organized in very different ways depending on the
area of responsibility and development status. It is generally especially customized to the
company needs. This way, it can be subsequently updated at any time. The staff specific
tasks and problems which are fulfilled with an information system can be separated in the
main areas of administrative and dispositive tasks.
With the administrative tasks rationalization effects shall be achieved which arise because of
the relief provided in the area of routine work and mass procedures. These include especially
repeated procedures like salary accounting.
The dispositive tasks support the decision and planning process in the human resource field
via the improvement of the information basis. By processing data material, a better
information basis and decision-making support is provided. It serves for future problem areas
of human resource planning and controlling, e.g. for the selection of applicants.
The personnel information system fulfils the functions of personnel planning, human
resource accounting, of master data administration, time determination, administration and
human resource reporting. The position plan, personal resource availability plan and the
plans for further training are understood as personnel planning.
Human resource accounting includes the calculation and management of remuneration costs,
income tax and social security contribution accounting. Master data administration connects
change services, labor contract data and address data. Time determination includes absence
control and administration and assessment as well as holiday accounting. Administration
includes administrative efforts for employment, dismissals and promotions. Personnel
reporting connects statistical analyses, creation of internal staff statistics, e.g. the age
structure or turnover rate, as well as statistics for external addressees.
Widely used data processing systems in personnel management are for example SAP or the
PAISY-system. The SAP system offers the possibility to standardize core processes in human
resource management. This means that the necessary data are available to the authorized
employees at once. The PAISY-system is a dialogue-oriented, modularly structured data
administration, calculation and information system for the DP-based human resource
management. It can be quickly and cost-efficiently used and is also applied in remuneration
accounting etc.
488
Comp. Strohmeier, 2008 and Jung, 2005
31.3 Area of application
31.3.1 Users
Users can be divided into the groups of active users and potential addressees. Active users
can be split into participants with active-indirect and active-direct contact. The active-
indirect users can access information without entering into direct contact with the personnel
information system. The active-direct contact involves the access with direct contact.
The information desires of potential addressees are fulfilled with the help of the information
system. Within a company, the data are needed by the human resource department, the
supervisors and employees. Outside the company, information from the personnel
information system is accessed by public institutions and the general public, as e.g.
shareholders, associations and media.
This means that information systems are used by complete workforce, managers and
executive board members.
31.3.2 Examples for application areas

There is a variety of application areas where information systems are helpful. Examples for
such application areas are online-queries, reports, applications, personnel development and
the termination of labor contracts.
In the case of an online-query, a request with regard to selected employee data is possible at
all times because of the direct and permanent connection of the terminals of the human
resource department to the central unit. Ideally, it is already clear when installing the system
how employee data are structured under certain topics, who has the authorization to access
the data and how the highest possible transparency in the presentation is achieved.
Reports on the other hands are issued by the information system in order to support the
human resource department in the execution of its supervisory functions. So called event
connected reports, periodic reports and aperiodic reports can be distinguished. Event-
connected reports are connected with the occurrence of certain facts, e.g. a job entry,
resignation or change of address of employees. Period reports are regularly issued in
previously defined intervals. Aperiodic reports on the other hand are individually issued if
needed. They are mostly prepared for organizational and administrative purposes, for
example address lists, telephone directories or parking space lists.
In the application field the applicants data are saved in accordance with a certain scheme.
With the help of the personnel data collected in the application and by further processing
with the help of the information system, a variety of interpretations is possible. An example
is the preparation of a list of all vacancies, an overview over the ads published in the media,
supervisory functions for running applications and the recognition of recurring applications.
In the personnel development area the most important elements of the career of an employee
are mostly saved in form of a list. Among these are the duration of the membership in the
company, area of responsibility, possible further qualification measures and promotions.
The termination of labor relations also creates a high number of administrative tasks which
are systemized and accelerated with the help of information systems. Important tasks in the
termination of a labor relation are the preparation of letters of notice, the issue of
employment certificates with an exit interview, changes of the personnel file or personnel
data as well as archiving the personnel records, in order to be able to give information in case
of further enquiries of succeeding companies or insurance-related questions and to make
additional statistical evaluations.489
31.4 Structure, functionality and application of the

model with four layers
31.4.1 Data management layer

The data management layer is divided in three areas: the database systems, the data
warehouse systems and the document management systems.
A Database System is a tool for storing, managing and furnishing large amounts of data.
A Data Warehouse System serves to combine and keep personnel management data from
several other sources for the purposes of information furnishing and decision support in
personnel management.
A Document Management System is an application for issuing, digitalizing, archiving,
retrieving, forwarding and destroying human resource documents of all kinds.
Now, a closer look is taken on a database system in relation to its structure, functionality and
application.
The composition of a database system is to be distinguished in the specified user interface,
the database component, the data management system and the programming language or
programming tools. The function of a database is data storage. The database management
system, on the other hand, has the functionality of definition and manipulation of the
database and of scanning. The database system is used as layer specific data keeping system
or as trans-layer application system. In this case data management services are rendered for
systems of higher layers. The efficient storage and facilitation of very large amounts of data
is guaranteed in this system category. This system is crucial for personnel management.
Database systems available in office packages offer multiple application scenarios in
489
Comp. Strohmeier, 2008 and Jung, 2005
personnel managing. They deal with general personnel data management. Many
commercially offered personnel information systems are really only simple database-based
applications. They relief the users from data modeling and designing the corresponding
forms or user interfaces. However, they offer the possibilities to make ad-hoc queries and
reports in the core functionalities of the database management system. Database systems are
widely used for data management in personnel management application systems.
31.4.2 Application layer

The following system types belong to the application layer: The personnel requirements
planning system is an application to determine future qualitative, quantitative, temporal and
local manpower needs. The staff assignment planning system is an application for short and
middle term adjustment of quantitative and qualitative personnel requirements with the
available workforce or the concrete assignment of personnel. This system is quasi a prime
example for decision-supporting systems in personnel management. The personnel
development planning system supports the systematic development of employees according
to their qualifications and interests and the requirements of the company. The personnel cost
planning system is an application for the support of personnel management in the prognosis
and analysis of personnel costs. The design, communication and administration of holistic
remuneration concepts are carried out with the help of the remuneration management system.
The online analytical processing system carries decision-oriented, multi-dimensional and
(dis-)aggregated data analyses out. The data mining system is used for the identification of
valid, still unknown, potentially useful and comprehensible patterns in data. The working
time management system electronically evaluates, plans and controls individual-related times
of presence and absence. The personal remuneration system is designed for an automated,
individual-related and work-related calculation of salaries and wages and further payment-
relevant factors e.g. travel expenses. The access management system is an application for
planning, managing, recording and controlling access by staff and third persons to individual
parts of the company. In order to execute and assess one or several standardized procedures
for the evaluation of the values of different performance and personality characteristics, there
is a test system. The supply management system helps with the facilitation of personnel. The
scenario system is an application for the purpose of self-diagnosis and training which
simulates a complex problem which is assigned to a test person and is meant to be solved
with regard to certain targets in the best possible way. The computer based training system
provides know-how through the facilitation of learning contents and the learning process
related support by learning users. In order to achieve a comprehensive, administrative and
didactical support of learning processes in the company, the learning management system is
used. Via the performance management system individual work performance of the
employees can be systematically managed. The enterprise resource planning system is a data
and function-integrated company-wide application for the support of central company
functions. It is used for procurement, production, financing, sales and personnel
management.
Between all these systems, the personnel assignment planning system is now analyzed with
regard to its structure, functionality and application areas in more details. The typical
structure is a strongly heterogeneous, sector-oriented group of personnel assignment

planning systems. The utilized data work with data on employees, requirements, shifts, shift
sequences and operation schedules. Within a personnel assignment planning system there
can be components for requirement planning, shift planning, employee assignment and
analysis and dispositions. The following Fig. illustrates the typical architecture of a
personnel assignment system. The requirements planning component is responsible for the
determination of the temporal, local, qualitative and quantitative staff requirements. It is
necessary for any assignment plan as input value. The shift planning component plans
individual shifts that cover the corresponding requirements. Once the requirements are
covered, the shift sequence planning is undertaken whereby the individual shifts in the
course of time are composed. The interim results are saved in corresponding files. The task
of the employee assignment component is to assign individual employees to the shift
sequences. The employees data are kept in an employee master file. In the assignment plan
data base the previously achieved results are finally saved. The analysis and disposition
component evaluates short-term manual changes in the issued assignment plans.
Personnel Assignment Planning System

User interface
Planning Component
Analysis
Require- Shift Employee and
Shift
ments sequences assignment Disposition
planning
planning planning planning Component
assignment
requirements shifts shift sequences employees
plans
requirement labor time

planning management
490
Fig. 31.1: Typical architecture of Personnel Assignment Planning Systems
Application areas are sectors and company areas characterized by short-term fluctuations and
requirements with need of timely fulfillment. These are for example commerce, hotels and
restaurants, guard services, transport and traffic and emergency services in the public are and
industrial fabrication. Around one quarter of the German companies use personnel
assignment planning systems.491
490
491
31.4.3 Presentation and Integration Systems

The business process management system is an application for the design, execution and
management for business processes over several application systems and users. The gateway
system is a platform where all necessary applications, information and interactions are made
available to the internal and external users in a personalized and requirement-adjusted way.
In order to connect the telephones as end user equipment with the application systems, the
voice response system is used. The service center system systematically supports specialized
organizational units for the network supported processing of administrative personnel
functions. The browser system makes the access, display and utilization of the services and
applications on internet servers possible.
A detailed description of a presentation and integration system is now carried out with the
help of a service center system. The structure generally contains a data keeping component
with service center agencies, a knowledge database and an access history. There is a
communication and process management and an analysis component. The data keeping
component receives the relevant data from the service center agencies. The communication
component combines different telecommunication services to a contact center and support
the communication between agents and the requesting persons. Through the process
management component the distribution and processing of the incoming request is managed.
The analysis component makes it possible to evaluate incoming requests and to handle them
and thereby to control the service center organization.
Service Center System
User interface
Telecommunication Process
Communication Analysis
Interface Management
Agents Knowledge Request

Database History
Application
systems
492
Fig. 31.2: Typical architecture of Service Center Systems
Furthermore, it has to be mentioned that there is the possibility of shared service centers.
There is a smooth transition to outsourcing: The services are not only offered to the own
company, but also to customer companies. Service center systems are useful for handling
administrative and personnel management tasks, the interaction between human resource
492
Source: Strohmeier 2008, p. 339
management and employees, supervisors and applicants. They are used to deal with the
proper requests, as information hotline and for reclamation management.
32 Conclusion
32.1 Opportunities
Modern IT solutions offer big opportunities to optimize the traditional, time and cost
consuming personnel management processes. A profound analysis and optimization of
personnel processes is indispensable for the successful and efficient utilization of
information systems in human resource area. By their introduction it is possible to offer
better personnel services at lower costs. Quicker administrative processes and the possibility
of quicker specialized trainings belong to the opportunities, too. Furthermore, the
information and communication are improved by use of internet and intranet.
32.2 Risks
However, the introduction implies certain risks as well. Different factors can be responsible
for this. E.g. problems can result from tensions between different factions in the company.
The employees who attribute high importance to their privacy are alienated and persons who
are not open-minded with regard to reforms and not willing to learn, show skepticism and
pessimism towards the introduction. The rationalization possibilities mean besides the
positive aspects for the company also negative aspects for individual employees, who are
afraid to lose their jobs and therefore take position against the introduction of an information
system.
A profound analysis and optimization of personnel processes is indispensable for the
successful and cost-efficient utilization of information systems in the human resource area.
Despite of the numerous advantages, a personnel information system remains only a tool in
order to be able to act in a better, quicker and more flexible way in human resource work.
Today, the introduction of a personnel information system can still offer large, strategic,
competitive advantages the introduction of an international personnel information system
will be unavoidable in future.
32 Conclusion 209
Literature
Jung, H.: Personalwirtschaft. 6. revised edition, Oldenbourg Wissenschaftsverlag GmbH,
Munich 2005.
Schmeisser, W. / Clermont, A.: Personalinformationssysteme und Personalcontrolling
Auf dem Weg zum Personalkosten-Management. Hermann Luchterhand Verlag,
Neuwird Kriftel (Taunus) 1999.
Schmeisser, W. / Grothe, J. / Hummel, Th. R.: Internationales Personalcontrolling und
internationale Personalinformationssysteme. Rainer Hampp Verlag, Munich and
Mering 2003.
Strohmeier, St.: Informationssysteme im Personalmanagement: Architektur Funktionalitt
Anwendung. Vieweg und Teubner Verlag, Wiesbaden 2008.
Wirtschaftslexikon24: URL:
http://www.wirtschaftslexikon24.net/d/informationssystem/informationssystem.htm
status: 2009.
IX International external personnel
recruitment and staff selection
33 Internet as medium of international

personnel recruitment
The use of the internet as way of recruitment of personnel has strongly increased since the
mid 1990s. According to a study of the University of Frankfurt on Main and the internet job
exchange Monster.de 91 percent of the 1,000 biggest companies located in Germany use
Electronic Recruiting by now.493
Similar trends were shown by a customer survey of the jobpilot AG in spring 2001 from
which could be understood that already at that time the internet was used as popular
recruiting instrument. 86 percent of the participating business clients (with less than 100 up
to more than 10.000 employees) reported the use of online job boards, while 71 percent used
print media and only 60 percent in-hose websites for the recruitment of staff (with the
possibility to give multiple answers).
The consequence was that most business customers increased their planned budget for the
online use from 22 to 39 percent until the year 2003 and reduced the budget in the print area
from 24 percent to 8 percent.494 See Fig. 33.1:
493
Comp. Holtbrgge, 2007, p.100
494
Comp. jobpilot AG, status: 04 June 2002
212 IX International external personnel recruitment and staff selection
Development of budget distribution for staff recruitment
Agencies/Third Parties 2003 8
Agencies / Third Parties 2001 4
Print 2003 39
Print 2001 22
Online 2003 11
Online 2001 6 in percent
Fig. 33.1: Budget distribution in staff recruitment495
34 Instruments of Electronic Recruitment

Electronic Recruiting (E-Recruiting) is when the applicant is approached directly via the
internet. While employment ads were formerly taken out in print media they are now
digitalized. While applicants formerly sent job applications to newspapers they can now be
published on the internet, and while formerly job application folders were prepared, now it is
online forms, emails or applicants web pages.496
Among the most important activities of E-Recruiting are:
job boards
human resources websites
Further possibilities to address applicants via the internet are:

virtual recruiting fairs,
online-recruiting games
newsgroups.497
495
Beck, 2002, p. 10
496
Comp. ibid, p. 17
497
Comp. Brake/Zimmer, 2002, p. 50
The advantages of e-recruiting are obvious. Via the system based selection it is possible to
save a considerable amount of time and money. It is not necessary any more to look at all
application documents received. All information needed on the applicants is available in a
standardized form and additional postal costs for sending application documents back do not
apply.498
Further advantages are the speed and availability of the internet, its timeliness as well as the
comfortable search and navigation function. Besides, a job offer which is published on the
internet can reach special international target groups and be seen for relatively little expenses
and independent from place and time by the applicants. Moreover, the internet offers the
possibility for applicants willing to change jobs to leave their profile anonymously.499
34.1 Internet job boards

Internet job boards are generally virtual platforms where employers offer positions to be
filled, but also job seekers can publish job applications. Without much effort the electronic
ad can be published at once and remains over weeks and sometimes even months on the
internet. A change of data is possible at any time and the ad can be removed with one click.
Graphic design of the ad is not needed and it is not necessary to take the rhythm of
publication of the print medium into consideration. The costs of an electronic ad are
relatively low.500 On the career website STEPSTONE the ad can be published from ca. EUR
600 for four weeks.
In comparison: the price of a print ad for example in the Frankfurter Allgemeine Zeitung
amounted to up to EUR 10,000 for a one-time publication. With this comparison,
opportunity costs of job boards are quickly calculated.501
34.1.1 Advantages and disadvantages of internet job boards

The real advantage of electronic job centres emerged only after more than one year after the
start of the first job platform, by the matching process. Within this process it is possible to
automatically preselect the job offers and applicants with predefined search criteria by
comparing the criteria of the job offers with those of the job searches.502 Furthermore,
companies can place banner ads or direct links to their own websites on the job board or even
498
Comp. Brkermann/Pepels, 2002, p. 86
499
Comp. Holtbrgge, 2007, p. 102
500
501
502
Comp. Weideneder, 2001, p. 385
create an own area to publish their company profile on the website.503 The target is to inform
potential applicants and to create and maintain a company image.504
If a position has to be urgently filled, the ad on the internet job board can be useful, because
it addresses a broad international market, because online job boards can be read supra-
regionally and worldwide. It is an advantage that over the link to the company homepage the
applicant can obtain essential information on the advertising company and reflect on whether
the employee would be suitable. If an applicant posts a job search the company can look at it
anonymously. If a potential applicant is found, he will be contacted, without need of having
placed an ad.505
A disadvantage, on the other hand, is the flood of applications. Through the online-
presentation, applicants can be animated to quickly apply for the job. The lowering inhibition
thresholds animate also those applicants to send an application, whose requirements do not
correspond to the needs of the advertising company, which can be the case for a large share
of the incoming applications. This leads to high administration expenses, if no screening is
installed, because all incoming applications have to be dealt with.506
34.1.2 Providers of electronic job boards

The number of online job markets has strongly grown in the last years. Today there are
around 200 providers of electronic job boards on the market.507 In the mid 1995 the number
amounted only to five providers of job boards on the internet, e.g. the Federal Employment
Agency, diverse daily and weekly papers as well some internet job boards which were
mainly specialized on certain professional categories.508
The most popular online job markets can be found under the following internet addresses:
http://www.monster.de;
http://www.jobpilot.de;
http://www.stepstone.de;
http://jobware.de;
http://www.jobscout.de,;
http://www.berufsstart.de;
http://www.stellenanzeigen.de;
http://www.jobonline.de.509
503
Comp. Brkermann, 2007, p. 7779
504
Comp. Spickschen, 2005, p. 101
505
506
507
Comp. Karle, 2001, p. 18
508
509
This high number of providers of job markets makes it difficult for the companies to make a
decision for the right electronic job board. The job boards have recognized this problem. In
the past years so called career boards were born where more services are offered than by
normal job boards and which have therefore become complete providers for personnel
recruiting.510 They offer to compose and design job offers and take the administrative part in
connection with recruitment over, as well as the pre-selection of applicants if desired.511
34.1.3 Arrangement and structure of internet job offers

The content and the formal design of job offers on the internet are very similar to those of
printed ads and in many cases the same ads are used online and offline.512
In the selection of the appropriate job board besides the usual criteria like the general optical
impression and the navigation of the website, the following points are important:
regional relation and extent of the offer, quality of the offer,
user friendliness and application as well as low error rate and exactitude,
offer of additional services.513
However, one should not forget that job boards are meant to publish job offers, which cannot
replace personal contacts.514
34.2 Human-Resources-Websites
In the context of electronic staff recruitment, the company website or the HR-homepage
gains importance beside the job boards. The essential reason can be seen in the fact that
companies that want to recruit personnel want to avoid the job board interface knowingly or
unknowingly. The attractiveness of a company is mostly subjectively assessed and can lead
to a visit to the company homepage. Whether an employer is attractive depends on the
company image, the popularity, the experience of other acquaintances, the products and
services etc. A further possibility to attract the applicants consists in the preparation of
contents and design of the website.
510
Comp. Karle, 2001, p. 18
511
512
Comp. Spickschen, 2005, p. 99
513
Comp. Egle/Bens, 2004, p. 324326
514
In the paper age the possibilities to present oneself as employer were very limited. In the
internet on the other hand, there is the possibility to obtain overall information without
problems, including HR-offers and activities.515
An optimally designed HR website consists of the following four contemplation elements:
Following Herzbergs motivation theory, the formal requirements to a HR website could be
referred to as hygiene factors. This means that the fulfillment of all requirement does not
forcibly lead to the success of the homepage, the non-fulfillment, however, leads to its failure
at once. The access to the homepage of a company has generally to be intuitively possible.
The homepage must be accessible by entering a simple publicly known name. An example is
the Badische Anilin und Soda Fabrik. Instead of this name the internet address
www.basf.com is used. In order to make sure that the homepage is internationally available it
should be accessible with pure .de or .com addresses in equal shares. In this context the
homepage should offer the possibility of seeing the page in different languages. Furthermore,
the layout has to support the recognition value of the presenting company by the use of a
corporate design. The formal requirements of a HR-homepage also include a user-friendly
navigation, the possibility of direct contact by providing an email address and name of
contact persons as well as the guarantee of timeliness and data protection.516
The basic elements are all functionalities, services and information which are mandatory for
the process of personnel recruiting without regard to sector and company size and which the
job seekers expect nowadays.
These are the address of the target group, job offers, information with regard to job offers,
company related information and the possibility to send an application.517
A target group specific address is only possible if it is known who visits the HR-page on the
internet. By direct interviewing on the page this knowledge can be gained, which makes it
possible to address the target group in accordance with motivation for a job and degree of
qualification. For example, the address could be under the heading: pupils and apprentices,
students, university graduates and professionals.518
Additional elements on the other hand contain functionalities, services and information
which give indirect support to the process of staff recruiting, clarify company HR activities
and increase transparency. Among those are the following elements: the possibility of
unsolicited applications, the HR-info-base, the personnel development as well as
personalization.519
515
Comp. Beck, 2002, p. 168
516
Comp. ibid, p. 169174
517
Comp. Beck, 2002, p. 175
518
519
Comp. Beck, 2002, p. 192193
Service elements of HR sites contain information which exceeds the personal recruiting.
This information has to underline the attractiveness of a company, accelerate interaction and
communication with the company and/or provide additional benefits520 and awaken the
users interest for further visits. Crazy Chicken, a computer game, which was available for
download on the company website of Jonny-Walker was one of the most spectacular actions
in this area and a reference with regard to individuality and creativity. Self-assessment,
surveys, application tips, screensavers or competitions already belong to the classic
additional offers.521
34.3 Virtual recruiting fairs

Under http://www.jobfair24.de it is possible to visit a job fair at home without paying entry
fees. The leading online job fair of the Federal Republic as it claims itself can be found
under this internet address. On the monthly dates of fairs graduates, diplomats, career starters
and prospective trainees can have a look around the virtual fair halls with their virtual Ego
and gather information on possible future employers or very generally on different career
options. All information is available on one mouse-click.
At the virtual stands the personnel managers are live available for discussions and questions.
It is possible for several persons at once to take part in the discussions, if however the
discussion should become more intense. the recruiter and the job seeker can continue the talk
in confidence in a private chat. The ideal case after a discussion in an individual chat would
be that the applicant hands a digital application file to the discussion partner or even receives
an invitation for a personal job interview.522
The advantage is that companies can directly compare the applicants qualification with their
own profile of requirements for the vacancy. Furthermore, all virtual application files have
an identical basic pattern, which simplifies the comparability of the applicants, but is to the
disadvantage of individuality.523
In addition to the fair dates, topic or sector specific company chats are offered several times
per month. Furthermore, expert chats take place where help for application questions is
offered. The virtual recruiting fairs are situated quasi in the niche between real recruiting
fairs and internet job boards. Almost all sectors are represented on such fairs, but above all
automobile, IT and telecommunication, transport and logistics. But also humanists and social
scientists as well as legal practitioners have good chances on these online fairs. Among the
520
Comp. ibid, p. 200
521
522
Comp. Brink et al., 2008, p. 285286
523
participating companies are e.g. Bertelsmann, Allianz, Siemens, Porsche, Daimler AG as

well as Chrysler Deutschland.524
The multimedia effort to be present on a virtual fair is relatively high but is willingly
accepted by the participants. The price of a company presentation depends on the desired
communication tool. The preparation of a virtual 3D-stand with a run-time of six months
costs as package with Jobfair24 around 12,000EUR.525 The platform was presented on the
CEBIT 2000 for the first time and purchased by the Klaus Resch Verlag at the end of 2003
and integrated into the job starter network (www.berufsstart.de).526
34.4 Online recruiting games
34.4.1 Definition
It is uncertain whether it was the realization that personnel will have higher significance in
the company in future or only the possibilities which the medium internet provides to
distinguish oneself from the competitors which lead to a new innovative recruiting
instrument. It is still a fact that the search for new forms of personnel recruiting has
developed an innovative recruiting instrument which is defined as follows:
Online games are a web-based link between assessment center elements and their
imbedding in a game context for a target-oriented recruitment, with the possibility of
documentation and matching of performance results (Hard and Soft Skills) as well as the
option of automated applicant screening and ranking for the support and backup of the
selection decision.527
34.4.2 Siemens Challenge Unlimited

With the online-game Challenge Unlimited in the year 2000 Siemens went a new way of
e-recruiting for the first time. Students and career starter could get into contact by means of a
game. On their journey to Nouvopolis, a city in the future, the players had to survive many
adventures and to solve the problems of a city in the outer space. Partially on their own or in
a team, the players were exposed to different dangers and had to protect the city from
threatening meteorites etc.528
524
525
526
527
Beck, 2002, p. 212
528
New ways of addressing target groups via the internet in combination with a procedure for
pre-selection were meant to be tested with this product. This instrument linked a high-
performance online assessment with a fascinating and attractive online-game and took
around between three and four hours. In the course of the play time the participants
elaborated their competence profile. This reflected the achieved results of the test against the
background that the online game is a recruiting instrument for Siemens. Almost 13,000
players took part within the game time on the internet and more than 10,000 participants
released their profiles for examination.529
34.4.3 Possible limitations to online games

Besides the opportunities as the increase of the degree of familiarity, the possibility to
improve the company image, as well as time and cost saving in the automated applicant pre-
selection, there are certain limitation of the utilization of online games.530
The first limitation is the medium internet itself. The use of the internet as recruitment
platform is not accepted by all applicants or companies. The second limit is the data security
and data protection. The users often fear that transferred data could be misused in the internet
or get lost. Besides, there is the fear of viruses, which exists in many companies despite
firewall solutions and antivirus protection programs. A further limitation is the appearing
capacity problems. Bottlenecks can emerge when many players access the game at the same
time, e.g. when the game is new on the internet. Besides, there is the problem of authenticity
of the player. There is not yet a guarantee that the solved tasks were really solved by the
registered person. Furthermore, the soft skills, e.g. on social competences can not be reliably
assessed via this medium. However, one should not forget that the development of online
games is still in its infancy and the above mentioned limitations with the exception of the last
point can be overcome in further developments.531
34.5 Newsgroups
In comparison with 3D-fairs or online recruiting games newsgups may seem rather old-
fashioned. Newsgroups are meant for the exchange of information on certain topics in open
groups. The notice board, where one could write or read notices, served as basic idea for
newsgroups. Because there is a big number of newsgroups, they are divided into topics.
Moreover, there is the possibility to search for keywords in the newsgroups, as Deja
(www.dejanews.com). Generally it is free of charge to post an ad. The disadvantage is that
there is no possibility for graphic design, company logos or other optical effects. The ads are
529
Comp. ibid, p. 213
530
Comp. Beck, 2002, p. 225
531
only published in text format. A corresponding link to the company website should not be
forgotten in any case. The danger that an ad is overlooked is quite high given the amount of
ads looking just the same. Among the most important German newsgroups are:
de.markt.arbeit.angebote,
de.markt.arbeit.gesuche,
de.markt.arbeit.de,
at.jobs und euro.jobs.532
In order to access one of the above mentioned newsgroups the user has to enter the
corresponding news-server with address in his browser. An alternative way of research is
possible under http://www.deja.com. Here it is possible to publish a notice in the newsgroups
without charge. In this context one may often find ads which are not directly linked to the
topic. Whether this form of employee recruiting is still interesting depends on the one hand
on the spread of job boards on the electronic applicant data bases and their price on the other
hand.533
34.6 Risks and opportunities of e-recruiting
34.6.1 Opportunities
Via the use of the internet, considerable amounts of time and costs can be saved. This
aspect can become the decisive factor in the fight for so called high potentials.534 The
internal processing and forwarding of application on a digital way is made much easier. The
processing processes are shortened which again improves the application process. With the
online presence companies can also contribute to the improvement of their company image.
Information is available at all times and by the timely transmission it can be assumed that
data are up-to-date. The internet as only medium can be used for worldwide personnel
recruiting without limits. Currently, there is a strong need for specialized workers in
Germany and especially for this reason an internet presence is crucial for internationally
active companies. Furthermore, a creative design and additional benefits for the user on the
company homepage can be a sign of capacity for innovation of the company. This effect,
however, could decrease with the growing establishment of the internet and the rising offer
of additional benefits. The simplified possibility to reach applicants via the internet is far
better as in print media. This aspect is certainly very important, because the probability to
find the best possible candidate for a vacancy increases with the number of applicants.
532
533
Comp. ibid, p. 56
534
Preuss/Knoll, 2001, p. 130
34.6.2 Risks
The personnel recruitment via internet does not only bring opportunities but also some risks.
A stable company security is condition for a communication without barriers between the
user and the company: Applicants who suffer a technical crash when accessing a company
homepage or when filling in a time-intense application form will certainly not return to the
company website too soon.535
The big question regarding security when transferring personal data concerns most users of
the world wide web (www). A company in which an online application is possible has to
provide for absolute security for data transfer and to make the access for unauthorized
persons impossible. The user is flooded with information in a continuously rising amount of
offers. In order to limit them and to guarantee an efficient use of job offers, a user-friendly
navigation has to be available. Table 35.1 presents opportunities and risks of e-recruiting
again in catchwords:
Opportunities risks
o Potential to save costs o Company security
o Potential to save time o Data security
o Stabilization of image o Information flood
o Worldwide recruiting o Identification in the staff selection
o Timeliness procedures
o Communication of capacity for innovation o Pressure for quick processing
o Broad range of contacts
o Neutrality in personnel selection
o Unlimited timely utilization
Table. 34.1: Risks and opportunities of e-recruiting536
Especially the risks have to be considered in online staff recruiting and have to be integrated
in the recruitment strategy. However, with the rapidly growing development of
communication and information technologies a reduction of risks can be assumed in the long
run. The opportunities offered via personnel recruitment on the internet should be used
because there will be enormous progresses in this area.537
535
Dix/Witrahm, 2001, p. 444
536
Brckermann/Pepels, 2002, p. 94
537
Comp. ibid, p. 9394
35 Scouting
In specialized literature there is no fix definition of the term scouting . Scouting rather
combines methods of personnel recruiting in such a way which allows the use of the
proactive character of addressing the applicants at an early stage and which is different to the
traditional recruitment methods through newspaper ads and recruitment consultants.538 In
any case scouting is about the recruitment of career starters. Scouting is directed towards a
special and important target group which is students and job starters and especially high
potentials. The focus of scouting activities lies on graduate-oriented measures and university
presence.539
35.1 Scouting through university presence

The target of university presence is to distinguish the company especially for career starters
as attractive partner with unique profile on the job market on the long run. The chosen
terminology of university presence shall comprehend all measures to implement an active
service and communication policy with regard to chairs, universities and students. The
following paragraphs shall describe several recommendations for the success of scouting at
universities more closely.540
35.1.1 Concentration on selected disciplines and universities

One way is to focus selected disciplines and universities at a high specialist level and strong
practical relevance. The so called key universities should be capable to form career starters
who can be used for multiple areas and are prepared to adjust to new situations and who can
always deal with new problems.541
35.1.2 Personalization and differentiation of offers

The next step is the personalization, i.e. the determination of certain key partners at the
university. The first contact partners should be the chairs or deans, because they are very
stable staff members. Also contacts with student groups and student councils are important.
538
Brckermann/Pepels, 2002, p. 135, own translation.
539
Comp. ibid, p. 120
540
Comp. ibid, p. 122
541
Comp. Eisele/Horender, 1999, p. 29
35 Scouting 223
Because of the higher turnover, these contacts have generally to be renewed each semester. It
is always recommendable to use a continuously created and maintained data basis.
It is possible to distinguish two groups of contact partners at universities in the context of
scouting via university presence: on the one hand professors, chairs and employees and on
the other hand students themselves. The group of professors, chairs and employees serve as
contact partners especially for lesson-related activities and offers for indirect scouting.
Among these offers are offers of working on topics of research and development in the
context of diploma and master theses, as well as dissertations but also by offering company
visitations, excursions and assigning assistant lecturers and instructors who offer
presentations and seminars. By such events often contacts with especially talented and
interested students are construed, which can then be intensified with the help of the following
measures:542
The group of students is the contact partners for direct scouting at university. The direct
scouting can be undertaken in a variety of ways. The offer of internships to students has to be
mentioned in this context. As in degree programs of some universities and in all universities
of applied science an internship is obligatory and the student is given the right to choose an
appropriate internship, companies can attract students and, thereby, also high potentials with
corresponding offers and information on internships and with the offer of special trainee
assistance. Very important is the support of student projects and initiatives. Initiatives as
AIESEC are mostly supported by highly talented and active students and can be supported
by sponsoring memberships and the offer of internships but also by means of fair
participation and ads. The involved students themselves are often very demanded in
recruitments.543
35.1.3 Use of multi-step programs

A further form of direct scouting is programs which are developed by students in several
steps. These are referred to as systematically structured scouting activities.544 A first
approach to be mentioned is a first contact with talented students in form of excursions
(partially in connection with case studies) with regard to an intense collaboration with
universities. This is followed by internships in the company and an intense after-care during
the time when the students do not work for the company. Also information on the
development of the company and on individual development possibilities within the
company, e.g. the offer to work on a certain topic in the thesis is given. With the career start
of the student the last phase is concluded.545
A further instrument of direct scouting is the participation in different cooperative programs.
Companies recruit students generally themselves and then send them to university courses. In
542
Comp. Brckermann/Pepels, 2002, p. 123
543
544
Brckermann/Pepels, 2002, p. 124
545
parallel, the students have a practical part of their studies in the company. Because it will be
more difficult in future to find enough qualified graduates, the participation in such
cooperation will gain momentum.546
35.2 Scouting via graduate-oriented measures

In order to cover a short-term recruiting need graduate-oriented measures are used. In this
case not the aspect of promotion and development is focused, but the interest in selection.547
The three most important instruments of graduate-oriented measures in this context are
graduate fairs, graduate workshops and on-campus recruiting.548
35.2.1 Graduate fairs

Graduate fairs has become a collective term for large informational events between one
and two days (frequently at university) with the target of informing graduates and students
close to graduation about their job entry and career possibilities, the right application
strategy, selection procedures of the companies etc.549
They can also be understood as market places where different companies present themselves
with their own stands to graduates and students. This gives students the possibility to meet
many potential employers and to gain additional information and to take part in the services
offered, e.g. discussions or specialized presentations, application trainings etc.
Because of the mass character of such events it is hardly possible to have a direct
communication or receive detailed information. The participation in a graduate fair often
targets more the improvement of the company image than the real recruiting purposes.550
With regard to the individual functions or sectors one can observe a stronger specialization
of todays graduate fairs. In this case the filling of certain positions is the main goal of the
fair. Already in the run-up phase of the fair the organizers make a preselection of the visitors
with help of the sent application documentation. In order to organize the processes during the
fair in the best possible way, job interview meetings are arranged by the company
beforehand. But problems can still arise, e.g. if the invited candidates do not comply with the
546
547
548
549
Bachelor und Master, status: 11 July 2009
550
Comp. Sunter, 2000, p. 42 et seq.
35 Scouting 225
assigned times or if the selection criteria for the participation in the fair were not exactly
defined.551
35.2.2 Graduate Workshops

Graduate workshops are company related events with exclusive character for a custom-fit
and tailor-made personnel recruiting.552 In the case of a graduate workshop, generally only
one company or only a small number of companies presents itself. The visitors are
preselected in correspondence with the individual requirements of the companies. The
workshops with a duration of between one and three days contain presentations, lectures as
well as an active participation of the visitors e.g. in case studies, scenarios and other tasks. It
is also possible to integrate additional framework programs to have a positive, long-lasting
influence on the value of the experience of such a workshop. The participants receive a
feedback at the end of the workshop. Organization and structure of the workshop are very
similar to assessment centers as method for staff selection.553
The organization and execution of such workshops can be carried out by the company itself
but also by an external service-provider. The Access AG is one of the most popular external
service-providers and carries out between 30 and 40 recruiting workshops per year.554 The
number of labor contracts concluded is seen as success criterion of graduate workshops from
the companys point of view, so that graduate workshop have established as quick recruiting
procedures.555
35.2.3 On-Campus-Recruiting
In the case of on-campus-recruiting companies present themselves on the premises of a
university with the goal to stimulate interesting applications of graduating students. In the
US On-Campus-Recruiting is an often used instrument of personnel recruiting; in Germany,
however, it is only rarely used. At the best US universities around 30 percent of the
graduates decide to start their career with a company with which they were in contact in the
context of on-campus-recruiting. Before the final examination phase the contact can also
have developed in an internship.556
551
552
553
Comp. ibid, p. 127
554
555
Comp. ibid, p. 127
556
Comp. ibid, p. 128
A German example of on-campus recruiting is the Job-Truck of the HypoVereinbank. The

Job-Truck was driven from university to university across Germany in the last years, in order
to contact students and present the company as modern and attractive employee.557
35.3 Future perspectives of Scouting

The demographic development in Germany makes clear that in a few years the number of
high-potentials will strongly decrease. The simplification of the distribution of Green-Cards
and the long-term promotion of the inclination to study are factors which can attenuate the
situation but cannot stop the process. As soon as the number of highly qualified staff
decreases the competition around them increases. One can therefore assume that the
company presence at universities will rise in the next years. This leads to a further
differentiation of existing scouting strategies and the development of new ones, in order to
reach a monopoly or at least positioning advantages. On the one hand, it is possible to offer
more service-oriented support to students in form of provision of scientific data and
information as well as literatures. On the other hand there is the possibility to show more
interest in the participation in cooperations in university programs.558
In the context of university-related scouting special attention should be paid to female
students who had been integrated in all marketing activities in the university area, but are
rarely taken into consideration and activated with regard to their own special potential.
Companies can also become more attractive via participation in alumni initiatives of the
university, which does not exactly support the search for career starters but the one of
experienced graduates. Nowadays the term alumni refers to university graduates who still
have contact to their university and their former fellow students.
36 Personnel leasing
A further modern external way of staff provision is personnel leasing. . This type of staff
provision is very different to the already mentioned ways of personnel recruiting. In this
form, the personnel seeking company acts as client. The client is referred to as lessee and
contacts the lesser. The lesser lends a workforce to the lessee against a fee for a limited
period of time. The legislator refers to this type of contract as temporary employment.
Personnel leasing is also called temp-work or freelance work. The Act on Personnel Lease
557
558
36 Personnel leasing 227
requires that temporary work Agencies dispose over a license and the authorization by the
Federal Employment Agency.559
Fig. 36.1 displays the economic and legal relations of the parties involved.
Temporary
worker
Labor contract Work instructions
Right to give workforce

instruction and
labor remuneration
lesser Agency fee lessee
Employee leasing agreement
Fig. 36.1: personnel leasing560
There is a labor contract between the temporary worker and the lesser. There are no special
regulations for this contract. All special regulations including the limitation possibilities
which generally exist for all labor relations apply. Within this working relation the usual
labor law, social law and tax law conditions are valid. The temporary worker receives the
agreed remuneration from the lesser who deducts the taxes and social contributions due. In
accordance with sections 3 and 9 of the Act on Labor Lease
(Arbeitnehmerberlassungsgesetz) the lesser has to send the permanent worker for the
leasing time under the individual labor conditions to the leasing company, which applies
especially to the labor remuneration of the work exercised. Because in quickly growing
companies in different sectors this is partially hard to put in practice, the legislator offers a
solution to the problem. If the lesser enters as member in an employer association which has
concluded a collective agreement with the unions in charge with regard to personnel leasing,
the conditions fixed in the collective agreement will apply.
The lesser is the one who can give instructions to the temporary worker. In the agency, the
temporary worker has a right to vote and can be elected to the labor council. Additionally,
the temporary worker, as soon as he comes of age and is assigned to the lessee for more than
559
Comp. Brckermann, 2007, p. 89
560
Brckermann, 2007, p. 89
three months, has a right to participate in the company labor council elections in accordance
with sec. 7 of the Industrial Constitutional Law.
The lessee has to pay attention that the lesser fulfills its duties with regard to payment of
social insurances. If it does not fulfill the payment duties, the lessee has the duties of a
primary obligor. For this reason, the lesser has to inform the health insurance in charge on
each personnel leasing. The company labor council of the lessee has a right of co-
determination, if a temporary worker is to be assigned to a job.
There is no labor relation between the temporary worker and the lesser. The temporary
worker provides his workforce to the lessee and the lessee gives instructions.
In this triangular relation, there is an employee leasing contract between the lesser and the
lessee through which the lessee is obliged to pay the agreed leasing fee and the lesser to
provide the agreed personnel.561
At the end of 2002, 4,261 companies were predominantly or exclusively active in the area of
temporary work leasing in Germany. Almost 320,000 employees were sent to other
companies on the annual average.562 Randstad Deutschland GmbH & Co. KG, which
belongs to the Dutch Randstad Holding, is one of the largest temporary work agencies
worldwide and has been active in Germany for 40 years. With around 700,000 employees
and total revenues of EUR 17.2 billion (2008) Randstad is active in more than 50
countries.563
The most important advantage of personnel leasing is that employees can be obtained at
short notice. Temporary workers are particularly used for writing work in the administrative
area or as craftsmen, assemblers and technicians in the corporate area. The personnel leasing
offers the possibility to cover short-time work peaks and to replace own personnel in the case
of illness, holiday etc.564 Another positive aspect of personnel leasing is that no costs for
personnel recruiting or for job adjustment arise. Furthermore, the lessee has no employment
risk. He can quickly release the temporary worker even without stating reasons.
Considering all these advantages, the disadvantages shall not be forgotten. Because their
activity is limited in time, the temporary workers often feel like second class employees.
Social problem and the high time consumption to transmit company specific knowledge are
the other side of the coin.565
561
562
563
Comp. Randstad, status: 01 July 2009
564
Comp. Jung, 2008, p. 145
565
37 Personnel selection process

The goal of personnel selection, the second partial phase or task of personnel
recruitment,566 is to find the most appropriate applicant on the labor market in the company
or outside the company to fill in a vacancy. Once, staff is employed, it is often very difficult
to dismiss them. Therefore, it is in the companys interest to have high entrance barriers for
the applicants via a strict selection.567 The key phrase the right man for the right
workplace568 is most appropriate to describe the object of personnel selection. In order to
find this employee, different, systematical processes were developed in the context of staff
selection. Among this procedures are rather classical procedures as analysis of written
application files, execution of tests and job interviews.569
The labor council has a co-determination right in the staff selection in accordance with s. 95
subs. 2 Work Council Constitution Act (BetrVG). This means that the selection criteria a
company has established need the labor councils consent. If a company employs more than
1,000 employees the works council can also demand for selection criteria to be
established.570
37.1 Selection process in form of a personnel

selection chain
The comprehensive selection process can be displayed with the help of a personnel selection
chain: the determination of the present and estimated future requirements, which depart from
a very good until acceptable fulfillment of the labor tasks are the point of departure. The
thereby determined requirements should be overcome with a corresponding qualification of
the applicants in question. This is ensured via a pre-selection with the help of the underlying
application. It will then be tried to determine the qualification of the applicant with diverse,
sometimes simultaneously applied procedures. Finally, an overall assessment is
undertaken.571 See Fig. 37.1:
566
567
Comp. Jung, 2008, p. 153
568
Manke, 2008, p. 8, own translation
569
570
Comp. Olfert, 2008, p. 131
571
Comp. Berthel/Becker, 2007, p. 262264
Applicant Assessment
Discussion and Analysis Job interviews, Overall assessment,
determination of and test procedures, comparison,
requirements with assessment assessment selection
regard to of center, biografic
qualification application questionnaires
documents
Connection to Preselection Simultaneous/succe Possibly in different

staff recruiting ssive use of phases
instruments
Fig. 37.1: Personnel selection chain572
In the best case, after the complete assessment procedure a test result from which can be
deducted to which degree the applicant fulfills the job requirements is received. It has to be
mentioned that without exact requirement profiles of the individual jobs no target-oriented
examination of the qualification is possible.
Against this background, it is necessary in practice to overcome a multitude of difficulties in
personnel selection, which result from the following factors:
There are always multiple requirement categories:
1. Can criterion: aptitude (mental as well as physical abilities, knowledge, personality

characteristics as e.g. concentration capability and persistence) or work experience.
2. Want criterion: desired personal goals in professional life and expectancies in connection
with work.573
There are multiple sources that show to which extent it is necessary to fulfill the
requirement categories, e.g.:
1. the future labor tasks of the applicant,

2. the labor processes and tools contributing to the fulfillment of the tasks (e.g. certain IT-
equipment) as well as
572
Ibid, p. 264
573
Comp. ibid, p. 264
3. the company internal (e.g. supervisors, colleagues) and the company external labor
environment (e.g. employees of certain customer businesses or suppliers) with which the
employee needs to be in contact.574
It can be tried via multiple procedures to determine the actual qualification of the
applicants:
1. analysis and assessment of application documents,

2. questioning in form of (job) interviews,
3. expertise,
4. tests,
5. observations,
6. in the case of internal job applicants: e.g. the results of performance assessment from
former times as well as,
7. in the case of external job applicants: observations of behavior, test work.575
The problem is that all procedures for personnel selection lead to results concerning several
types and partially categories of requirements. In order to be able to make a decision on the
qualification of the applicant, the results of the examination of the qualification are attributes
to the different requirement types in such a way that a conclusion can be drawn to which
degree each is fulfilled. The main problem is that the determination of the applicants
qualification is rather an evaluation. The better the assessment is with regard to its
verifiability and interpersonal comprehensibility, the closer it gets to the ideal of
objectivity.576
37.2 Selection procedures in internal and external

applications
The personnel selection of internal applicants turns its attention not only on the
application, but especially on already available data, e.g. from personnel assessment and the
performance in former or actual positions in the company. A comprehensive personnel
assessment systematically evaluates the performance and personality characteristics of the
employee. The data available in the human resource area are entered in the context of
personnel development. The advantage is that information on the applicant is already
available and the information basis is larger than in case of external applicants.
574
Comp. Berthel/Becker, 2007, p. 264
575
Comp. ibid, p. 256
576
The selection of external applicants is especially based on the analysis of application

documents, however these documents might have been obtained. Only afterwards, further
procedures come into consideration. In practice, the continuative instruments are used
alternatively or in combination. Among the procedures and instruments of external personnel
selection is for example the analysis of application documents, the job interview, tests
(performance, intelligence as well as personality tests), and graphological expertise. The
assessment center is a combination of most of these procedures,577 see Fig. 37.2.
Instruments of personnel selection
Analysis and Job interview Tests Assessment center

assessment of
application
material
o Analysis of o Aanalysis of o Intelligence test o Intray exercise

application behavior of o Performance o Group
letter expression and capacity discussions
o Analysis of CV o Analysis of tests o Roleplays
o Verification of performance o ... o Presentation
referees behavior o ...
o Graphological o Analysis of
expertise social behavior
o Analysis of o ...
biographic
questionnaire
o Analysis of test
work
o ...
Fig. 37.2: Instruments of personnel selection578
Many companies still use only the analysis of application documents and job interviews.
Assessment centers are often used for the selection of national and international managers.
577
578
Following Berthel/Becker, 2007, p. 266
Among the mostly frequently used selection procedures in Germany are:

analysis of application material (almost 100 percent),
job interviews (about 98 percent),
diverse tests: IQ, behavior, personality, performance or mixed forms,
assessment center (increasingly)
referees and graphological expertise (max. 2 percent to 5 percent, decreasing).579
37.3 Process of external selection of personnel

Internal as well as external applicants come into consideration for the selection of personnel.
Even if more information is available on internal applicants, they go through similar
selection processes especially in large companies.
In following scheme the necessary steps and the time requirements of a selection
procedure are only presented for external applicants because of the similarity of the
procedures. See Fig. 37.3.
Through the necessary correspondence in the selection process there can be large time
intervals between the individual steps. The time requirement depends on how many
candidates are asked to come to the interviews. If 20 applicants take part, a time requirement
of about three days should be estimated.
It is important that the works council is always officially informed if the company wants to
employ a new employee. In accordance with section 99 subs. 2, 3 BetrVG it can deny its
consent to an intended employment.580
579
Beska-Bewerbungsservice, status: 22 July 2009
580
Comp. Blank et al., 2009, p. 142
Receipt of application material
- Letter of confirmation to applicant

- Collection and processing of documents
1st Preselection
- Letter of rejection to inappropriate candidates

- Invitation letter to appropriate candidate
Selection process (e.g. Assessment-Center)
- Evaluation of results
2nd preselection

- Invitation to short-listed candidates
Additional selection
zustzliche procedures(z.B.
Auswahlverfahren (e.g.zweite
second interview round)
Gesprchsrunde)
- Evaluation of further process results
Selection decision

- Information to work council
- Acceptance letter to appropriate candidates
- Preparation of labor contract
- Obtain signature for labor contract
- Preparation of personnel master data
Commencement of employment
Fig. 37.3: Course of external selection of personnel581
581
Blank et al., 2009, p. 142
38 External procedures of selection

of personnel and instruments
38.1 Electronic applicant data administration

workflow management
The conventional applications in paper form often need a long time to circulate in the
company. In bigger companies it can partially take days or even weeks until the responsible
employee receives the application. If it is possible to dispose over an application in digital
form, the access to it is simplified and above all accelerated. As soon as an application is
deposited on the company server, it is possible to access it within few seconds. However, the
following question arises: How does the application get on the company server? At first, the
company has to decide whether it wants to use a combination of electronic management and
paper form or pure electronic applicant data management. It has to be observed that some
applicants (especially the older generation) will still apply in the traditional way in the next
years. If the procedure is limited to pure online applications, a large circle of applicants is
excluded. If applications sent by mail are accepted anyway, the data have to be prepared
manually or per scan for the system to allow electronical management. At a first glance it
seems to be easy to process digital data. But many different programs and systems often
make the access to these data complicated. For example, several problems can arise in email
applications; however, standardized contact forms can help to solve them.582
The applicant management via special software is less problematic. SAP/HR, Peoplesoft or
BEWERBIS are popular programs. With the help of these programs correspondence,
adjournments of appointments, travel expense accounting, labor contract composition and
many other activities in the workflow are possible.583 With the help of the workflow
management the recruiter can distribute and forward the sighted CVs with or without
comments. The workflow management is therefore an instrument which supports the
individual steps in whole work process, beginning with receipt of the application up to the
formulation of the labor contract.584
582
583
Comp. ibid, p. 58
584
Comp. Beck, 2002, p. 149
38.2 Online application

Keeping in mind to which extent internet has established itself as procurement method, it is
no surprise that the possibility of online applications becomes more and more popular
(especially among the applicants).
Against the background of a steadily increasing cost pressure and competition for well
trained and qualified employees, companies are more and more prepared to accept electronic
applications.
Online applications, depending on how detailed they are, receive diverse feedback from the
human resource department. Anyway, human resource managers still like complete written
application files.585
Especially in case of job offers on the internet, applicants are often asked to hand in online or
internet applications. In order to be able to apply, applicants sometimes have to go through
an online assessment with internet-based exercises or test procedures or have to fill in forms
for the determination of their aptitude, i.e. a type of questionnaire. Personnel managers or
corresponding software compare the qualifications stated by the applicant with the
requirement profile of the vacancy. If there is no analogy, the possible candidate will not be
allowed to apply at all.586
38.2.1 Possibilities of online application

First of all there is the brief application which is received by the company via email. It
should contain a traditional application letter and a short presentation of the applicants
profile.587 This form of application meets little acceptance in companies, because the care
leaves often a lot to be desired and important information on professional and personal
background of the applicant are missing.
Another point of critique is that often general formulations are used, which bears the danger
that the applicant might send a mass circular which again could lead to the disappearance of
inexact applications in the flood of information.
E-mail applications with CV are a little more popular. Thus, the personnel seeking company
can obtain a first impression of the personal and professional background of the applicant.
However, this form of application does still not contain all documents which are usually
comprised in a written application.588
585
586
587
Comp. Olfert, 2008, p. 129
588
In an email application with attachment the application material is sent as attachment (e.g.
text file with CV or scanned certificates). Reason for criticism is the danger to transfer
viruses or problems when opening the attachments. This form of online application,
however, is the most popular one in companies and has nowadays the same significance as
written applications. Therefore, the same assessment criteria apply for both application
forms.589
Besides, there is the possibility of an own website or application website to which the
applicant can refer in an email or written job application letter. This page is mostly created
by the job seeking person himself and serves to present his own person. In most cases,
however, it is not designed in a position-specific way.590
38.2.2 Default in online applications

Several disadvantages in connection with online applications need to be mentioned:
Because of technical problems attachments of an email application cannot be opened or
contain viruses.
Often online applications contain insufficient information on the applicant and are
quickly excluded from the application process.
Online applications and offered position do not match.
The speed of the internet leads the applicant to neglect the care with which a written
application is created.591
Because of the named problems many companies develop and use so-called online
application forms. These structured and standardized forms are positioned on online job
boards or the company website as a link in order to receive all important information about
an applicant which is necessary for an application. This way an equal treatment of any
applicant who has applied in writing is ensured and the same assessment is possible.592 A
further advantage is that the statements made are compatible with the system to 100 percent.
Unfortunately, the force of expression and the individuality of the applicant are lost this
way.593
589
Comp. Olfert, 2008, p. 130 and Brckermann/Pepels, 2002, p. 217
590
591
592
593
38.3 Telephone interview

Telephone interviews are seen as modern and personal procedures of staff selection. It is
generally used before a possible job interview or other instruments of staff selection to
examine language knowledge. The aim of the telephone interview is to make a selection
between the potential candidates for efficiency reasons and to obtain further information if
necessary.594
The content of the conversation is similar to the one in a job interview. This kind of
interview, however, is rather shorter.595 If the ideas of the company do not match the
applicant and if a realistic solution cannot be expected, the application process can be
stopped at this point. This has the advantage that the following cost and time-intense
selection procedures can be left out.596
Well aimed questions of the interviewer and his capacity to lead a professional telephone
interview are decisive for the success of such calls. It would be fatal, if a strong candidate
was excluded because of a badly organized telephone interview. In order to secure the
quality of the phone interview, a telephone training of the appointed interviewer is a must-
have.597
38.4 Digital interview

After the analysis of application material and the selection of the eligible applicants usually a
job interview is carried out. This step can today be digitally supported; however, the degree
of utilization and acceptance is still expandable.
In order to carry out a digital interview, technical conditions, i.e. a web-cam, PC-equipment
and high-performance transmission capacities must be available to the recruiters and
applicants. Furthermore, both sides must have the point of view that the chosen medium is an
appropriate instrument.
The recruiter must be completely convinced to be able to take an employment decision with
this kind of media utilization and a full renouncement to personal contact. Against this
background the question arises to which extent things can be evaluated in a digital interview
which are important in a personal, private conversion.
Certainly, the digital interview reduces the travel expenses of personal job interviews, but the
practicality of the use of this instrument is still at least questionable. Today it is imaginable
594
595
596
597
that interviews serve as preselection for the completion of application material. It can be
concluded that digital interviews still have rather the status of a phone interview and not the
one of a selection or job interview.598
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Martin Meidenbauer 2006.
X Company culture and country
culture
The term Company Culture contains cultural values in form of company specific basis
convictions, imagination and orientation patterns that coin the behavior of and relations
between company members. In specialized literature, company culture is also referred to as
organizational culture. In the context of increasing pressure of competition and in the process
of globalization it becomes more and more important to look into the concept of company
culture. On the one hand, company culture can be a decisive competitive advantage on
national and international markets, with which companies can distinguish themselves from
the competitors and improve their own image. A strong company culture can help to improve
labor structures, motivate employees and contribute to efficient work within the organization,
and finally it makes a positive contribution to the company growth and its success. On the
other hand, an internationally active company which has subsidiaries abroad or starts a
subsidiary with a multinational company automatically needs to deal with its company
culture. The formation of Joint Ventures steadily increased in the context of growing
globalization and today confronts companies with big challenges, because a joint
organization-culture framework has to be found.599 This means that the company has to
decide whether to follow the concept of worldwide standardization with a uniform
presentation of the company to the outside or of local differentiation.600
The company culture shall create circumstances for the best possible conditions for the
viability of the system company 601 or to exist as competitive dimension on the national and
international market.
Jones and Bouncken understand company culture as system of joint values and rules, the
relation of the organization members between each other, as well as interactions with
external partners.602 The company culture shall give a common understanding to the
organization members or employees on how to react to certain situations. Certain norms,
standards, work instructions and rituals embody thereby joint basic convictions, values and
ideals in the company. The company culture reflects the moral concepts of the management
599
Sackmann, 2002, p. XIII, own translation
600
Comp. Welge/Holtbrgge, 2003, p. 190
601
Sackmann, 2002, p. XIII
602
Jones/Bouncken, 2008, p. 408, own translation
244 X Company culture and country culture
as well as the behavior to each other and to employees and external partners. The goal of
company culture is to coordinate company targets, employee satisfaction and customer
orientation and to achieve a competitive advantage over the competitors and to increase
company effectiveness.603
In certain situations it becomes necessary for the company to question the existing culture, to
analyze it and to change it, if necessary, or to set priorities. The reasons can be in the external
sphere, the company environment or the internal sphere, i.e. in the company itself.604 Now,
some of these situations will be described.
39 Factors in the company environment
39.1 Economic factors

Increasing internationalization/globalization: By opening up new markets abroad, the
international competitive pressure in some sectors rises. The company needs to create a
strong company culture as competitive advantage which is hard to copy.
Strategic alliances/mergers: these find their reason in the global presence (propagation of the
image), enlargement of the own product portfolio (creation of new market segments) and the
creation of a competitive dimension (higher market share) and serve to maintain the
competitive capacity. A joint culture has to be created.
Technological progress: new technologies as the internet access demand for new sales
channels. The company should adjust its culture to the new developments.
39.2 Socio-cultural values

Moral values: One can distinguish moral values of customers and of employees. The moral
values of customers have an influence on their needs, desires and interest in certain products.
The moral values of potential employees have an influence on their expectations towards the
company culture and thus, on the selection of the future employers. Through a diversity of
values with high expectations, the company should create a culture which awakens the
interest of customers and potential employees.
603
bpb, status: 13 June 2009, 16:15h
604
Comp. Sackmann, 2002, p. 11 et seq.
40 Company-internal factors 245
Demographic developments: The decreasing birth rate causes a low availability/number of

highly qualified employees especially in the area of IT and engineering. Companies compete
for these potential employees and should try to get their attention via company culture and to
win persons with high know-how over.
40 Company-internal factors
Strong company growth: In case of strong company growth the former company culture and
the internal company environment should be maintained and communicated to new
employees. Typical growth sectors are currently the IT and communication sector.
Stagnation: Stagnation causes changes in the company strategies and tactics as well as in
the company culture.
Productivity problems: these are mostly signs of internal friction losses. Also in this case,
thoughts should be given to a change of company culture.
Management changes: a change in the top management can either lead to continuance of
existing strategies, aims and the company culture, a reorientation or setting of new priorities.
41 Cultural values
A company culture consists of many cultural values which influence the behavior of
employees, e.g. how they perceive their environment, how they take information and process
them, how they react to and behave in certain situations. Cultural values can be understood
as general criteria, standards, principles and directives which make clear to the employees
which behavior is desirable in certain situations. These values are mostly not formalized and
not written down. Special norms, rules and standard work instructions help the employees
and external partners like customers, suppliers and the society to understand and internalize
the company culture.
41.1 Types of cultural values

There are two kinds of cultural values: target-oriented performance values and instrumental
values (see Fig. 41.1).
Company Culture
instrumental values target oriented performance

path to success values cultural orientation
creativity innovations
courage profit
honesty morality
hard work quality

Fig. 41.1: Company Culture
In accordance with Jones and Bouncken target-oriented performance values are the aspired
targets and results of a company or an organization.605 This is also referred to as lead-culture
or cultural orientation in a company. This lead culture depends on the company and the
sector and is reflected in economic efficiency, reliability, responsibility for ones actions,
innovations, morality etc. The instrumental values represent the desired behavior to reach the
target-oriented performance values. Among these values is respect for authority figures,
preparedness to take risks, honesty, creativity etc. To make it clear: A company cannot
launch innovative products if the employees in the development department do not have
creative ideas and are not willing to take certain risks, because the company knows only later
via sales revenues and profits whether the product was really well accepted by customers
and whether it was beneficial for the purchasers.
41.2 Functions of cultural values

Cultural values fulfill diverse tasks. They serve as important intermediary for mutual
adaptation of people in organizations.606 If employees in organizations share cultural values,
a joint basis is created in order to reduce tensions within the organization, overcome
605
Comp. Jones/Bouncken, 2008, p. 409
606
Jones/Bouncken, 2008, p. 416
41 Cultural values 247
misunderstandings, strengthen the collaboration and to create a harmonic company

atmosphere.
Besides, team-related work within an organization can mean higher identification of the
employees with the organization and its aims and have positive effects on its motivation and
performance.
For partners outside the company, the organizational team seems to be a coherent unity and
within the company, the individual self-esteem of the team-employees rises. Cultural values,
as informal structure, simplify working within the organizational structure. The company
culture points the desired behavior patterns of the employees out (via rules, instructions,
directives) and show which cultural values should be followed and therefore serves as
behavioral guidelines. Furthermore, cultural values give orientation support in case of
ambiguities and uncertainties within and outside the organization. If an employee is insecure
in a certain situation whether the decision is wrong or right, or which action is in the
companys interest, he can base the decision on the cultural values of the company.
41.3 International aspect

The global interconnections grew constantly in the past years, which challenges
internationally active companies, because different countries and cultures come together and
need to be aligned with each other. This way, the values and norms of different countries, so
called national cultures, have influence on the organization culture. If two or more
companies collaborate in form of a joint venture, the challenge it to create a cross-country,
joint company culture, which respects the values and norms of each member company.
However, the companies have to make compromises. The difficulties shall be pointed out
with the help of the following example: if a Mexican and a US-American company merge,
completely controversial work methods and behavior can be observed. For Mexican
companies a moderate work pace with long lunch breaks with the family and slow decision
taking in small teams of top managers are characteristic. Relations between companies are
only built up after some time, because several personal contacts are necessary to create a
basis for mutual trust. In the US, on the other hand, high working speed with short or no
breaks prevail, and decisions are quickly taken by managers on the lower level (peripheral
decision-taking).607 Because of the controversial ways of working, a takeover-country-
culture expert can help in order to avoid failure because of national cultures.
Also the delegation of managers and experts abroad, e.g. in subsidiaries, belongs to the
central topics in companies today. The employees should learn in trainings, country studies
or country lectures the values, norms, customs and behavioral forms in the foreign society
before being delegated, in order to be able to react to certain local situations in an appropriate
and target-oriented way and to avoid a failure of national cultures.
607
42 Communication of culture
This chapter presents, how the company culture is communicated to employees and groups
of stakeholders (suppliers, customers, society). This is undertaken in form of socialization
tactics, stories, rituals, the company language etc. Now different forms of communication of
culture will be described
42.1 Communication of culture via socialization

Socialization is needed to learn, communicate and internalize existing company values,
norms, regulations and role expectancies towards new employees. The socialization as
instrument for direction of people contains the cognitive, affective and behavior-related
assimilation by employees based on conscious and unconscious psychical influence.608 The
employee is subject to unconscious influence if he observes the behavior of employees who
have been working for the company for more time, analyzes their conduct and deduces for
himself a situation-adjusted, appropriate behavior. A conscious influence can be exercised on
the employee by the purposeful use of socialization tactics, as will now be explained.
In order to clarify the term socialization there are different model approaches in specialized
literature. In this book the socialization model of Van Maanen and Schein will be examined.
This model shows the socialization process and points out which measures an organization
can take to influence new employees, to internalize desired values and to act accordingly.
This influence on the behavior of new employees and the role orientation is taken via
socialization tactics, an instrument of directed socialization.
Van Maanen and Schein distinguish twelve socialization tactics, while always two confront
each other and lead to controversial role orientations.609 The tactics named in Fig. 42.1 on the
left side lead to an institutionalized role orientation of new employees, i.e. employees are
required to accept certain norms and regulations, to adjust themselves and to obey. They
shall use the autochthonic employees as guidance and react in the same way as desired.
A disadvantage is the connected danger of mental unification of the employees, which
means that their sensitivity for important changes of environmental conditions is reduced.610
It becomes clear that in this role orientation there is no space for individual reactions and
creative suggestions for problem solving. Companies run the risk to miss the entry in new
markets because of lack of innovation and customer orientation. Therefore, it is not
recommendable to use this style in creative, innovative sectors. However, these tactics are
advantageous in order to prevent erroneous decisions, to simplify coordination, take
608
Welge, 2003, p. 169, own translation
609
610
Welge, 2003, p. 169, own translation
42 Communication of culture 249
decisions faster and to reduce the control efforts. In practice, the institutionalized role
orientation is above all relevant in military, in the financial sector etc. where values as
honesty and trustworthiness come in first place. The danger of institutionalized role
orientation lies in the manipulation of the employees by the leaders. Leaders might play on
the behavior adaptation, obedience, subordination and act against the law.
collective individual
communication of company-typical learning learning experience is unique individual
experience standardized reactions to reactions by new employees
certain circumstances
formal informal
learning of new tasks in isolation from old experiencing new tasks in the organizational
personnel (e.g. external trainings) team as new team member
sequential random
new employee obtains overview over task sequences of tasks and order of functions
process and functions directed by employee needs (individual)
fix variable
new employee knows time schedule for tasks Learning and tasks directed by the individual
employee needs
directed individual
old employees as mentors and advisors for Employees individually analyzes own actions
new employees without instructions from others
separating integrating
no social support by old employees Social support by existing team
(ignoring, derision)
Fig. 42.1: Socialization tactics of Maan and Schein611
The tactics on the right (see above) lead to an individual role orientation. In this case
individual and creative ways of working of the employees are targeted and promoted. The
employees can experiment with changing norms and values within their scope of action and
create innovative solutions for problems. This type of role orientation is typical of creative,
innovative sectors as the IT or automobile sector.
611
42.2 Communication of culture via stories, rituals and

company language
With increasing age and growth of the company, stories, rituals and ceremonies emerge612
and coin the company image. These means of communication tighten company networks up,
as will be explained in the following paragraphs.
Stories, partially true, partially invented, can reflect behavior and methods of persons
which appear in the story and show what employees estimate or condemn and therefore,
have influence on the employees behavior.613 The company stories are very different, but
always have a true core and morality.
Rituals on the other hand are returning ceremonial, solemn actions on a certain place at a
certain time. These serve to communicate and strengthen certain company specific values
and norms and to strengthen inter-personal connections. The communication between the
employees can improve the company atmosphere and contribute to higher employee
motivation and satisfaction. Finally, motivated and satisfied employees have a positive effect
on the company success, because they are more willing to perform and to identify with the
company culture.
In practice three different rituals are used: transition rituals, integration rituals and
expansion/improvement rituals. Transition rituals are timely limited, from entrance, over
promotion up to leaving the company and comprehend e.g. special job titles (e.g. fashionable
titles) as well as badges of honors for the most effective and creative employees of the year.
Integration rituals strengthen the relations between employees in form of Christmas parties,
company parties, company excursions, Halloween, barbecue, eating together or traditional
weekly meetings. In case of expansion/ improvement rituals certain employees are
complimented for their work performance/ efforts in awarding events, newspaper
publications or employee promotions, which motivates them to continue to commit
themselves to their work.
The company culture is also reflected in company language in form of company typical
abbreviations and verbiage. The meaning behind the term company language is a uniform
language in a company or an organization whose meaning can be understood by all
organizational members. In specialized literature the term company parlance is also common.
The knowledge of a specific language within a sector, a company or a certain department is
of central importance for the daily work, the communication with colleagues, employees and
the supervisor, i.e. for the daily survival in a company614, because the uniform company
language as communication basis simplifies the coordination of tasks, avoids communication
612
Comp. Sackmann, 2002, p. 57
613
614
Sackmann, 2002, p. 28, own translation
problems and reduces communication barriers and strengthens the identification feeling of
employees within the company.
Examples for sector-typical company language are:

For example, bottom fishing is a verb that refers to a practice of buying up stock that is
undervalued due to overtrading or a falling market.615
Chasing Returns refers to the practice of taking great risks on the feeling that one can
gain great returns.616
42.3 Communication of culture via other means of

communication
Besides the above mentioned means of communication to communicate the company culture,
there are still diverse others, e.g. company symbols, company dress, brands of company cars,
manuals etc.
Company symbols are certain characteristics of the company which are consciously used by
the company to recreate a recognition value and to exclude confusions with other companies,
to create a corporate representation to the outside and project a good company image.
Examples are a good company location (view over the city), design of the building or
location of the offices on a certain symbolic floor.
Also uniform company dresses or a certain brand of company cars (e.g. Mercedes for
prestige in upper segments) get company values across to the outside.
Furthermore, new employees can gain information on work directives, rules and typical
conduct from company manuals and get to know the company culture.
43 Formation of company culture

After having explained the term company culture and the means of communication, now the
formation of company culture is analysed. It is composed of four factors: the characteristics
of the employees, the ethics within an organization or company, the disposition rights of the
employees and the company structure. In the following chapter these factors of influence will
briefly be described.
615
http://www.ehow.com/about_7426498_stock-market-slang-termp.html, Status: 30 June 2011, 13:15h
616
Ibid.
43.1 Employee characteristics

The most important influence factor for company culture is the people who constitute the
company.617 Different moral ideas of people account for the company culture, but also for
their interest in the company. Each potential employee chooses a company which suits his
moral ideas. On the other hand, companies search on purpose for suitable employees who
identify with company values and ensure effective work. The company founders have the
most important influence on the company culture, because their ideas and convictions are
reflected in the company culture and provide the basis for the desired conduct of the
employees.
43.2 Ethics within the organization

Also ethics of individual personalities in the companies, of professional groups and of the
society coin the company culture. The term company ethics comprises moral values,
convictions and rules which ensure an appropriate behavior of the employees towards each
other and to other company stakeholders.618 Ethical values are used by leaders in certain
situations to support the decision-making process. If the managers have to decide whether a
measure is morally right or wrong, they observe the ethical values of the company and act
accordingly.
43.3 Disposition rights

Besides the characteristics of the employees and the company ethics, disposition rights of the
employees coin the company culture. Demsetz defines disposition rights as rights to dispose
and use company resources and responsibilities which a company gives to its employees.619
Disposition rights also function as employee motivation. If the employees perform well, the
company can concede disposition rights as award and further motivation. Furthermore,
employees are bound to the company e.g. through employee shares or profit participation
options. If a company wants to keep highly qualified employees, this aspect is of great
relevance. Some examples of disposition rights are displayed in the following table 43.1:
617
618
Comp. ibid, p. 434
619
Comp. Demsetz, 1967, p. 347 et seq.
Rights of disposition over Rights of utilization of

company resources company resources
Manager High salaries, stock options, high authorization to take decisions,
compensations to control resources
Employee permanent position, profit Responsibility, degree of
participation systems, non-monetary control over ones own actions
benefits, employee shares,
compensation payments, company
pension, etc.
Table 43.1: Disposition rights of managers and employees620
A good practical example for a company that provides certain disposition rights to its
employees is the Google group. It offers numerous non-monetary benefits two T-shirts for
free per week, free all-you-can-eat buffets and snack machines, a company own fitness
studio etc. Furthermore, Google employees receive free broadband internet access and
mobile phones for their disposition. In addition to these non-monetary benefits, a higher
salary in case of good work assessment makes a positive contribution to the motivation and
company connection of the employees.621
43.4 Organizational structure

The fourth influence factor of the company culture is the organizational structure a system
for the coordination of company processes via the use of tasks and rights to give instructions.
Similar to the role orientation of the employees in the socialization tactics, mechanistic and
organic structures are opposed to each other. Typical of mechanistic structures are a steep
structure caused through many company levels, a strong centralization (e.g. central
managerial powers) or the standardization of processes. Typical conducts within these
mechanistic structures are carefulness, obedience, traditions and conformity of the
employees. The company culture of mechanistic structures is coined by stability and
predictability and is practiced military and financial institution and power plants, in order to
avoid errors and to make quick decision-making possible. Organic structures on the other
hand tend to be flat and decentralized (e.g. decentralized managerial powers) and are
characterized by a larger freedom to deal with tasks. The employees are meant to work
creatively and with courage and willingness to take risks. Because innovation and flexibility
620
621
Google, status: 13 June 2009, 16:15h and onpulson, status: 13 June 2009, 16:16h
are characteristics of the company culture, the decentralized structure can often be found in
the IT and marketing sector.
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Jones, G. R. / Bouncken, R. B.: Organisation. Theorie, Design und Wandel [book], Pearson
Studium Verlag, Munich 2008.
onpulson: URL: http://www.onpulson.de/karriere/magazin/fachartikel/show--727-1.htm
Status: 13 June 2009, 16:16h.
Sackmann, S. A.: Erkennen Entwickeln Verndern [Buch], Hermann Luchterhand
Verlag, Neuwied Kriftel (Taunus) 2002.
Welge, M. K. / Holtbrgge, D.: Internationales Management. Theorien, Funktionen,
Fallstudien, Schffer-Poeschel Verlag, 3rd edition, Stuttgart 2003.
XI Country research at the example
of South Africa: history,
population and culture
South Africa is a world in a country. This is the slogan that the tourist board uses to
advertise the outstanding landscapes and the diverse climate, numerous peoples and various
cultures as well as religions and mentalities. There is hardly any other country that allows
such different impressions. Two worlds, the rich and the poor still called third world
often collide and there is still harmony. The country is intriguing, but characterized by the
social contrasts, AIDS and political change.
44 Early history
The history of South Africa is the history of a battle for land and political power.622 It starts
with the San, the so-called native people of South Africa. The Bushmen were mere gatherers
and hunters and lived in the whole Southern area of Africa. Characteristic for their language
are the click-consonants. Later on came the Khoikhoi, the human-humans, to the South
Africa of today. Their traditional way of life combined nomadism and foraging. Both peoples
were similar to each other regarding their looks and their language, which is why, nowadays,
they are often called Khoisan. The hunting Khoikhoi had first and foremost conflicts with the
San with regard to cattle. However, the Khoikhoi successfully drove away the San from their
settlement or subdued them.
The great migration movement of the Bantu peoples began already before Christ in the
Cameroon of today. The Nguni-language group with the languages Swazi, Tsonga, Zulu,
Xhosa and Ndebele have spread furthest south from the different Bantu peoples. They
reached the area between todays city of East London and Bloemfontein around 1500 post
Christ.623
622
Hagemann, 2001, p. 7 et seq., own translation.
623
Comp. Wiese, 1999, p. 88
256 XI Country research at the example of South Africa: history, population and culture
Given the great Bantu-expansion, the original inhabitants were squeezed out to other
territories increasingly. Therefore, the only living space left for the San was the central
Kalahari. The advancing expulsion and impoverishment of this population group came about
as a consequence of their exploitation by the political and economic elite. To this day, the
only surviving tribe of the Khoikhoi is the Nama tribe, which migrated to the south of
Namibia. All others were traded as slaves and driven away from their settlements by the
Boers since the 17th century. Diseases which were introduced, such as pox, and wars have
further reduced the tribes. A vast part also mixed with the Caucasians and the Bantu.
45 Arrival of the Europeans and

development of the partitioning
of the land
It was not until 1652 after the foundation of Cape Town that more European settlers came to
South Africa. Jan van Riebeeck, commissioned by the Dutch East Indian Company, built a
supply station for their ships and crew at the Cape of Good Hope in order to reduce the
human toll on their long sea routes. Initially, they did not think to expand the station in order
to make it a settlement colony. Some farms and gardens administered by the free citizens,
former employees, were supposed to suffice in order to cater for the ships. However, the
Cape colony became larger step by step and also the geographical research increased in the
back country. This was because on the one hand, more settlers travelled to the country from
Europe, and on the other hand, expeditions were initiated to instigate the cattle trade with the
Khoikhoi and in order to search for natural resources. Missionaries were also interested in
the country and brought the Christian faith and the European civilization to the population.624
From 1657, the Dutch brought numerous slaves from Indonesia and Madagascar into the
country, which brought a new population group into life, which has contributed to todays
ethnic diversity.
Also, politically undesirable individuals from East India were left at the Cape who brought
with them the Islamic religion and still constitute as Cape Malay a population group with
an own culture. The white settlers led may wars with the Xhosa which lasted for years.
After the Cape had been occupied by the Dutch in the 17th and 18th centuries, the British
conquered the land in 1806 and built up a British Crown Colony. Most of the white settlers
spoke a modification of the Dutch language, which later developed into an own language,
Afrikaans. It is only after 1820 that a new large wave of English speaking settlers came into
624
Comp. Jrgens/Bhr, 2002, p. 42 et seq. and Hagemann, 2001, p. 26 et seq.
45 Arrival of the Europeans and development of the partitioning of the land 257
the country. This gave rise to two language groups with English being determined as the
official language.625
The British parliament abolished slavery in 1834. First and foremost the Boers626 which
were native to the border regions of the colony considered their existence threatened thereby.
Therefore, they moved as Voortrekker to the largely unknown inland in order to escape the
British law.627
The Boer republics received much attention with the discovery of diamonds near Kimberly
in 1867 and of gold at the Witwatersrand in 1886 which attracted thousands led by diamond
fever and gold rush. Finally, in 1899 the so-called Boer War (South African War) erupted,
which the militarily superior English won only with great effort. However, this impaired the
relationship between Caucasians of English and Boer origin for a long time.
The South Africa of today has only been a unified state since 1910 which has formed by the
unification of the four colonies Natal, Transvaal, Oranje-republic and the Cape Colony to the
South African Union (see Fig. 45.1).
Fig. 45.1: Former provinces of South Africa628
625
Comp. Pabst, 1997, p. 36
626
Derived from the Dutch boer for peasant.
627
Comp. Pabst, 1997, p. 3637
628
South Africa Infoweb, 2007
46 Population groups
The division of the population into four groups which was established at the times of the
apartheid is still common as of today. However, only the Whites belonged to the privileged
people, followed by the Coloureds and the Indians, which, again, were superior to the
Blacks.
Statistics of South Africa carried out a population census in 2001. As shown on Fig. 46.1
79.0 percent of the about 45 million inhabitants of South Africa belong to the Blacks. In
contrast to that, the Whites constitute a small population group at 9.6 percent, similar to the
Coloureds at 8.9 percent. The smallest group is that of the Indians at 2.5 percent.
Coloured
8,9%
Indian/Asian
2,5%
White
9,6%
Black African
79,0%
Fig. 46.1: Population groups629
Within the four categories there are further sub-groups with different languages, ethnic
groups and religious beliefs. The skin color dominated the existence of the South African
population up until the elections in April 1994. During the apartheid the skin color
influenced the choice of the place of domicile, the school, the means of transport, the
workplace, just to name a few examples.
In the following four chapters the population of South Africa will be presented group by
group, categorized into Whites, Coloureds, Indians/Asians and Blacks.
629
Statistics South Africa, Census, 2001
46 Population groups 259
46.1 Whites
The 4.5 million white South Africans are of Dutch origin, also called Boers, and were the
first to arrive at the Cape in the mid 17th century. They were followed by settlers from
England from 1820.
Both groups battled each other mercilessly in the Boer Wars. From 1857, over 5,000 German
men, women and children stepped on land at East London. Cities such as Braunschweig,
Hamburg or Heidelberg developed. Today, around 1 million Germans live in South Africa,
along with French, Italians and 120,000 Jews.630
The mother tongue of these South Africans is the Afrikaans similar to Dutch. There is also
an English speaking part of the population which is concentrated in the western and eastern
Cape area and in Natal. This population group lives primarily in cities and controls the
commercial and economic sectors to a large extent.
46.2 Coloureds
The children of black and white couples are still often called Coloureds. These are around 4
million South Africans that live first and foremost in the Cape Province and in Cape Town.
They are the descendants of relationships of the first Dutch settlers with the Khoikhoi, the
native people on the Cape. Also, the around 200,000 Cape Malay are added. They are
descendants of slaves that were brought from East India to the Cape in the 18th century. The
Coloreds have their own cultural heritage. As an example, the Coloreds which were
privileged as compared to the Blacks at the time of the Apartheid define themselves by way
of their profession rather than by way of their origin.631
46.3 Indians/Asians
Given the introduction of large-scale sugar cane farming, the expansion of mining activities
and the commencing railway construction, the need for workforce in Natal increased
considerably in the middle of the 19th century. This need was partly satisfied with the hiring
of Indians. The Indian population of South Africa derives from the descendants of the
original day laborers. The around 1.2 million people dominated a vast part of commerce in
Durban. Mainly Chinese people settled in the area around Johannesburg. They came to South
Africa as miners at the end of the 19th century and were also classified in this category.632
630
Comp. Nohlen, 1996, p. 631
631
Comp. Wiese, 1999, p. 8586
632
Comp. Pabst, 1997, p. 4647
The Indians were bound by the British in five year work contracts. After the contract
terminated, many of them stayed in the country as Free Indians. They had the freedom of
establishment and were entitled to run a business. From 1870 further Indians, so-called
Passenger Indians were attracted to the country without work contracts and oftentimes
brought their wives with them. The non-native Indians did not form a homogeneous
population group given also their religion, language and classification into a certain caste.
They were overwhelmingly Hindus and came from rather low castes. Among the languages
commonly spoken were initially Tamil, Hindi and Gujerati. Later on, English became their
official language.633
Up until today the vast part of the Indian population lives in Natal. In the system of the
Apartheid the Indians were categorized as a separate population group since 1959. They, too,
were subject to similar restrictions as the other non-white population groups. Especially, they
had to face compulsory relocations of inhabitants and business people. There were tensions
between the Indian and the black population which turned into violence at times.634
46.4 Blacks
Nine different Bantu peoples with equally as many official languages belong to the black
population. Around 10 million people form part of the largest South African people, the
Zulu. This is almost a third of the black population. They settle first and foremost in
KwaZulu-Natal and in the wider area of Johannesburg. Regarding their number, they are
followed by the Xhosa (7.2 million). They live primarily between Port Elisabeth and Durban.
6 million people belong to the North and South Sotho followed by the Tswana (3.3
million), Tsonga (1.8 million), Swazi (1 million), the Ndebele (0.6 million) East of
Johannesburg and the Venda (0.9 million) in the furthermost North East on the border to
Zimbabwe. The traditional cultures also contain different larger and smaller sub-groups.
Most of the Blacks live in rural areas of the former ten Homelands or still in a very small
space in the Townships at the border of the cities.635
47 Religion
Missionaries have contributed their share over many centuries. The largest part, around 80
percent, of all South Africans is Christians. The Dutch-Reformed Church, NG-Kerk, of the
633
Comp. Bilger, 1986, p. 172
634
Comp. Jrgens/Bhr, 2002, p. 57
635
Comp. Bilger, 1986, p. 215216
48 Culture 261
Boers did not only convey its strictly Calvinistic way of life, but also promoted the
Apartheid, which was also palpable in the NG-Kerk through the division into the four known
groups.636
Already in 1910 the Zion Church was founded as a Church without the White. There, its
members found recognition and understanding. Most communities of faith of the Blacks
combine Christian with traditional African religious beliefs. The proportion of Hindus and
Muslims as part of the population is relatively low at a total of about 0.5 million people.637
48 Culture
Many different ethnic groups with different language, culture and origin are native to South
Africa. Among these are eleven official languages. The population mainly speaks English,
Afrikaans, seSotho, isiXhosa and isiZulu.
The fusion and commingling taking place in the urban areas of South Africa lead to the
dilution of old, at the same time to the creation of new cultures. However, in many rural
areas, the black traditions are still alive.
All of them have as common trait the belief in a male God, in the spirits of the ancestors and
in supernatural powers. Polygamy is legal and usually a bride price is paid. In many cultures
cattle plays an important role, both as status symbol and for sacrificial rituals.
Oftentimes the artistic heritage of the native South African people provides the only
possibility to learn about a vanished culture. The petrography and cave art of the San
constitute an example. Further, traditional crafts, such as the pearl crafts of the Zulu, were
developed in times of need for the purpose of securing the existence of such people. The
culture of the Xhosa, the so-called red people, is likewise prominent and comes from the
red scarves which are worn by most adult Xhosa. The Ndebele which are related to them live
in Northern-Transvaal in self-painted homes (see Fig. 48.1).638
636
Comp. Wiese, 1999, p. 9899
637
Comp. Wilke-Launer/Khne, 1993, p. 421
638
Comp. Jrgens/Bhr, 2002, p. 39.
Fig. 48.1: Painted house of the Ndebele639
The totally independent culture of the white Africans formed in self-inflicted isolation. They
tramped around Africa among their herd of cows and with a bible in their hand. To this day
the conservative Dutch-Reformed Church is the center of all attention.
Even though many cultures originated in South Africa, most of them became obsolete or
were destroyed during the Apartheid when the conventional and contemporary cultures were
not looked after.640
The new South Africa arises in the streets of the Townships and cities. Retrospectives of
black, contemporary and traditional artists are on display in galleries and musicians from all
of Africa make an appearance at big festivals.
49 Socio-political aspects
South Africa is still far away from the ideal of a multi-cultural society. There is still a large
division in the population. Blacks and Whites live largely separate from one another. There
are few points of contact. The Apartheid regime made an effort to stress the differences
between the ethnic groups and to ignore the common grounds. The politics of racial
segregation served the purpose to secure the political and economic governance of the white
minority. South Africa is still battling the consequences of these politics as of today.
639
Saembassy, 2004. own translation
640
Comp. Sdafrika Guide, 2008
49 Socio-political aspects 263
49.1 Concept of Apartheid

In the system of Apartheid the white minority population had developed a certain ideology.
The goal was to differentiate between ethnic groups according to the origin such as language,
religion, customs and traditions and to separate them physically to safeguard their respective
cultural identity. Thereby, discriminatory methods used by the Whites against the Blacks in
an economic and political context could disappear. The white Boers held the view that
Whites and non-Whites would be forced to be equal. The black population had the chance to
escape the superiority of the Whites by way of self-administration and political
independence.641
Skin color became the most important distinguishing criterion for the definition of groups.
Other phenotypical characteristics led to a legal differentiation of the population in Whites,
Blacks, Coloreds and Indians/Asians in the 1950s. The country dominated by the white
population pursued a specific political, social and economic discrimination against people
with non-white skin color. Also, competitors could be controlled in their businesses and at
their workplace in economic life. The isolation of the black population in Homelands
revealed the concept of ethnicity as a mere political construction in order to achieve a
demographic and also politically legitimate majority for the white minority.642
49.2 Reservation- and Homeland Policy

With the Native Land Act of 1913, the existing voting rights of the non-white population
were abolished step by step and a first step was taken in the direction of Apartheid with
regard to a separation in space. The native reserves created back then occupied 7.3 percent
of the land. A sale of this land to Whites was prohibited and, on the other hand, Blacks were
not allowed to purchase land in the white area. The area available to Blacks proved much
too small from the start, and with the increasing population pressure, the problem became
increasingly significant.
A first trial to consolidate the reservations was undertaken with the Native Trust and Land
Act of 1936. The share of area should be brought to 12.4 percent via purchase of land. The
reality, however, proved to be otherwise, as the area consisted of only 9.6 percent in 1945
and the split-up remained important, too. For the first time, the state obtained the right to
arrange resettlements. The country which had been the property of black people since the
time before 1936 and which lay in the white area was dissolved especially after 1948.
641
Comp. Pabst, 1997, p. 102104
642
Finally, the inhabitants had to accept resettlement to the reservations. The total number of
forced resettlements was 3.5 million only between 1960 and 1982/83.643
The introduction of the Homeland-Concept after 1948 was finally the continuance of the
reservation policy. The Bantu Authorities Act of 1951 and the Promotion of Bantu Self
Government Act at first accounted for eight, later ten Homelands, and in parallel abolished
the last representation of black people in the white parliament. Then, efforts of
consolidation and frontier displacements of the Homelands were continued. Around 16.2
million people lived in the Homelands in 1990 among them around 1.6 million, mostly
male migrant workers, who were active outside their Homelands. Around 800,000
commuters traveled, partially long distances, into the white region. This made clear that
the economic basis of the Homeland was insufficient. The migrant workers and commuters
constituted over 50 percent of the black workforce in white South Africa. However, the
homeland-concept still did not make a real independence of the black population
possible.644
Since 1994, the government has tried to reverse this massive injustice regarding the
repartition of land without endangering the economic effectiveness. A land reform was
planned to be carried out in three stages: the return of land, the redistribution of property and
the reform of land and tenancy rights. The return of dispossessed land to the former owners,
which was regulated in corresponding Act on the Return of Land of 1994, had highest
priority.645
In order to avoid losses of productivity, cultivated farmland was protected against it at first.
It will still not be easy to reach a balance between the high expectation of landless people,
the interests of white farmers and the financial possibilities of the state.646
49.3 Democratization
The wave of democratization started in 1991 and affected the whole country. In order to
point out the importance of this change, it is sometimes referred to as second independence
or second liberation. Especially church groups, influential legal associations and the free
media, which has been flourishing since 1990, have decisively contributed to the
construction of a civil society.647
643
644
645
646
647
Comp. Ansprenger, 1999, p. 137
For the first time, a government was elected by all South Africans in 1994 which changed the
political map. The independent Homelands were dissolved, but the outlines remain existent.
Almost 50 percent of the population, i.e. around 19 million people, live in these areas.
Fig. 49.1 shows that todays South Africa divided into nine provinces. They do not have the
same status as German Bundeslnder. The provinces have each their own parliament with a
Premier.
Fig. 49.1: Today's provinces in South Africa648
In South Africa a back-breaking preponderance of the African National Congress (ANC) as

new leading force and party is recognizable. The explanation is that the voting conduct of the
population is still largely driven by their clanship. But also the political opposition is more or
less driven by ethnic belonging.649
50 Demographic and social aspects

Since the 1950s, it was possible to rise the mortality age from 40 over 55 up to 60 years in
1990. The improvement of survival chances is above all the result of exogenous impacts.
Cheap medical-hygienic agents and practices were imported from industrialized countries
which were partially with international support extensively distributed. This way, many
infectious diseases could be partially kept under control or even eradicated. An example for
648
South Africa Infoweb, 2007
649
Comp. Jrgens/Bhr, 2002, p. 62 et seq.
this is the worldwide anti-Malaria program which was started by the World Health
Organization (WHO) with the help of several foundations in 1955. They also installed a
project for the eradication of pox in 1967. Pox stopped to exist worldwide from 1977.
With the start of the 1990s the mortality rate rose all over South Africa again. Many of the
returning infectious diseases started to spread again. The reasons were the agents that have
become immune as well as the unhygienic living circumstances in a big part of the country,
which caused a successful fight against diseases to fail. A simple solution would be the
improvement of sanitary installations and the connection to a water network. However, this
can still not be realized for monetary reasons in every household.650
50.1 Population growth

The dynamic of the development of the population results especially from the big difference
between birth and mortality rate. The birth rates reach partially 40 and more, while the
mortality rate has been reduced to under 1314 in some cases. South Africa can already
be attributed to a phase of distinct dropping of birth rates and strongly decreasing
mortality.651
Other than expected by experts, the decrease of mortality has not continued since the end of
the 1980s. Further progress was not achieved and the life expectation is with 55 years even
below the one of the end of the 1970s. It looks as if South Africa had fallen back and showed
a situation similar to the phase of high birth and death numbers. The most important factor
for this negative development is the high number of AIDS cases in the population.
50.2 Development of the population under the

influence of AIDS
Scientists assume that the disease originated in Central Africa and was brought in the country
by migrant workers who spread it in the accommodations of mine workers. In the list of
countries with the highest HIV/AIDS rates among adult population (15-49), South Africa
joins the row of sad top places of south African countries with over 20 percent.652
A purposeful education on the risk of AIDS infections takes place only in rare cases or not at
all. First steps were undertaken and a way for cheap medicine and free distribution of
condoms was paved. However, there is still not enough money to put it in practice all over
the country. Therefore, AIDS will still gain influence on the mortality rate.
650
Comp. ibid, p. 177
651
652
Comp. Weltbank, 2007
AIDS does not only lead to mortality, but also to a deterioration of the general state of health,
the outbreak of other diseases like tuberculosis and the early death of the badly fed and cared
AIDS orphans. Up to the year 2010, the life expectation will drop to 48 years. Because of the
loss of human resources and the strongly rising health costs. the economic consequences of
the disease are considerable. Already today, partially three persons have to be trained for
each higher position, in order to take precautions for the case of deterioration of performance
and death as result of AIDS. Many companies complain about warning signals as insufficient
employee morale and disturbed production processes. The abatement of mass poverty and a
betterment of population groups which have been disadvantaged for a long time have
receded into dim distance.653
50.3 Birth control and decline in the rate of birth

Family planning programs started already in the 1960s in South Africa. It became apparent
that not only the white population, but with some delay also Indians and Colored would go
through a demographic transition similar to the one in Europe. A reduction of the fast growth
of the black population on the other hand could not be established.654
Despite of massively supported immigration, a decrease of the share of Whites in the total
population was lurking. In order to counteract this trend, the Apartheid governance started to
especially support family planning, for example via the National Family Planning
Programme of 1974. Despite the political background of the measures, the offers were
mostly accepted. The context for the decrease of birth rates was rather favorable, with higher
incomes and a higher share of urban population. Many black women have decided in favor
of family planning because of different social and economic limits of the Apartheid politics,
because pregnancy and child education would have narrowed their employment possibilities
in the cities. Today the background of family planning is not political goals, but a
comprehensive health program.655
An early pregnancy often conflicts with a successful graduation. The information on
contraceptives should therefore be given as early as possible. A better formation of women
has a positive influence on the reduction of birth numbers.
50.4 Age pyramid and future growth

It is difficult to predict the future growth of the population. It has not only to be taken into
consideration how further reproduction develops, with a high number of children and
653
Comp. Wiese, 1999, p. 119 et seq.
654
Comp. Caldwell/Caldwell, 1993, p. 225262
655
adolescences coming into reproductive age, but also the influence of AIDS on the mortality
and fertility has to be estimated.656 Up to now the reduction of births has had only little effect
on the age structure, as can be seen in Fig. 50.1.
Age category
0,1
85+ 0,2
0,2
80-84 0,4
0,3
75-79 0,5
0,5
70-74 0,9
0,7
65-69 1,1
1,0
60-64 1,4
1,2
55-59 1,5
1,7
50-54 1,9
2,2
45-49 2,5
2,8
40-44 3,1
3,2
35-39 3,6
3,6
30-34 3,9
4,2
25-29 4,5
4,7
20-24 4,9
5,5
15-19 5,6
5,6
10-14 5,7
5,4
5-9 5,4
5,0
0-4 5,0
0 1 2 3 4 5 6
male female %
Fig. 50.1: Total population in accordance with sex and age groups657
50.5 Education deficit

The term lost generation has become a keyword for almost one third of the population.
17.9 percent of young people have no school education (comp. Fig. 50.2). Therefore, they
656
Comp. Wiese, 1999, p. 130133
657
have no job and no proper home. For example in the township Soweto near Johannesburg
more than 90 percent of all acts of violence are committed by young persons between 14 and
25 years. The realization by leading ANC members that the boycott of schools and university
for decades during the Apartheid had harmed a whole generation is not sufficient. Training
programs, school and university education will have to give new opportunities and hope to
these young people.658
Completed primary Some primary

6,4 % 16,0 %
Some secondary
30,8 %
No schooling
17,9 %
Higher
8,4 %
Grade 12/ Std 10
20,4 %
Fig. 50.2: Population aged 20 and older and highest school certificate 659
Education in South Africa is an example for all the problems which arise in the context of
restructuring the Apartheid society. Since April 1994 all children have access to state schools
and general compulsory schooling was introduced. Many hundred million rand are necessary
for a school developmental program, in order to guarantee the necessary human resources for
further economic progress.660
With the Higher Education Act 1997, the government started a reform of universities. By
combining universities and higher technical colleges in 2004 and 2005, the target is pursued
to get rid of the former separation into white and black universities. The complex
redesign is a difficult management task.661
658
659
660
Comp. Wiese, 1999, p. 115119
661
Comp. Auswrtiges Amt, 2007a
51 Economic aspects and employment

policy
Among the most important economic sectors in South Africa is industry, services, mining
industry and agriculture.
After the Apartheid was abolished and international sanctions were given up, the country
could record a stronger economic growth. The Gross Domestic Product (GDP) increased by
around 5 percent in 2006. A further growth increase from 5.1 to 5.4 percent is predicted for
the next three years. The manufacturing industry and financial services account with 20
percent each for the largest part of the GDP.662
The economy is strongly oriented towards foreign commerce. More than half of the Gross
Domestic Product is achieved with export trade. By investing in modern production
technologies after the end of the Apartheid, South African products became competitive on
the world market again.
Already in 1996 an export surplus of about Rand 8.7 billion was achieved. Mainly raw
material, agricultural products, chemical products, machines, electronic devices and vehicles
are exported. Among the most important imports are machines, synthetic material, chemical
products and vehicles.
In the meantime the emerging market South Africa counts among the biggest investors in
Africa and has become an economic driver on the African continent.
51.1 Unemployment
The unemployment rate of the white population is relatively low with around 2 percent. In
contrast, each second Black person is unemployed or lives from occasional jobs. The main
reason is the educational deficit. Furthermore, criminality and diseases like AIDS are
further reasons.663
Fig. 51.1 illustrates the unemployment in South Africa over a period from 1999 until 2007. It
can be perceived that since 2001 the unemployment rate has decreased by 12.8 percent. This
success can be explained by the creation of new workplaces and an increasing level of
education. However, there is still need for further measures.
662
Comp. Auswrtiges Amt, 2007b
663
Comp. ibid
51 Economic aspects and employment policy 271
unemployment %
40 37
34
35 31
30 30
30 26,2 26,6 25,5 24,2
25
20
15
10
5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007
year
Fig. 51.1: Unemployment in South Africa664
A public job program shall provide training positions and work to the young generation
between 6 and 19 years that accounts for one third of the black populations.665 The
Reconstruction and Development Programme aims at a faster and stronger
industrialization of the country. This means especially an improvement of technological
capabilities and thus of international capacity to compete.666
Economic experts like Clem Sunter ex manager of the gold and uranium division of the
mining group Anglo American Corporation hold the view that small and middle-sized
companies should be supported in order to avoid a reduction of workplaces and to create new
jobs. This should not aim at a racial separation conform to the former line white
corporations and black corner shops. This is about giving black people their place in
large-scale industry as well as promoting small business.667
Beside the official labor market there is also an expanding informal sector. Examples are
private taxi companies who drive their customers from the townships to work, traders with
portable junk-shops or car mechanics who open a garage on the side of the road. If young
664
CIA The World Factbook, 2008
665
Comp. Behren/Rimscha, 1994, p. 180
666
667
Bond, 1994, p. 34, own translation
people should not achieve to get access to an official labor relation, they will also try to earn
their lives with this African form of economy.668
51.2 Work relationships and Black Economic

Empowerment
Even if statutory racial discrimination belongs to the past, social Apartheid will continue to
exist for a long time. The reason is that the white population has collected a lot of capital
during their preferential treatment over years; however, it represents only a small political
power in times of black government. This leads to a tricky situation in the country. In the
corridors of power in industry and economy there are mainly Whites; the political power on
the other hand is in black hands.669
In order to escape this situation, the South African Government pursues the concept of Black
Economic Empowerment (BEE), in order to increase the black influence with the help of
statutory regulations and a preferred acceptance of tenders in an economic environment
which is dominated by white people. An essential part of the BEE Act of 2004 is the
Balanced Scorecard, which assesses companies in accordance with their progress in the field
of empowerment of employees in four areas:670
direct empowerment through ownership and control of enterprises and assets
management at senior level
human resource development and employment equality
indirect empowerment through: preferential procurement, enterprise development, and
corporate social investment a residual and open-ended category.
Despite of this, many Blacks still need to resort to the knowledge and experience of white
people. The Whites again cannot exist without the black potential of workforce and
purchasers.
51.3 Reasons for the discrimination against women

Despite of the fact that the South African constitution explicitly prohibits discrimination on
the grounds of sex, it is not ensured that the principle is put into effect. Women have a dual
legal status. On the one hand they have the same codified civil rights as men and on the other
hand they are subject to traditional and unwritten clan rituals. These rituals often contradict
668
Comp. Behrens/Rimscha, 1994, p. 181 et seq. and Wiese, 1999, p. 183 et seq.
669
Comp. Alexander, 2008
670
Comp. ibid
the states legal system and limit the principle of equal treatment and liberal decision-making
of women.671
The socially weak position of women also results from a lower educational standard. The
reasons are early pregnancies, the compulsion to work or to take care of younger siblings.
The social and geographical mobility is limited for many women. They are disadvantaged on
the formal residential market, because single educating persons under 21 years or women
over 21 years without children have no chance to receive state housing loans.672
The percentage of women in white-collar-professions (employees) is very low with 21
percent. There are better chances in the blue-collar-sectors (workers) with 88 percent. Here,
women can clearly catch up with men. Because of the bad education of women from the
country, their activities are concentrated on the informal sector, where little seed capital is
needed. Formerly they were disadvantaged by the white colonial power and after the
independence they are discriminated in a black world of men if they want to gain access to
the formal labor market. The consequence is that women cover local supply deficits in
unattended townships as sellers of grocery and household equipment or prostitutes.
The participation of women and the co-determination of women in political decision
committees are still of little importance. The ANC supports them, and therefore has one of
the highest female representation rates in parliament.
52 South Africa: automotive industry

The export of resources as gold and diamonds had been the determinate income source of
South African economy for many years. Today, on the contrary, many products of
automotive industry have surpassed mining products as export hit. With the new black
government new production capacities are built up.
The automotive sector already counts for 29 percent of the manufacturing industry and
contributes together with sub-suppliers, retailers and garages to 7.2 percent of the Gross
Domestic Product (GDP). The exports amount to five billion Euros. Including sub-suppliers,
retailers and garages, the sector employs around 310,000 people.
Leaders on the South African automotive market are Volkswagen, BMW and Mercedes-
Benz. Companies export from there to places all around the world and account for a big part
of the most important success story in South African industry. Only in 2006, the seven
international car manufacturers Mercedes-Benz, BMW, Volkswagen, Toyota, Nissan, Ford
and General Motors invested almost EUR 750 million in their South African factories.
671
672
Comp. Lohnert, 2000, p. 67
52.1 International automotive manufacturers in South

Africa
At the beginning of the 1920s international automotive manufacturers expanded to South
Africa. The reasons were cheap labor and a lucrative domestic market which made the
country attractive for US company groups. Ford was first to open a production manufactory
close to Port Elizabeth. General Motors followed in 1927. Around the year 1930 96 percent
of registered cars were US-models.
After the Second World War further manufacturers entered the market. Mercedes-Benz,
Toyota and Volkswagen had above all imported components, assembled them and therefore
preferred locations close to the coast as East London, Durbain and Uitenhage next to Port
Elizabeth. The state import subsidies supported the expansion of local sub-suppliers in the
1960s and 1970s. Since then the part of locally fabricated assembled components has been
growing.
The province Eastern Cape had become a centre of car production where several providers
concentrate up to today. The transport distances to the main purchasers in the metropolitan
area of Johannesburg, however, are long and because of the geographical landform
differences, it is not possible to drive to these locations with car transporters. Therefore,
BMW and Nissan have switched to locations in the Pretoria area since the 1960s.
The expansion of European and Japanese companies caused that the US-market share
accounted for only 35.6 percent in 1975. The following decrease in investments of American
companies strengthened the dominance of Japanese and German automotive manufacturers.
Today, they enter into more and more cooperations, like Mitsubishi and Daimler. At the
same time, this practice led to a reduction by 50 percent of the number of manufacturers.
After the end of the Apartheid the automotive companies expanded even further, because an
increasing motorization of the upcoming black middle class became apparent.
The international automotive manufacturers Daimler, General Motors, BMW, Volkswagen,
Land Rover, Daewoo, Peugeot, Toyota, Subaru, Ford, Nissan and Fiat fabricate in South
Africa original equipment manufacturer (OEM)-components as well as completely built up
(CBU)-cars. Other companies, as Renault, supply the market exclusively with imports. From
an international point of view the South African business market is still relatively small
despite of favorable tendencies. Therefore, besides small numbers for the local market,
production takes place especially for export business.
52.2 Motor Industry Development Program

The South African context makes the subsidiaries of international automotive groups
profitable despite of the small South African market. In 1995 the Motor Industry
Development Programme (MIDP) came into effect. MIDP reduced the import customs for
imported cars drastically. At the same, time incentives were given for a stronger local share
in automotive fabrication. This way, companies could export at cheap prices, and models
which were only required in small numbers could be imported at low costs. Therefore, many
companies decided to fabricate in South Africa.
Presently the MIDP which is effective until 2012 is examined by the government, industry
and trade unions. The government, however, has already assured that it would continue its
support to the automotive industry after 2012.
The export of components and the emergence of an own sub-supplier industry complete the
growing automotive production and have become an important economic factor. In the
surroundings of Uitenhage and Rosslyn, where several manufacturers have their business,
Supplier Parks have been created. Joint Ventures between local companies and traditional
suppliers fabricate the necessary components like catalytic converters, seats and airbags in
these Supplier Parks.
52.3 Influence of the unions on the automotive

manufacturers
The National Union of Metalworkers of South Africa (NUMSA) is largest union in South
Africa. Also in the name of the government, it is committed to the following issues:
defend rights of the members against the companies,
process reclamations of members,
represent members in hearings,
fight against unfair labor conditions, limitations and all types of discrimination,
negotiate for better wages and labor conditions with the employers and
for death benefits for members and support of their families.
NUMSA especially wants to improve the life of worker in factory buildings. Therefore, it
pursues its aims persistently:
Close wage gape from Apartheid. With the Apartheidm a big wage difference between
qualified and non-qualified workers was created. This difference existed mainly between
white and black workers.
Gain workers interest in trainings which are recognized in other companies, in case they
lose their workplace.
Reduce training grades at the workplace to five stages of training and introduce a
grading system based on capabilities. This way, anybody who attends the trainings could
be awarded with higher remunerations because of his further qualification.
Make employers aware of capabilities which workers have gained in their position in the
company and encourage payment for these capabilities.
Make sure that women receive jobs which traditionally are occupied by men, if they
have the appropriate qualification. Women have to receive the same payment as men, if
both sexes carry out the same work.
Receive more control over investment plans and strategies from management. If the
company plans massive workplace reductions, NUMSA wants to be informed in order to
reduce the consequences for its members.
NUMSA believes in comprehensive affirmative action.

The workers need technical training and basic formation. The basic formation and training
have to be provided by the employer to the employees during working hours. Furthermore,
there must not be any form of discrimination against workers because of their race, sex or
religion.
52.4 Future of the automotive industry

The South African car market still booms. However, one can only count on new investments
in the automotive sector if the government has finally decided whether and to which extent it
will further subsidize the sector after 2012. For the sub-suppliers, good business
opportunities come up. The automotive manufacturers hope for a higher share of OEM-
components from local fabrication. Supplier Parks like Rosslyn near Pretoria offer
interesting possibilities for the customers in this context.
Because the number of cars has risen in South Africa in the last year, the demand for
component parts has increased as well, e.g. for spoilers, light alloy rims, seat systems or
audio equipment. These components were not offered by the manufacturers so far and the
sub-suppliers can benefit from this fact. Especially among the car owners of black middle
class the demand for such equipment is big. Furthermore, this group of costumers becomes
more and more important in South Africa.
Although if sales have increased considerably in the last years in South Africa, the
automotive manufacturers focus the fabrication of few models and export business, to
achieve profitable piece numbers. BMW has started the fabrication and the export of the new
BMW 3 series in its factory in Rosslyn near Pretoria. Mercedes-Benz fabricates the new C-
series in its manufactory in East London and exports heavily as well.
Today, step by step other companies follow the example of German manufacturers. In 2002
BMW, Mercedes Benz and VW accounted for 97 percent of the car export business. Now,
Toyota, Nissan and Ford are expanding their production and export as well.
There will be increasing pressure by cheap manufacturers from China and India that offer
cars for less than 10,000 and want to take up production in South Africa.
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XII The AGG and Diversity
Management a managerial and
European-national legal
response to the
internationalization of labor
markets in Europe and
worldwide
Changes of environmental circumstances for companies and their employees have never
been faster. Because of the increasing internationalization, the demographic changes and the
fast growing technological progress, companies need to react ever faster to the changes in
their environment. Especially with regard to employees, there are strong deviations from
what had been known before which require new reactions to the cultural, social and
experience-related characteristics of the staff. The German legislator reacted to the cultural
and other variety among the employees with the introduction of the General Equal Treatment
Act (AGG), which was meant to avoid discrimination in the company. At the same time, it is
not only necessary to comply with the General Equal Treatment Act, but to utilize people as
resources in all their varieties in order to be successful on the market. In order to use the
variety of employees for own purposes, it is necessary to react via Diversity Management to
the personal characteristics of each single employee. The following chapter will provide an
overview over the most important aspects of the General Equal Treatment Act and explain
the process of Diversity Management.
282 XII The AGG and Diversity Management
53 Changes in the company environment
53.1 Internationalization of labor markets

Worldwide, international economic relations are being built up like never before. The
international interrelations have been intensifying since the 1990s because of the
technological development, the elimination of trade, capital and employment barriers as well
as because of political and economical integration trends.673
In Germany, the international orientation of the companies is becoming more and more
important, because Germany is an export-oriented country on the one hand and on the other
hand needs to import a variety of goods because of the scarcity of raw material. From Fig.
53.1 can be seen that the import and export numbers of German goods and services have
more than doubled since 1997.
in bn. EUR
1.200
1.000
800
Export
600
Import
400
200
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
year
Fig. 53.1: Key figures of German foreign trade from 1997 to 2008674
673
Comp. Oechsler, 2006, p. 98
674
Following Statistisches Bundesamt 2009b
This ever stronger international orientation of companies is also reflected in the rising
number of cross-border mergers all over the world. As can be seen in Fig. 53.2 the number of
mergers and acquisitions has steadily grown since 1993, and thereby the purchase of
foreign employees by mergers in the group.
bn. US$
1200
1100
1000
900
800
700
cross-border mergers & acquisitions
600
direct investments
500
400
300
200
100
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
year
Fig. 53.2: Worldwide direct investments and cross-border mergers and acquisition675
Now it can be deflected that companies have to face ever more variable customer and
supplier structures. It is crucial to respond to the diverse cultural differences with different
employees, in order to make a long-term collaboration possible. At the same time, personnel
delegations take place in the context of joint ventures and strategic alliances with foreign
companies, and what is especially problematic for developing countries and emerging
nations also an emigration of qualified employees, e.g. to Germany.
Many industrialized countries headhunt qualified specialized workforce from the health
sectors in India, China or the Philippines, because there is a lack in qualified labor in the own
country.676 At the same time the emigration does not only concern developing and emerging
675
Andruchowitz, 2003
676
Comp. Stewart/Clark/Clark, 2007
nations. In Germany alone 500,000 people have emigrated since 1990.677 The disadvantage is
that economically weak countries or regions that pay for the formation of specialized
workforce do not benefit from their formation in order to push their own economic
development.
It has to be mentioned in this context that the number of foreign citizens amounted to 6.73
million in the Federal Republic of Germany at the end of 2008. This meant a small decline in
comparison with the year before, but this might be caused by the high number of
naturalizations of Turkish citizens.
What is noteworthy, on the other hand, is the increase by 1 percent of the persons who
belong to an EU-member state.678 It is noticeable that the formation of the European Union in
1993 has been widely contributing to the internationalization of the labor market, as could be
seen in other country unions. The emergence of an unlimited labor market leads to an
increasing number of foreign applicants and the possibility for companies, to start balancing
the lack in specialized and managing personnel on an international level,679 and causes a
higher variety among the workforce.680
It can be seen that via the internationalization in general and the internationalization of the
labor markets, e.g. in the European Union, an intense reflection of the companies on the
values, cultural backgrounds and points of view of the applicants, employees and merger
partners has become necessary to be able to continue successful work.
53.2 Technological advance

Because of the rapid technologic progress and the ever shorter product life cycles, the factor
time has become a competitive factor. In order to overcome this challenge, companies need
more highly qualified staff. The requirements towards the employees change in ever shorter
intervals and repetitive jobs are more and more eliminated. The challenge for personnel
recruitment is to win such highly qualified personnel.681
677
Comp. Heckmann, 2006
678
Comp. Statistisches Bundesamt, 2009a, p. 194
679
Comp. Kirchgeorg/Gnther, 2006
680
Comp. Gloger, 2000, p. 37
681
Comp. Oechsler, 2006, p. 100
53.3 Demographic development

Around 82.2 million people lived in Germany at the end of 2007.682 In accordance with
estimations of the German Federal Statistic Office the number will drastically decrease until
2050 as can be seen in Fig. 53.3.
It is assumed that only between 69 and 74 million people will live in Germany in 2050.683
This fact can be attributed to the decreasing birth rates on the one hand and the rising
mortality rates on the other hand.
Million Million
90 90
average
85 85
population, upper limit
80 80
average
75 75
population, lower limit
70 70
65 65
0 0
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
year
Fig. 53.3: Forecast of development of population numbers in Germany until 2050 684
The reason for the growing birth deficit is that with the low birth rate, the number of
potential mothers decreases. It is foreseeable that the number of people in school and training
age will quickly decrease and that in 2050 twice as many old as young people will live in
Germany.
682
Comp. Statistisches Bundesamt, 2008
683
Comp. Statistisches Bundesamt, 2006, p. 15
684
Ibid, p. 15
The mortality rate increases despite increasing life expectations, because the age groups with
high numbers are getting into old age and therefore many deaths occur at once per time unit.
Today the mortality rate is already higher than the birth rate.
Also the migration balance of 100,000 to 200,000 people per year cannot really encounter
this tendency. Therefore it has to be expected that the population in working age will get
older and less numerous. Until 2014 it can be assumed that the number of working
population remains at around 50 million. The number of young people diminishes at the
same time and will be compensated by a higher number of older people. In the years after,
however, the total number of employable people will decrease, with the result that in 2050
only 35-39 million employable people are expected to live in Germany. Discussions on e.g.
how to integrate older employees in the company work organization, because young
graduates become a decreasing group, show that companies will have to adjust to this
tendency in any case during the next years. As a result, older employees will have to be
given special consideration especially in the case of new hires and a longer duration of
employment has to be granted to them.685
Because of the decrease of population it will become unavoidable to integrate also women
with and without children and ethnic minorities in the employment, because despite of
technological progress the potential of these groups will be demanded especially in company
management and administration.
53.4 EU-antidiscrimination directives

Because of the European integration, the growing globalization and the accompanying
internationalization of companies and demographic change, the European Community issued
directives to avoid discrimination on diverse labor markets and to promote equal chances and
treatment and justice for a good life. The basis is provided in Art. 13 subs. 1 of the Treaty
establishing the European Community (TEC), in accordance to which the Council may take
appropriate action to combat discrimination based on sex, racial or ethnic origin, religion,
disability, age or sexual orientation.686 This is the basis of the four EU-antidiscrimination
directives of the EU council of ministers:687
Council Directive 2000/43/EC of 29 June 2000 implementing the principle of equal
treatment between persons irrespective of racial or ethnic origin
Council Directive 2000/78/EC of 27 November 2000 establishing a general framework
for equal treatment in employment and occupation;
685
Comp. Statistisches Bundesamt, 2006, p. 5 et seq.
686
Europische Gemeinschaft, 2002, p. 11, own translation
687
DGB Bildungswerk e.V., o. J.
Directive 2002/73/EC of the European Parliament and of the Council of 23 September

2002 amending Council Directive 76/207/EEC on the implementation of the principle of
equal treatment for men and women as regards access to employment, vocational training
and promotion, and working conditions; and
Council Directive 2004/113/EC of 13 December 2004 implementing the principle of
equal treatment between men and women in the access to and supply of goods and
services
The directives oblige the EU member countries to ensure the implementation of the
directives. In Germany they were implemented with the coming into effect of the General
Equal Treatment Act (AGG) on 18th August 2006688.
54 General Equal Treatment Act
54.1 Objective and content of AGG (Sec. 1 AGG)

Already before the General Equal Treatment Act came into effect in August 2006,
discrimination because of sex, parentage, race, language, homeland and origin, faith,
religious and political opinions or because of disability had been prohibited in accordance
with Art. 3 of German Basic Law. Reality, however, does not correspond to the regulations
of the constitution no to international law.689 The AGG can be considered as the
implementation of the EU antidiscrimination directives into national law. This means that the
objective of the law, as shown in sec. 1 AGG, is to prevent or eliminate adverse treatment on
the grounds of race or ethnic origin, gender, religion or secular belief, a disability, age or
sexual identity. The legislator uses the terminology adverse treatment and not
discrimination on purpose to make clear that not any unequal treatment being connected
with a disadvantage has discriminating character.690
The AGG is structured in seven parts, starting with Part 1 (sec. 1 to sec. 5 AGG), containing
purpose, scope of application and definitions of terms. The second part comprehends
sections 6 to 18 and regulates the protection of employees against unequal treatment as well
as the personal scope of application in the context of employment. Part 3 regulates the
protection against unequal treatment under civil law (sec. 19 to sec. 21 AGG). Regulations
on legal protection can be found in Part 4 (sec. 22 to sec. 23 AGG). Part 5, consisting of sec.
24 AGG, regulates special provisions for civil service positions, which will not be analyzed
in this context. Part 6, consisting of sec. 25 to sec. 28, provides explanations on the
688
Comp. Raasch, 2007
689
Comp. Busch/Kocher/Wolkoborsky, 2009, p. 17
690
Comp. Wisskirchen, 2007, p. 9
installation of antidiscrimination offices in the Federal Republic of Germany and on this

basis the last three paragraphs contain final provisions.691
54.2 Elements of unequal treatment

The AGG names eight elements of unequal treatment whose application will now be
explained.
54.2.1 Race
The term race has to be treated with special care in the interpretation of the AGG, because
the legislator wants to distance itself from the existence of differences with regard to races.
The utilization of such terminology does not imply acceptance, which was meant to be
clarified by the formulation on the ground of instead of because of.692
54.2.2 Ethnic origin

The wording ethnic origin on the other hand implies a wide definition in the sense of
parentage, national origin or folklore. This means, that ethnic origin cannot be derived from
citizenship, but it also implies special ethnic groups with an own cultural identity.693
54.2.3 Disability
With regard to the AGG the legislation took the definition of 9th book of the German Social
Code (SGB IX) and the Act on the Equal Treatment of Persons with Disability (BBG) over.
These Acts define disabled people as persons whose physical functions, mental capabilities
or psychological health are highly likely to deviate, for more than six months, from the
condition which is typical for the respective age and whose participation in social life is
therefore impaired (sec. 2. subs. 1 sentence 1 SGB IX and sec. 3 BGG).694 Disabled people
for whom adverse treatment is prohibited are therefore only persons with a severely
handicapped pass.695
691
Comp. Hoffjan/Bramann/Kentrup, 2008, p. 3338
692
Comp. Schiek, 2007, sec. 1 AGG, mn. 9
693
694
695
54.2.4 Sexual identity

A final statutory definition of the term sexual identity is still missing. There is only an
interpretation of the term, which means that homosexual and bisexual men and women, as
well as transsexual and intersexual persons shall be especially protected in the AGG.696
54.2.5 Age
Age in this context means biological age. Not only younger but especially also older people
shall be protected. The basis is that each person is ageing at individual speed and the physical
characteristics of growing age cannot be generalized. Additionally, disadvantages can be
caused by age itself in todays society on the ground of high degrees of automation and the
change towards a society based on the provision of services.697
54.2.6 Religion and secular belief

Religion in the sense of the AGG is a very wide term that includes minority religions. On the
other hand, there are still country-specific differences regarding how certain groups like for
example the Scientology Church, can be categorized. However, it shall be underlined that
rarely an adverse treatment because of religion alone takes place, but normally
discrimination for multiple reasons is to be expected.698
Secular belief has a narrow understanding as a certainty connected with a person on certain
statements on the totality of the world and on the origin and aim of human life, which is
limited to inner-worldly references and explicitly excludes the general political ideology. In
order to avoid the access to denied business for example for right-wing followers, secular
belief is not protected against discrimination in sec. 19 AGG and therefore under Civil
law.699
54.2.7 Sex
Furthermore, sexual discrimination is prohibited under the AGG. This includes the male and
female sex, as well as transsexuals and hermaphrodites.700
696
697
Comp. ibid, sec. 1 AGG, mn. 4446
698
699
Comp. Bundestagsdrucksache 16/2022, p. 13
700
54.3 Scope of Application

In the personal and objective scope of application it is explained by whom and when the
AGG can be applied.
54.3.1 Objective scope of application (sec. 2 AGG)

In sec 2 AGG it becomes clear that the focus of the AGG lies on labor law, but that large part
of civil and social law are also included. This becomes obvious because in sec. 2 subs. 1 n
1-4 labor law aspects are determined, while in sec. 2 subs. 1 n 58 AGG aspects with
relation to civil and social law are established.701 Discrimination on the grounds of one of the
elements in any phase of the labor relation, from selection of staff until the termination of the
labor relation, is prohibited.702
The objective scope of application embraces:
access to employment and to professional advancement,
conditions of employment, work and dismissal,
access to vocational training
membership and participation in organizations,
social security,
social advantages
education and
access and supply of goods and services.
With regard to the termination to employment, the Act on the Protection against Unfair
Dismissal applies in accordance with section 2 subs. 4 AGG. Benefits under the Social Code
and company pensions are regulated by the company Pension Act.
Access to employment and professional advancement

The conditions for the access to independent or employed work, regardless of the area of
activity or the professional position, as well as the professional advancement shall be free of
discrimination. The selection and employment criteria obtain special attention in this context,
because they offer special potential for unequal treatment. Therefore, unequal treatment is
prohibited in the advertisement of a vacancy, in selection of personnel and promotion of staff
as well as in the employment conditions.703 The inclusion of access to professional
advancement shall avoid that unequal treatment is not only eliminated in the decision on a
701
Comp. Worzalla, 2006, p. 43
702
Comp. Schtt/Wolf, 2006, p. 17
703
promotion, but already in the professional assessment, which provides the basis for the
decision.704
Conditions of employment, work and dismissal

Sec. 2 n 2 AGG includes any employment and work conditions including remuneration and
reasons for dismissal, especially individual and collective agreements and measures in
relation to the execution and termination of the labor relation e.g. in form of dissolution
agreements, as well as in relation to professional advancement. Therefore, the subsequent
consequences of the terminated labor relation are included as well. This means that e.g. labor
contract agreements, regulations of a company agreement, tariff regulations, promotions,
individual instructions for the concretization of the duties of employment or the unilateral
duties of the employer are protected by the AGG.705
Access to vocational training

Discrimination is prohibited with regard to the access to all forms and levels of vocational
training, vocational guidance, advanced vocational training and retraining, including
practical work experience. In accordance with sec. 1. German Vocational Training Act
(BBiG), the preparation for vocational training, vocational training, vocational advanced
training and vocational retraining are comprised in the term professional training. Practical
work experiences are measures that are suitable to improve a persons chances on the labor
market by imparting practical professional experience.706
Membership and involvement in organizations

The scope of application of the AGG also includes the membership and involvement in a
labor union, an employers association or professional organizations. The prohibition of
discrimination also refers to the benefits provided by these organizations.707
Social protection, social benefits and education

Discrimination for a reason named in sec. 1 AGG is also not admissible in reaction to social
protection, including social security and health services, socials benefits and education. A big
part of these factors is regulated under public law, because to a large extent, they are state
benefits. But also benefits on a private law basis in form of private medical contracts or
private educational services by private providers are covered by the AGG.708
704
Comp. Schleusner/Suckow/Voigt, 2007, sec. 2 AGG, mn. 6
705
706
Comp. ibid, p. 46
707
708
Access to and supply with goods and services

Sec. 2 subs. 1 n AGG includes the access to and supply with goods and services provided to
the public including living space. The term services means not only service and labor
contracts, but also agency agreements, financial services, rental agreements, loan and
insurance contracts as well as leasing agreements. The protection is limited to the extent that
the goods and services have to be available to the public, whereby not the size of the named
public is decisive, but the fact that the declaration of intent of the provider exceeds his
privacy.709
54.3.2 Personal scope of application (sec. 6 AGG)

Sec. 6 AGG specifies the protected persons as well as the employers
Persons covered
Among the employees and therefore, the possible claimants under the AGG are:
employees,
persons employed for vocational training,
persons of similar status on account of their dependent economic status,
applicants for an employed work relation,
persons whose employed work relation has ended
in public economy and public service.710

An employee is defined as a person who is obliged to exercise independent work in personal
dependence on the basis of a contract under private law. Thereby, the employee is subject to
the employers authority to give instructions, which can include content, place, time and
duration of work. Furthermore, the employee is integrated in the employers labor
organization.711 Among the employees under the AGG are also persons who have a factual
work relation. 712 Part-time employees who work at least 10 hours a week and people with
marginal occupation are also covered by the AGG713.
Among the people employed for vocational training are under sect. 1 subs. 1 German
Vocational Training Act (BBiG) not only trainees, but also employees in preparation for
their profession, in vocational advanced training and vocational retraining.714 If the person in
question has concluded a contract under private law in dependence of another person and is
709
710
Comp. Dubler/Bertzbach, 2008, sec. 6 AGG, mn. 1
711
712
713
Comp. Rust/Falke, 2007, sec. 6 AGG, mn. 12
714
Comp. sec. 1 subs. 1 BBiG
regularly bound by the instructions of that person, this constitutes a case of employment in
the sense of the AGG. Also working students,715 student apprentices and voluntary workers
are included in the personal scope of application, because remuneration is not relevant.716
The circle of employees includes also persons with similar status on account of their
dependent economic status, as well as people engaged in home work and those equal in law
to home workers,717 as for example persons occupied in sheltered workshops and persons in
rehabilitation. Basically, people with similar status are no employees in the sense of the labor
law. A definition of the term can be found in sec. 12a Collective Bargaining Agreements
Act: persons with similar status are employees, who are economically dependent and similar
to employees in need of social protection and who have a personal obligation to fulfill their
work on the basis of service or labor agreements. Additionally, they have to work
predominantly for one person or to obtain on average more than half of their salary from one
person.718 There is no need for social protection if the obligor himself just like an
entrepreneur employs people under his own name.719
The Discrimination elements named in the AGG cover equally applicants to an employee
relation. It is regarded to be sufficient when a person applies with an employer for an
employment, by which the same must receive the desire for contract conclusion.720 However,
claims are only possible under the AGG if the application was subjectively serious and if the
applicant can objectively be taken into consideration for the vacancy,721 which can also be
the case in unsolicited applications.722
The legislator also included people into the scope of the AGG whose employment has come
to an end to encounter the case of subsequent consequences of the labor relation, especially
with regard to the company pension.723
Because they have no contract under private law, civil servants and trainees with civil service
contracts, judges, soldiers, community servants and war resisters are not considered in this
part of the AGG. However, the AGG covers them with special consideration to their special
legal position under sec. 24 AGG.724
715
Comp. Bhrle, 2007, p. 12
716
717
718
719
720
721
722
723
724
Employer in the sense of the AGG

Employers are natural and legal persons as well as partnerships with legal capacity that
employ one or more persons in accordance with sec. 6 subs. 1 AGG. In the case of people
engaged in home work and those equal in law, the employee is replaced by the principal or
foreman.725
A special case it the one of temporary agency workers, because in addition to the contractual
employer, i.e. the leasing agency. the leaser is deemed to be an employer in the sense of the
AGG.726
Self-employed people and board members

Self-employed persons and board members, especially managers and members of the
executive board,727 are only covered in connection with the access to employment and with
professional advancement by the regulations of Part 2 of the AGG. In this context,
discrimination in relation to selection criteria and employment conditions should be avoided,
which also corresponds to the objective scope of application. Self-employed people and
board members are not part of the persons covered by sec. 6 subs. 1 AGG, because they are
basically considered as legal representatives of the employer and therefore are deemed to
have the position of employers.728
54.4 Elements of discrimination (sec. 3 AGG)

Sec. 3 AGG contains definitions to the different elements of discrimination. Unequal
treatment can be effected in form of direct and indirect discrimination, harassment or sexual
harassment as well as instructions to discriminate.
54.4.1 Direct discrimination

There is a case of direct discrimination in accordance with sec. 3 subs. 1 AGG, if one person
is treated less favorably than another is, has been or would be treated in a comparable
situation, whereby the unequal treatment can also be an omission.729 The prohibition of direct
discrimination shall forbid express unequal treatment, whereby structural unequal treatment
is not taken into account. This means that actual differences are not considered.730
725
726
Comp. Kolmhuber/Schreiner, 2006, mn. 64
727
728
729
730
Comp. Busch/Kocher/Welkoborsky, 2009, p. 36
Examples for direct unequal treatment are:

A vacancy advertisement states that a young saleswoman is required (this is a direct
discrimination against older applicants and males).
The labor contract of a pregnant woman is not extended, even though this was assured
before the pregnancy had come to knowledge (direct discrimination against women).
Graduated salary in accordance with age groups (direct discrimination of younger
employees).
54.4.2 Indirect discrimination

Indirect discrimination shall be taken to occur where an apparently neutral provision,
criterion or practice would put persons at a particular disadvantage compared with other
persons, while in reality the unequal treatment has different reasons. In this case an
examination is necessary whether the disadvantage can be justified by a legitimate aim and
whether it is appropriate.
Examples for indirect discrimination are:
Part-time employees may not obtain certain benefits without work time-related reasons
(because part-time employees are predominantly females, this can be a case of an indirect
discrimination against women).731
A social plan provides that parent time has no relevance for the staff membership time
and thus, for the amount of compensation (this can be a case of indirect discrimination
against women).
54.4.3 Harassment
On the basis of Art. 2 subs. 3 of the anti-racism directive 2000/43/EC732 there is deemed to
be an unlawful harassment in the sense of the AGG when an unwanted conduct takes place
with the effect or purpose of violating the dignity of another person.733 The stage of violation
of human dignity under Art. 1 German Basic Law does not have to be reached in this case.
With regard to the degree of violation, a conduct is sufficient which meets the criteria of
defamation in accordance with sec. 185ff. Criminal Code.734 Furthermore it has to be a case
where an intimidating, hostile, degrading, humiliating or offensive environment is created.
The conduct can be of verbal or non-verbal nature with the result that the point of view of an
uninvolved third person decides whether there is a case of harassment under the above
mentioned criteria. The harassment can also take place in form of defamation, insult,
hostility, threatening or physical assault and does not have to be carried out neither
731
Comp. Busch/Kocher/Welkoborsky, 2009, p. 36 et seq.
732
Comp. Gaier/Wendtland, 2006, sec. 2 AGG, mn. 87
733
734
Comp. Rust/Falke, 2007, sec. 3 AGG, mn. 57
intentionally nor repeatedly. Also a one time violation of a persons dignity is sufficient if a
hostile environment is the consequence.735
Examples for harassment are:
An employer makes a tasteless joke on gypsies without knowing that the employee is a
Roma (harassment on grounds of ethnic origin),736
Abusing certain groups of people.
54.4.4 Sexual harassment

Sexual harassment is part of harassment in accordance with sec. 3 subs. 3 AGG, with the
difference that the harassment has sexual motives. The description of harassment is therefore
also valid for sexual harassment, with the exception that for sexual harassment the hurdles
are lower, because the intrusion into privacy is bigger. Therefore, no humiliating
environment has to be created, because the sexual harassment itself can be taken as example
for humiliation. No danger of repetition has to be existent to fulfill this criterion;737 however,
there has to be a connection to the labor relation or a connection to the company.738
Examples for sexual harassment are:739
smacking on an employees bottom,
imposing kisses on the employee,
the supervisor hugs a trainee with sexual intentions.
54.4.5 Instructions to discriminate

Also giving instructions to discriminate against a person on any on the grounds referred to
under sec. 1 AGG is deemed to be an unlawful act in accordance with the AGG. Although
the instruction to discriminate has to be given intentionally, it is not necessary that the
executing person has to know this prohibition. Furthermore, the instruction is also deemed to
be unlawful when the instructed person does not carry out the instruction.740
735
736
737
738
Comp. Bauer/Gpfert/Krieger, 2008, sec. 3 AGG, mn 50
739
Comp. Dubler/Bertzbach, 2008, sec. 3 AGG, mn. 77a
740
Examples for instruction to discriminate are:

the instructions of a house owner to a estate agent not to sell the house to colored people
(instruction to discriminate on the grounds of ethnic origin),741
the instruction of an employer to the Federal Employment Office not to contract women
for a vacancy (instruction to discriminate on the grounds of sex).742
54.5 Permissible differences of treatment

The AGG provides exceptions when a different treatment on the ground referred to in sec. 1
AGG is justified. Differentiated treatment is permissible because of occupational
requirements, religion or belief, age and because of positive action.
If the discrimination against a person is undertaken because of multiple grounds stated in sec.
1 AGG, the justification has to be valid for all grounds in accordance with sec. 4 AGG. This
means, if a woman is discriminated because of her sex and her religion, there has to be a
reason for justification for each discrimination element.743
54.5.1 Positive action

Sec. 5 AGG gives the employers, parties of collective agreements, business partners and
parties of a contract under private law the possibility to promote formerly disadvantaged
groups. The aim is to prevent or compensate for disadvantages arising on any of the grounds
of sec. 1 AGG or to avoid them for the future. However, fixed rates of affirmative action are
not admissible according to the European Court of Justice, because in that case persons of
other groups would be subject to discrimination.744 It has to be noticed that in case of
positive action there is freedom of assessment, which has to be partially filled by an
assessment of proportionality.745
54.5.2 Permissible differences of treatment because of

occupational requirements
Unequal treatment is admissible for reasons of occupational requirements in accordance with
sec. 8 AGG, if:
741
742
743
744
745
Comp. Steinkhler, 2007, mn. 84
a differentiation is made because of the nature of the occupational activities or the

context in which they are carried out, if the grounds constitute a genuine and determining
occupational requirement and
the occupational objective is legitimate
the requirement is proportionate
Bare considerations of practicality, however, do not justify unequal treatment. The
requirement made has to be necessary and proportionate.746 For this point there is no final
statement possible on when special occupational requirements exist, because these can also
exist by determination of an organizational concept by the employer. Therefore, it is always
necessary to examine the individual case.747
There is no justification for harassment or sexual harassment, because no occupational
purpose is imaginable for these cases.748
The equality of remuneration regulated in sec. 2 is now expanded to the rest of the grounds,
with the result that not only unequal treatment on the ground of sex, as regulated in the Civil
Code, is prohibited. Differences with regard to remuneration are also not admissible if
special regulations apply for the element of discrimination in question. On the other hand,
there is a right to equal remuneration for the same and equivalent work only. The same work
is performed when the usual activities of the compared persons are identical or if the
employees could replace each other, i.e. if responsibility, qualification, work conditions and
workload are corresponding. In order to examine whether there is a case of equivalent work,
factors like education, experience, capabilities as well as mental, physical and intellectual
demand and the responsibility for people and objects have to be compared.749
54.5.3 Admissible differences of treatment on grounds of

religion or belief
Religious communities or facilities founded on religious principles are privileged by the
legislator to a certain extent in the so called church clause. Also organizations which have
formed to practice a religion or belief have the right to differential treatment on grounds of
religion or belief in accordance with sec. 9 AGG, as far as the grounds constitute a justified
occupational requirement for the form of activities by reason of their right to self-
determination or by the nature of the particular activity.750
The scope of application of sec. 9 AGG comprises also facilities like confessional schools,
hospitals or the Caritas which therefore have the possibility to make a certain religion or
746
747
Comp. Schtt/Wolf, 2006, p. 39 et seq.
748
749
750
belief an occupational requirement for the employees. It is still not clear how far the
justification goes, e.g. whether auxiliary activities can be included. Subs. 2 extends the
privileges of the above mentioned facilities even further and makes it possible for them to
demand for a certain conduct of their employees in the sense of acting in good faith and with
loyalty. Legal consequences of violations of these requirements are determined by the
facilities themselves; the courts, however, may examine whether they are adequate and
proportionate.751
54.5.4 Admissible differences in treatment on the grounds of

age
An objectively and reasonably justified and legitimate aim is the condition for a justification
of unequal treatment on grounds of age. In this case the means for achieving this aim have to
be appropriate and necessary.752 The aims in accordance with sec. 10 AGG can be of general
nature, for example employment policy, labor market policy or vocational training or
concerning only one company.753
The grounds of the Act show that there are complex correlations in the case of differences in
treatment because of age, with the result that it is not possible for the legislator to provide
general principles to avoid discrimination, so that a flexible application is necessary.754 In
order to point out at least a certain direction, the legislator provides eight examples; the
enumeration of the reasons for justification, however, is not conclusive.755
Example 1: Setting of special conditions of employment

Example 1 declares differential treatment to be admissible if it includes the setting of special
conditions for access to employment and vocational training, as well as particular
employment and working conditions, including remuneration and dismissal conditions, as far
as it serves the vocational integration of certain groups. The purpose of differential treatment
has to be:
vocational integration of young people,
vocational integration of older workers,
vocational integration of persons with caring responsibilities or
to ensure the protection of young people, older workers or persons with caring
responsibilities .
751
752
753
754
Comp. Bundestagsdruckssache 16/1780, p. 36
755
The term young people can be understood in accordance with sec. 2 subs. 2 German Youth
Employment Protection Act as natural persons aged between 15 and 18 years. The term of
older workers, however, has not been defined by law so far. Person with caring
responsibilities include especially persons who care for children, older or handicapped
relatives.756
Example 2: Minimum requirements to age and work experience

The AGG also admits to fix minimum conditions regarding age, professional experience or
seniority in service for access to employment or to certain advantages linked to employment.
It has to be observed that it has to be examined beforehand whether the unequal treatment is
justified by a legitimate aim.757 This rule can for example be applied to the remuneration,
because a connection to professional experience and seniority is easier to justify as a
connection to age.758
Example 3: Fixing of a maximum age

The fixing of a maximum age for recruitment which is based on specific training
requirements of the post in question or the need for a reasonable period of employment
before retirement is admissible in accordance with sec. 10 sentence 3 n 3 AGG. The
background of this example is that an extensive introduction into the work shall be
confronted with productive performance.759.
Example 4: Company pension

It is not a case of discrimination on the ground of age in accordance with sec. 10 sentence 3
n 4 AGG, if upper age limits in the company social security systems, especially for
company pensions, are fixed. However, no discrimination on other grounds may result from
this.760 This part of the law, however, conflicts with sec. 2 subs. 2 AGG where the company
pension is excluded from the objective scope of application, with the result that it has to be
seen to which extent this clause is applied.761
Example 5: General age limits

Sec. 10 sentence 3 n 5 AGG makes clear that it is possible to fix age limits in labor
contracts, company agreements or collective agreements, as it was already admissible under
sec. 41 SGB VI. N 5 determines that agreements are admissible under which the termination
of the labor relation is possible without dismissal at a point in time when the employee may
756
757
758
759
Comp. ibid, p. 36
760
Comp. ibid, p. 36
761
apply for payment of old-age pension. This rule is meant to give younger persons the chance
to integrate into the labor market, while the older workers have already reached financial
security.762
Example 6: Differentiation between benefits of social plans

Furthermore, a differentiation between social benefits within the meaning of the Works
Constitution Act is admissible. A graduation of the compensation regulations based on age or
length of service, whereby the employees chances on the labor market which are dependent
on his age, have been taken into consideration by means of emphasizing age relatively
strongly, is legitimate. Furthermore, it is admissible to exclude the employee from certain
benefits of the social plan, because they are economically secure. However, both
differentiations are only valid in the context of the Works Constitution Act. Collective
Agreements are currently not admissible in this form.763
54.6 Organizational obligations of the employer

Sec. 11 and 12 AGG provide for organizational obligations of the employer, which can be
divided into preventive and reactive protection, warning and information duties.764 The
organizational duties are:
obligation for neutral advertisement of vacancies (sec. 11 AGG),
take necessary measures for protection (sec. 12 subs. 1 AGG),
training obligations (sec. 12 subs. 2 AGG),
obligation to react in case of violation against employees (sec. 12 subs. 3 AGG),
protection of employees against discrimination by third parties (sec. 12 subs. 4 AGG)
and
information (sec. 12 subs. 5 AGG).
The employees are entitled to claim against the employer on the basis of this clause and can
oblige him to fulfill his duties.765 If the employer takes no or inappropriate measures for the
elimination of harassment or sexual harassment, the affected employees are entitled to use
their right to refuse performance without loss of pay in accordance with sec. 14 subs. 1 AGG.
Furthermore, they have the right to claim for compensation in accordance with sec. 280 subs.
1 Civil Code (BGB), if the employer violates his obligations under sec. 12 subs. 1-4 AGG.766
In the case of a violation of the duty to inform there are no implications concerning damages,
762
763
Comp. Worzalla, 2006, p. 120 et seq.
764
765
Schleusner/Suckow/Voigt, 2007, sec. 12 AGG, mn. 46
766
Comp. ibid, sec. 12 AGG, mn. 47 et seq.
i.e. it constitutes a penalty-free provision.767 If the employer, on the other hand, violates the
duty of neutral formulation of advertisements for vacancies, a violation against sec. 7 AGG
can be assumed,768 which means that all affected applicants are entitled to claim for
compensation.769
54.6.1 Preventive measures

Among the preventive measures is the duty of neutral advertisement of vacancies, taking
necessary measures of protection and training measures.
In accordance with sec. 11 AGG the advertisement of the vacancy shall not violate the
prohibition of unequal treatment under sect. 7 subs. 1 AGG, also in the context of vocational
training and advanced training. The possible discrimination of certain groups of applicants
shall be avoided from the start. This clause, however, constitutes a mere intensification of the
comparable sec. 611b BGB.770 If an external third party is assigned with the advertisement of
the vacancy, as the Federal Employment Office or a human resource agent, the employer has
the duty to supervise that the advertisement is conform to the AGG. If he does not fulfill this
obligation, the violations will be attributed to the employer.771
In accordance to sec. 12 subs. 1 AGG the employer has the obligation to take measures
necessary to ensure protection against discrimination on any on the grounds referred to under
sec. 1 AGG. Also preventive measures are included, because they can be regarded as more
efficient than a direct intervention in case of unequal treatment. It has to be determined under
objective aspects when a case of discrimination is given, which is also dependent on
company structures.772
In sec. 12 subs. 2 AGG the employer is required to draw attention to the inadmissibility of
such discrimination in a suitable manner.773 Because this duty exists before the
discrimination, preventive measures in the sense of training or further training or similar
measures have to be taken by the employer. The training shall be appropriate with regard to
kind, content, extent and frequency to sensitize the employees in such a way that they
recognize discrimination and react to it. Also in this case, the degree of necessary efforts
depends on the structure of the company. As soon as the employer has provided necessary
training for his employees in accordance with sec. 12 subs. 2 sentence 2 AGG he has
767
768
769
770
771
772
773
Comp. Schtt/ Wolf, 2006, p. 57
fulfilled his duty, which means that he cannot be claimed against for discriminations by his
employees.774
54.6.2 Reactive measures

Reactive measures include the obligation to react to violations by employees as well as
protection of the employees against discrimination by third parties.
Where employees violate the prohibition of discrimination, the employer has the obligation
under sec. 12 subs. 3 AGG to take necessary and appropriate measures to put a stop to the
discrimination under sec. 7 subs. 1 AGG. If there is a violation against the prohibition of
discrimination, this means in accordance with sec. 7 subs. 3 AGG that the discriminating
employee has violated the contractual obligations. Possible measures taken by the employee
may include cautioning, moving, relocating or dismissing the employee in question.775
Under sec. 12 subs. 4 AGG the employer has the obligation to protect his employees while
pursuing their profession. Also in this case appropriate counter measures776 have to be taken
against third persons, e.g. customers and suppliers. The reaction by the employer, however,
is expected to be proportionate e.g. to avoid the loss of important customers.777
54.6.3 Information obligations

Furthermore, employers have the obligation under sec. 12 subs. 5 AGG to make the General
Equal Treatment Act, as well as the departments competent to handle complaints pursuant to
sec. 13 AGG known to all employees. However, the employees shall only get notice of these
regulations, the employer has no obligation to take care that the employees are aware of
them. Possible ways of communication are putting up a notice or displaying information
leaflets in a suitable place or using the internet to display a text.778
54.7 Legal consequences of violations of the AGG

In case a discrimination or harassment in connection with a running labor relation has taken
place, the AGG provides the following penalties for the discriminated persons:
774
775
776
777
778
right of appeal (sec. 13 AGG)

right to refuse performance (sec. 14 AGG)
right to compensation and damages (sec. 15 AGG)
prohibition of victimization ( 16 AGG)
In the context of these penalties, the employer is granted liability alleviation in case of
discrimination in the application of collective bargaining agreements in accordance with sec.
15 subs. 3 AGG. Furthermore, a two months waiting period and the period for filing a claim
under sec. 61 Labor Courts Act apply.779
54.7.1 Right of appeal

Under sec. 13 subs. 1 AGG the employee has the right to complain about a discrimination
against him, which creates an instrument of in-company settlement of disputes. The
employee is entitled to lodge an oral or written complaint with the competent department of
the company, which has to be named by the employer.780 The competent authority can also
be a department installed on the grounds of the Employee Protection Act. The legislator
names a superior, an equality ombudsman or a company department for complaints as
examples for competent authorities.781 In case of an informal complaint, the employee does
not have to respect any terms, however, he can forfeit his right. For the right to be forfeited,
the employee has have omitted to complain for some time, although it would have been
possible for him, with the result that the employer could assume that no complaint would be
made.782 An examination of the content of the claims has to be undertaken and the
complaining person has to be informally informed on the result and the decisive grounds.783
If the notice is negative, the procedure of complaint is deemed to be completed with the
notification to the complaining person. If the complaint is judged as being justified, the
employer has the duty to take adequate measures to remedy the complaint. At least the
discriminating person has to be instructed to stop his duty violating behavior.784
54.7.2 Right to refuse performance

Under sec.14 AGG the employee is entitled to refuse performance without loss of payment,
if the employer does not take the necessary measures in order to eliminate discrimination or
sexual harassment. So far, sexual harassment has been penalized under sec. 4 of the
Employee Protection Act, which was widened by the extension to all elements of
779
Comp. Kolmhuber/Schreiner, 2006, mn. 203207 und Punkt 3.8.1
780
781
782
783
784
discrimination under sec. 1 AGG. The condition for a possible right to refuse performance is
that a complaint has been previously filed with the employer and the necessity for the
protection of the employee, e.g. if health problems can be expected.785 Sec. 14 AGG can be
applied if the employer does not sufficiently react to a complaint, commits the harassment
himself or if he has taken notice of a harassment with danger of repetition.786 If an employee
uses his right to refuse performance, the employer is still obliged to take care of the
elimination of discrimination in order to make the employees return to his workplace
possible.787
The reference to the general right to refuse performance under sec. 273 BGB was integrated
to underline, that this remains intact for other case constellations. The background is that the
purposes of both regulations are different. Sec. 273 BGB shall enforce the fulfillment of an
obligation by means of pressure, while sec. 14 AGG is meant to protect employees against
further harassment or sexual harassment.788
54.7.3 Right to compensation

The compensation regulated in sec. 15 subs. 1 AGG corresponds to the claim under sec. 280
subs. 1 BGB and therefore constitutes a contractual right which arises from the violation of
sec. 7 subs. 3 AGG. In contrast to the right for damage, the compensation compensates
material loss in accordance with sec. 15 subs. 1 AGG as far as the employee is responsible
for the violation of duty. In accordance with the regulations on general determination of
responsibility under sec. 276 BGB the employee has to have acted intentionally or
negligently. If discrimination is established, the employer is obliged under sec. 22 AGG to
prove that he is not responsible for it. The compensation of the damage can only be
monetary, because under sec. 15 subs. 6 AGG there is no claim to establish a work
relationship, vocational relationship or professional promotion.
Furthermore, the employer is liable under sec. 278 BGB for discrimination on the part of his
legal representative or persons whom he uses to perform his obligation. This means persons
who become active in his name under the will of the employer. The representative must be
exercising the rights or fulfill the duties of the employer and have a right to give instructions
to the discriminated person.789
The extent of the compensation is determined in accordance with sec. 249 BGB. If an
employment relationship already exists, there are primarily rights to fulfillment and equal
treatment, which leads only in rare cases to rights of compensation. Claims for compensation
are more common in cases of failed applications. In these cases, however, only the so called
785
786
Comp. Worzalla, 2006, p. 154 et seq.
787
788
789
best qualified applicant is entitled to compensation and has to prove that damages really
occurred. This would be possible for example, when he had terminated another work
relationship on the basis of the awakened confidence790 or if travel costs for the job interview
had arisen.
54.7.4 Right to claim damages

In sec. 15 subs. 2 AGG the legislator opens the possibility for a claim to damages because of
discrimination on a ground under sec. 1 AGG, which however constitutes only a special form
of sec. 253 BGB. This means damages for intangible loss can be required,791 with the former
exclusiveness of material and intangible damages being eliminated.792 There is already a
claim for damages if the motive for discrimination has contributed to the damage.793
The claim for damages can arise in case of execution or termination of a labor contracts and
subsequent duties, which corresponds to an expansion of sec. 611a BGB. In contrast to the
right for compensation, in case of the right for damages it is not necessary that the employer
is responsible.794
Also in case of damages, no upper limit has been set yet; however, the damages have to be
appropriate. The courts have a freedom of assessment with regard to the amount of damages,
as already regulated under sec. 253 BGB. Correspondingly, damages shall be paid which are
in an appropriate relation to the loss, but which have at the same time a deterring effect on
the employer.795 A limitation of the amount to three monthly salaries is only given in the
course of selection procedures in which the applicant was not employed due to a
discriminating selection.796
If in the execution of a collective bargaining agreement or a company agreement,
discrimination takes place, there is only a claim for damages under sec. 15 subs. 3 AGG if
the employer acts with intention or gross negligence.797 However, agreements which violate
the prohibition of discrimination under sec. 7 subs. 2 AGG, are void.798
790
791
792
793
794
795
796
797
798
54.7.5 Prohibition of victimization

The prohibition of victimization under sec. 16 AGG determines that employees, persons who
support the employees as well as witnesses shall not be disadvantaged because of utilizing
their rights under the AGG. Furthermore, the employee has no right to penalize persons who
refuse to carry out unlawful instructions.799 Sec. 16 subs. 2 AGG determines that neither the
tolerance nor the rejection of discriminatory conduct by an affected employee may be used
as the basis for a decision affecting that employee. For example, an employee may not be
discriminated against, because he formerly rejected harassment by a superior or, in the
contrary case, tolerated it. Therefore, the last case cannot be judged as silent consent by the
affected person in any case.800
54.8 Court enforcement of claims under the AGG

Employees can go to court to enforce the above mentioned claims, as far as the employer
does not fulfill them on his own accord. The following chapter will shortly analyze the terms
to be respected as well as the burden of proof.
54.8.1 Terms
In order to claim for damages, compensation, omission or elimination of a discrimination a
two-month term has to be respected, after whose expiration the claims under sec. 15 subs. 4
AGG and sec. 21 subs. 5 AGG expire. However, it is possible to agree on deviating
regulations in collective agreements. The term commences as soon as the employee takes
notice of the discrimination. In case of a rejected application or the rejection of professional
promotion, the legislator assumes that the affected person gains knowledge when receiving
the rejection.801 However, it is often not yet recognizable at moment that this is a case of
discrimination.802 After the expiry of the time limit the claim may only be asserted when the
disadvantaged person was prevented from meeting the deadline through no fault of their
own.803
Furthermore, there is a three month term of assertion before a court in the sense of sec. 61b
Labor Courts Act, which starts with the moment of the assertion of claims in due form and
799
800
Comp. Schleusner/Suckow/Voigt, 2007, sec. 16 AGG, mn. 14 et seq.
801
802
803
meeting the terms. The period for claims only affects claims for damages in accordance with
sec. 15 AGG.804
54.8.2 Statement of facts and burden of proof

The repartition of the burden of proof deviates from the usual procedures under civil law
under which the plaintiff has to prove the facts on which the claim is based.805 The burden of
proof regulated under sec. 22 ABB imitates sec. 611a subs. 1 sentence 3 BGB and
determines the obligation to state the facts and the burden of proof in dependence of the
scope of influence of the incidences. The discriminated person has to fully prove with the
help of evidence that he was discriminated against in comparison to other people and that the
unequal treatment was based on one of the elements of discrimination under sec. 1 AGG.806
The case of defective advertisement of a vacancy receives special attention in this context. In
the case of harassment or sexual harassment it has to be proven that the harassment has
actually taken place, which leads to a lack of evidence in the case of absence of witnesses.807
In the next step the burden of proof is reversed, i.e. if discrimination on one of the grounds
referred to under sec. 1 AGG has been established, the discriminating person has to prove
that no discrimination has taken place or that the discrimination was admissible.808
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XIII International/European Labor
Law
55 On a personnel resource management
approach in international, European
and national labor law
The economic and personnel management approach of this book was especially supported
by the subsequent practice-related considerations concerning international and European
Labor Law. Labor law does not only provide company internal conditions for actions. The
extent of regulations itself constitutes a reaction to economic changes on the labor market.
This means that in different economic systems and time spans, only that labor law prevails
which is best to solve issues with regard to employment law, because employees, labor
unions or employers vote only for the law which they assume to be most appropriate to solve
an employment law conflict in the above mentioned sense.809
The condition for such an evolutionarily developing labor law is that the parties are free to
choose between different rules and regulations. The national labor regulations have therefore
to open the access to other labor laws.810 At least under German law, this condition is largely
fulfilled, because in principle the parties are allowed to agree on other labor law regulations.
This freedom is limited by the fact that they have to respect the obligatory standards of the
German labor protection (Art. 30 Introductory Law to the Civil Code/EGBGB811). Secondly,
the described choice of law is only possible, if the parties have sufficient knowledge on the
other legal system with regard to labor law. Therefore, it seems to be unavoidable to
concentrate not only on the horizon of German labor law, but to look out for possible choices
of regulatory alternatives in other countries and international organizations.
809
See in detail: Krimphove, 2006, p. 10 et seq., 17 et seq. (with further references); Krimphove (a), 2001, p. 497
et seq., 509, 528
810
Krimphove, 2006, p. 10 et seq., 14 (with further references)
811
See below: Chapter III. C (with further references)
314 XIII International/European Labor Law
Companies with activities in several countries have been using this point of view into
international labor law for years. This way, they have been able to obtain considerable cost
advantages.
The following chapter shall make a contribution to this point of view and make the capacity
to choose also available to the personnel management policy of small and medium-sized
companies.
56 On the terminology labor law

At second sight it proves to be especially difficult to provide a comprehensible and plausible
definition for the term labor law. Its scope of regulations comprehends for example the
Dismissal Protection Law, vacation regulations, the Work Council Constitution Law, strike
regulations etc. The regulations are so varied and diverse that definitions of labor law for
example as law on employed work cannot do justice to the phenomenon of labor law and
seem to be too superficial. This problem does not only concern German labor law, but even
more European and international labor law. Especially the last mentioned fields of law
regulate and determine not only legal relations with regard to the relation between employer
and employee but also with regard to relations in the community of states.
No examination so far had put the international/European and national labor law under a
personnel expense-economic approach, despite the fact that structuring labor law under these
aspects seems especially relevant in practice, because in case of conflict the attribution to
international, European or German labor law is decisive for the circle of persons affected by
this field of law: in international labor law, for example, neither the individual employer nor
the individual employee is addressed. Addressees of this field of law are merely countries
and organizations under international law.
The overall view on labor law which also includes international regulations on labor law
is of special importance for academics as well as practitioners. The knowledge of the existing
and developing international regulations on labor law make it possible to foresee labor law
trends, developments and their future implementation into national/German law.
This chapter conveys a comprehensive description of the existing international/European and
German labor law. The purpose is not only to provide a guideline for the description of the
rights of employees and employers arising from labor relations, but also to focus the relation
between international and European and national labor law and to make it possible for the
first time to assess its cross-border, worldwide importance in a globalised reality of labor
law.
57 International labor law

The existing regulations under international labor law are very varied. They can especially be
systematized according to the fact whether and how far an individual regulation of individual
labor law grants an individual and independently enforceable legal position to the individual
person, employee and employer.
57.1 International labor law as public international

law
International legal regulations are characterized by the fact that in principle, they bind only
the legal entities of international law, i.e. countries or entities under the law of nations with
legal capacity, like confederations and country unions. The international labor law only
obliges states and state organizations. The individual citizen as legal entity does not appear in
international labor law. This means that employers and especially employees can benefit
from international labor law regulations, but only states and state organizations are bound by
them and therefore, employers and employees do not have any possibility to refer to the
benefits in the context of their existing labor relation. The benefits are only available under
international labor law as reflex to individuals, but not as independent rights.
It seems to be consequent that citizens cannot take court actions to enforce their legal
advantages in front of an international court.
A very limited exception is provided by Art. 31 of the European Convention on Human
Rights. Here, the citizen may have a right to claim, when he wants to take actions against
state limitations. However, Art. 31 European Convention on Human rights does not give the
possibility to take actions against an employer in an international labor law conflict, for
example. Moreover, the judgments of the European Court for Human Rights have only
political significance, because the ECtHR has no power to oblige the member state to
implement its judgments (Art. 47 subs. 1 ECHR). Therefore, they are not binding.
Among the international regulations which can immediately influence labor law are:
Object of regulation Universal European Convention

Declaration of on Human Rights
Human Rights (ECHR)
(UDHR)
Prohibition of discrimination Art. 2 Art. 14
prohibition of slavery Art. 4 Art. 4 including
prohibition of forced
labor
right to
1. work Art. 23 I (-)
2. free choice of profession Art. 23 I (-)
3. remuneration and leisure time Art. 24 (-)
4. equal remuneration for equal work Art. 23, II (-)
5. education and access to trade unions Art. 23 III Art. 11
right to social security Art. 22 (-)
right to move freely between states Art. 14 Art. 13
freedom of thought, conscience and Art. 18 Art. 9
religion
freedom of opinion Art. 19 Art. 10
freedom of assembly Art. 20 Art. 11
Table 57.1: relevant labor law regulation of international labor law
Among state duties are also the responsibilities of states to take care for the legal protection
of their citizens and to create the corresponding institutions. Such obligations exist especially
in the context of provision of a working legal protection (Art. 8,9,19 UDHR/ Art. 6, 13
ECHR).
Because the regulations under international labor law provide no claims to the individual
citizens, they are able to name such generous and comprehensive legal objects as the right
to work in Art. 23 subs. 1 UDHR.
Also the constitutions of numerous European countries812 as well as the Lnder-

constitutions813 in Germany provide the right to work only as non-binding declarations of
intent or objectives which do not entitle individual citizens.
57.2 International special regulations

Individual regulations can have direct influence on individual labor relations and give
employees and employers independent legal positions. Such isolated regulations exist in
special areas of occupation as the field of transportation. In this case it is especially
international treaties which prescribe certain working times for steering a vehicle and are
binding for the employer.
57.3 Regulations of international private law

All other conflicts of international labor law are assessed in accordance with international
private law. International private law determines which national law has to be referred to in
order to solve a certain conflict. This means that international private law does not provide
any material law regarding labor regulations. It is rather adequate to answer the question
which national labor law shall be addressed to decide about an international labor law
conflict.
For German law this question is answered in accordance with Art. 27 and Art. 30 of the
German Introductory Act to the Civil Code (EGBGB) However, each nation has its own
International Private Law. Besides the German International Private Law, there is a French,
Japanese and Syrian one. The principle of these regulations states that the national labor law
of that nation is applied where the work itself takes place. Yet, the parties in international
labor relations are also free to choose the application of a certain national labor law. Which
international private law is applied, is principally the choice of the plaintiff when he chooses
a court (lex fori). Only if he claims before a German labor court, the German International
Law is applied and decides on the question which material national labor law shall solve the
conflict. For the purpose of this book it seems too extensive to enumerate all possible
alternatives and all national legal systems.
812
E.g.: Belgium: Art. 23; Finland: Art. 18; France: Preamble of 27th Oct. 1946; Greece: Art. 22; Italy: Art. 4;
Luxembourg: Art. 11; Portugal: Art. 53; Spain: Art. 35
813
Bavaria: Art. 168; Berlin: Art. 12; Bremen: Art. 49; Hessen; Art. 28; North Rhine-Westphalia Art. 24 I 3
58 European Labor Law

For the last few years the international discussion on the European Labor Law has gained
memento. Judgments as in the cases Christel Schmidt814, Ayse Szen815, Kalanke816
and Francovich817 provoked an immense number of comments in legal literature.
Individual statements of the European Court of Justice in its decisions and also the numerous
comments lead unfortunately to much insecurity in legal and managerial practice. The
question is more than ever: which influence has the European Labor Law on the national
labor law and the individual work relations and on the concrete formulation of obligations
between employer and employee? The regulations of European Labor Law have generally a
direct effect on the individual work relations, in contrast to international labor law. They do
not only grant independent rights to the parties of the labor relation against the European
member states and European organizations, but also provide legally enforceable rights which
the employers and employees can bring forward. In contrast to international labor law, the
European Labor Law constitutes a real labor law order.
However, this labor law order is most complex, because it does not only consist of the
statutory measures, as the European treaties, the European decrees and directives, but
especially also of the comprehensive and most differentiated decisions of the European Court
of Justice. As the still existing principle of unanimity of the European legislator halts its
work back, the jurisdiction of the European Court of Justice is currently the most important
source for European Labor Law.
Besides, the access to European Labor Law seems to be so difficult in practice, because the
European Labor Law did not abolish the national labor law systems in the individual member
countries, but rather supersedes them. This leads to the complex question on the interaction
between European and national law.
814
European Court of Justice 14/4/1994 (Case C-329/92) Christel Schmidt vs. Spar- und Leihkasse der frheren
mter Bordesholm, Kiel and Cornshagen, ECR. I 1994, p. 1311
815
European Court of Justice 11/3/1997 (Case C-13/95) Ayse Szen vs. Zehnacker-Gebudereinigung GmbH
Krankenhausser-vice
816
European Court of Justice (Case C-450/93) Eckhardt Kalanke vs. Hansestadt Bremen
817
European Court of Justice, 19/11/1991 (Case C-6/90 and C-9/90) Andrea Francovich, et al. Italian Republic,
ECR 1991, p. I5357
58.1 Application of European Labor Law in the labor

law systems of the member states
Since the decisions Costa/ENEL, Walt Wilhelm, Internationale Handelgesellschaft
und Simmenthal, the European Court of Justice has established it as case law that
Community law has precedence over national law.818
In this context, the intensity of the influence of European law on national law depends on the
quality of the European rules:
Law of the European treaties (EC; Treaty of Paris, EURATOM-Treaty) as well as the
European regulations have direct impact on national labor law. They are binding not only
for the European member states, but also for the citizens of the European Community, who
are subject to direct rights and obligations on the basis of these rules.
At first European directives are only binding for the member states which have the duty to
implement the content of the directives into national law. Only after the legislator has drafted
a national statute, the parties of a labor relation can refer to it.
If a member state does not comply with its duty to implement a directive or does not comply
with it in due time, a citizen who is disadvantaged by this can directly refer to this directive
against the state, because the state may not take advantage from neglecting its duty.
However, the European Court of Justice has noticed in the past year that a directive which
has not (yet) been implemented has never effects to the disadvantage of European citizens.
An un-implemented directive has therefore no effect for citizens in a labor relation.819
At best the disadvantaged citizen can claim for compensation against the omitting state.820
818
European Court of Justice 15/7/1964 (case 6/64) Flamio Costa vs. ENEL, ECR 1964, p. 1251; European Court
of Justice 13/2/1969 (case 14/68) ECR 1964, p. 1251 et seq., 12691271; Walt Wilhelm vs. Bundeskartellamt,
ECR 1969, p. 1; European Court of Justice 17/12/1970 (case 11/70) Internationale Handelsgesellschaft vs.
Einfuhr und Vorratsstelle Getreide, ECR 1970, p. 1125 et seq., 1135; European Court of Justice 9 March 1978
(case 106/77) Staatliche Finanzverwaltung vs. Simmenthal, ECR 1978, p. 629 et seq., 644, mn 17/18 ; Details:
Krimphove, 1992, p. 379 et seq. (with further references)
819
European Court of Justice 26 February 1986 (case 152/84) M. H. Marshall vs. Southampton and South-West
Hampshire Area Health Authority, ECR 1986, p. 723; European Court of Justice 19 January 1982 (case 8/81)
Ursula Becker vs. Finanzamt Mnster-Innenstadt, ECR 1982, p. 53; European Court of Justice 14 July 1994
(case C-91/92); European Court of Justice, 19 November 1991 (case C-6/90 and C-9/90) Andrea Francovich, et
al. vs. Italian Republic, ECR 1991, p. I-5357; European Court of Justice 14 July 1994 (case C-91/92) Paola
Faccini Dori, ECR I 1994, p. 3225; European Court of Justice 7 March 1996 (case C-192/94), mn 19 et seq.; El
Corte Ingls SA vs. Christina Blzquez Rivero printed in NJW 1996, p. 1401 et seq.; Ukrow, NJW 1994,
p. 2469 et seq.; Krimphove, 2001, p. 62 et seq. (with further references)
820
European Court of Justice, 19 November 1991 (case C-6/90 und C-9/90) Andrea Francovich, et al. vs. Italian
Republic, ECR 1991, p. I-5357; European Court of Justice 14 July 1994 (case C-91/92) Paola Faccini Dori,
ECR I 1994, p. 3225; European Court of Justice 7 March 1996 (case C-192/94), mn 19 et seq.; El Corte Ingls
SA vs. Christina Blzquez Rivero printed in NJW 1996; European Court of Justice 8 October 1996 (case C-
178/94, C-179/94, C-188/94, C-189/94190/94) Dillenkofer et al. vs. Bundesrepublik Deutschland; European
Francovich; European Court of Justice, 19/11/1991 (Case C-6/90 and C-9/90) Andrea
Francovich, et al. vs. Italian Republic, ECR. 1991, p. I5357
The Italian state had neglected its duty to implement the Directive 80/987 ECC into national
law and therefore failed to create institutions for the protection of employees whose
employers have become insolvent.
The employee, Mr. Francovich, was therefore not able to enforce his rights to remuneration
against his insolvent employer.
The European Court of Justice rejected the action of Mr. Francovich against his employer.
However, the court granted the corresponding claim for damages against the Italian state to
Mr. Francovich.821
The jurisdiction of the European Court of Justice has the most important influence on labor
relations:
Because the court interprets the Law of the Treaties as well as Regulations and Directives,
the influence of its jurisdiction reaches across all levels of European norms. With regard to
the extremely long duration of the creation of European norms (Directives, Regulations), the
way of the European Court of Justice to change law by means of case law seems far more
rapid and less laborious.
By means of the above described sources of law especially the jurisdiction of the European
Court of Justice the European legislation intervenes in many central question of company
labor law for example the equal treatment of national and foreign employees, equal
treatment of men and women at the workplace and technical and social work protection.
Court of Justice 5 March 1996 (case C-46/93) brasserie du pcheur vs. Bundesrepublik Deutschland, ECR I
1996, p. 1029, mn 31
821
Similar cases: European Court of Justice, 19 November 1991 (case C-6/90 und C-9/90) Andrea Francovich, et
al. vs. Italian Republic, ECR 1991, p. I-5357; European Court of Justice 14 July 1994 (case C-91/92) Paola
Faccini Dori, ECR I 1994, p. 3225; European Court of Justice 7 March 1996 (case C-192/94); El Corte Ingls
SA vs. Christina Blzquez Rivero printed in NJW 1996, p. 1401 et seq.; European Court of Justice 26 March
1996 (case C-392/93 British Telecommunications, ECR I 1996, p. 1631; European Court of Justice 3 May 1996
(case C-5/94) Hedley Lomas, ECR I 1996, p. 2553; also: European Court of Justice, 10 April 1984 (case 14/83)
Colson and Kamann vs. Land Nordrhein-Westfalen, ECR 1984, 1891; European Court of Justice 10 April 1984
(case 79/83) Doris Harz vs. Deutsche Tradax GmbH, ECR 1984, p. 1921; European Court of Justice 9
November 1993 (case C-132/92) Birds Eye Walls Limited vs. F. M. Roberts
58.2 Free movement of workers (Art. 39 EC) in labor

relations
The historic point of departure of the development of the European Labor Law constitutes
Art. 39 EC. Art. 39 EC gives European workers the right to choose the workplace freely
and regardless of its location in each member state of the European Community, in line with
the formation history of European Labor Law.
While, at first, the right of free movement of European workers was conceived against
national states,822 this entitlement under Art. 39 EC has now become a right with direct effect
between the parties of a labor contract.
Especially the jurisdiction of the European Court of Justice has established the principle that
European employees have to be treated just as their national colleagues by the employers.
Scholz; European Court of Justice 23/2/1994 (Case C-419/92), ECR I 1994, p. 505
The plaintiff applied for a job in the canteen of the Cagliari University. When asked about her professional
experience in public service, the plaintiff could refer to her activities with the Deutsche Bundespost. The Italian
employer did not want to take her professional experience into account, because Ms. Scholz had gained it in
German public service and not in the Italian one.
The European court of justice considered the negation of the Italian employer to take the
professional experience Ms. Scholz had gained in Germany into account to be an
inadmissible discrimination of the plaintiff in accordance with the right of free access to
employment in the sense of Art. 39 subs. EC.
If the employer bases employments, classifications, especially tariff classifications and
professional advancement of the employee (promotion) on the circumstances of existing
professional experience, professional experience gained in another European country has to
be considered just as experience gained in a national context.
The case Ugliola provides a far-reaching example:
822
The state has to refrain from anything which obstructs the employees right to move within Europe; e.g.
obstructing entry procedures: European Court of Justice 27 April 1989 (case 321/87) Commission of the
European Communties vs. Kingdom of Belgium, ECR 1989, p. 997; visas: European Court of Justice 14 July
1977 (case 8/77) Concetta Sagulo, Gennaro Brenca and Addelmajid Bakhouche, ECR 1977, p. 1495; European
Court of Justice 3 July 1980 (case 157/79) Stanislaus Pieck, ECR 1980, p. 2171, 2184 mn 6 et seq.; employment
instruction for lack of language knowledge: European Court of Justice 28 November 1989 (C-379/87) Anita
Groener vs. Minister for Education and the City of Dublin Vocational Education Committee, ECR 1989,
p. 3967; refusal to grant work permit: European Court of Justice 27 March 1990 (case 113/89) Socit Rush
Portugesa Lada vs. Office National dImmigration (ONI), ECR I 1990, p. 1417; European Court of Justice 14
July 1977 case (8/77) Concetta Sagulo, Gennaro Brenca and Addelmajid Bakhouche, ECR 1977, p. 1495
Ugliola; European Court of Justice 15/10/1969 (Case 15/69) Wrttembergische

Milchverwertung Sdmilch-AG vs. Salvatore Ugliola, ECR 1969, p. 363
The Italian citizen, Mr. Ugliola, had worked in Germany, before he commenced his military
service in Italy. After Mr. Ugliola had taken work up again with his German employer, his
employer did not to take the time served in the Italian military service into consideration for
the calculation of seniority in the German company.
The employer argued that the corresponding regulation of the German Workplace Protection
Act (Arbeitsplatzschutzgesetz) being valid for German citizens on the consideration of the
military service for seniority would not be applicable to Mr. Ugliola. Firstly, Mr. Ugliola
was no German citizen. Secondly, he had served his time not with the German military but
with the Italian one.
The Court of Justice ruled this procedure to be a case of unequal treatment and
discrimination of foreign workers, which violates European Law especially Art. 39 EC.
This means that the statutory regulation of the German Workplace Protection Act is void to
the extent to which it excludes the consideration of military service times of European
workers who are employed in another European country. This applies even to the case where
the European worker serves his time in his home country.
Thus, the European Court of Justice approved the claim of Mr. Ugliola for consideration of
his military service in Italy for the calculation of job seniority of a German employer.
The case Ugliola makes clear how much influence the European Labor Law and the
jurisdiction of the European Court of Justice have on the content of the individual labor
relation: for that reason the employer has the obligation to treat employees in the same way
as their national colleagues with regard to each individual part of the labor relation from its
creation over questions regarding holidays and rights to continued remuneration to the
termination of the labor contract by dismissal or cancellation agreement.
An especially controversial example of this jurisdiction is the case Paletta:
Paletta; European Court of Justice 3/6/1992 (Case 45/90) Alberto, Vittorio, Raffaela and
Carmela Paletta vs. Brennert AG [1992], n C 166/10823
All four members of the Italian family Paletta were simultaneously reported sick by an
Italian doctor subsequent to their holiday in their home country Italy. Thereby their annual
vacation was extended.
Their joint German employer refused to continue payment of their wages in case of illness.
There were serious doubts with regard to the illness-related incapacity to work of the four
employees in question: Almost every year the members of the Italian family had reported sick
for several years when they spent their joint family leave in Italy.
823
Comp. also European Court of Justice 2 May 1996 (case C-206/94) Paletta II Brennet AG vs. Vittiorio Paletta
Firstly, the European Court of Justice determined that the payment of benefits under the
Lohnfortzahlungs-Gesetz (German Act on Continued Payment) in case illness to an
employee, forms part of the social security scheme of the employee in accordance with Art. 4
Regulation 1408/71. Regulation 1408/71 must for that reason not only be applied to public
institutions of the social security system, but also to private employers.
Then, the court interprets Art. 18 subs. 1-4 of the implementing regulation (Regulation
574/72) such that the employer is bound by the declarations by a doctor of another member
country with regard to the start and duration of incapacity to work.
The court stated the promotion of the right to free movement of workers as reasons for its
result of interpretation, as well as the sense of Art. 18 Regulation 574/72, which is meant to
avoid difficulties of evidence for an employee whose capacity to work has been reestablished
in the meantime and therefore to support the highest possible freedom to move.824
58.3 Equal treatment of men and women in labor

relations
The European Labor Law has especially much influence on the company labor relation with
regard to equal treatment of men and women.
The importance of the equal treatment of sexes under European Labor Law is shown by the
fact that the obligation of equal treatment is enshrined in one of the most important sources
of European law i.e. in Art. 141 EC.
The introduction of equal treatment of men and women at work had not only women-
friendly motives in the history of its formation. With the introduction of Art. 141 EC
(former Art. 119 EEC) especially France pursued the aim to avoid emergence of competitive
advantages of other member states, after having in contrast to most of the other European
member states already introduced the principle of equal remuneration into its national labor
law. France was therefore afraid of considerable disadvantages for France as business
location.825
The European legislator tried in numerous initiatives to regulate the equal treatment in labor
relations826 and created especially for this purpose the so called Equal Treatment
824
Similar in European Court of Justice 12 March 1987 (case 22/86) Giuseppe Ridone vs. Allgemeine
Ortskrankenkasse Bad Urach-Mnsingen, ECR 1987, p. 1339
825
Neri-Sperl, Trait instituant la communaut conomique europenne. in: Smit Herzog: The Law of the
European Economic Community, Art. 119; Jansen in, Grabitz, Kommentar zum EEC-Vertrag, Art. 119 mn 3.
Jansen, in: d. Groeben et al., Kommentar zum EEC-Vertrag Art. 119, mn. 4
826
Art. 119 EC
-Council Directive of 10 February 1975 on the approximation of the laws of the Member States relating to the
application of the principle of equal pay for men and women (75/117/EEC) (OJ 1975, N L 45, p. 19)
Regulation (2000/78/EC) -, but it is preponderantly the jurisdiction of the European Court of

Justice which determines rights of labor contract parties and especially duties of the
employer in this field with a variety of individual decisions.
58.3.1 Equal treatment regarding formation of the labor

contract
Dekker; European Court of Justice 8/11/1990 (Case C-177/88) Elisabeth Johanna Pacifica
Dekker vs. Stichting Vormingscentrum voor Jong Volwassenen (VJV-Centrum) Plus, ECR. I
1990, p. 3941
Ms. Dekker applied with an educational institution operated by the VJV. Ms. Dekker
affirmed the question about her pregnancy in her job interview.
The application was rejected only for reasons of the existing pregnancy.
-Council Directive 76/207/EEC of 9 February 1976 on the implementation of the principle of equal treatment
for men and women as regards access to employment, vocational training and promotion, and working
conditions (OJ 1976, N L 39, p. 40)
-Council Directive 79/7/EEC of 19 December 1978 on the progressive implementation of the principle of equal
treatment for men and women in matters of social security (OJ 1978, N L 6, p. 24)
-Council Directive 86/378/EEC of 24 July 1986 on the implementation of the principle of equal treatment for
men and women in occupational social security schemes (OJ 1986, N L 225, p. 40)
-Council Directive 86/613/EEC of 11 December 1986 on the application of the principle of equal treatment
between men and women engaged in an activity, including agriculture, in a self-employed capacity, and on the
protection of self-employed women during pregnancy and motherhood (OJ 1986, N L 359, p. 56)
- Commission Proposal of 27 May1989 for a Council Directive on the burden of proof in the area of equal pay
and equal treatment for women and men (Com [88] 269 fin.) (OJ 1988, N C 176, p. 3)
- Council Resolution 12 July 1982 on the promotion of equal opportunities for women (OJ 1982, N C 186,
p. 3)
- Resolution of the Council and of the representatives of the Governments of the Member States meeting within
the Council of 6 December 1994 on equal participation by women in an employment-intensive economic
growth strategy within the European Union (OJ 1994, N C 368, p. 3)
- Council recommendation of 13 December 1984 on the promotion of positive action for women (OJ 1984, N
L 331, p. 34)
- Second Council Resolution of 24 July 1986 on the promotion of equal opportunities for women (OJ 1986, N
C 203, p. 2)
- Council Resolution of 29 May 1990 on the protection of the dignity of women and men at work (OJ 1990, N
C 157, p. 3)
- Resolution of the European Parliament of 22 October 1990 on the protection of the dignity of women and men
at work (OJ N C 305, p. 30)
- Commission Proposal 92/131/EEC 27 November199l on the protection of the dignity of women and men at
work (OJ 1992, N L 49, p. 1)
- Commission Proposal 87/567/EEC of 24 November1987 on vocational training for women(OJ 1978, N L
342, p. 35)
The European Court of Justice ruled this rejection to be a direct discrimination in the sense
of Art. 3 of Regulation 76/207/EC. A woman has a sex-related disadvantage to access an
employment in case of consideration of an existing pregnancy as reason for rejection
The Federal labor court interpreted the judgment of the European Court of Justices such that
the question about pregnancy is inadmissible in a job interview at all:827 The non-
consideration of pregnancy for the selection leads to the general inadmissibility of the
employers question about pregnancy during the job interview. This applies irrespective of
whether men and women apply simultaneously for the position. This meant that the
corresponding jurisdiction of German High Courts on the admissibility of the question about
pregnancy, which made a difference depending on the circle of applicants,828 had become
obsolete with this judgment.829
The jurisdiction of the European Court of Justice in the Case Dekker has the result for the
individual employer that under German law already the question on an existing pregnancy
may not be asked in a job interview.
A further important consequence for the employer is the penalty which the jurisdiction of the
European Court of Justice connects to sex-related discrimination in the selection process: In
order to underline the effect of Regulation 76/207/EEC, the European Court of Justice
requires in its judgment in the case Dekker for any case of inadmissible sex-related
discrimination in the job selection process a civil law penalty for the employer. This penalty
arises even regardless of the responsibility of the employer or the justification by national
statutory exculpation reasons.830
The amount of the penalties for the employer is still unclear. Originally, the German labor
law (sec. 611 a BGB) granted a fidelity guaranty claim to the discriminated person. In the
cases Colson831 and Harz832 the European Court of Justice modified the content of sec.
611a BGB. The German legislator had in correspondence with the European Regulation
827
BAG 15 October 1992, 2 AZR 227/92; Hanau, EG-Recht und deutsches Arbeitsrecht, Brennpunkte des
Arbeitsrechts 1993: Thesen und Ergebnisse der 4. Arbeitsrechtlichen Jahrestagung, p. 37 et seq., p. 18
828
In accordance with the German High Court judgment the prohibition of discrimination was only violated when
men and women applied jointly for a vacancy (applicants of mixed sex). If only women or exclusively men
applied for a vacancy, the prohibition of discrimination could not be violated from the point of view of the
former jurisdiction. The question about and existing pregnancy would therefore be admissible.
829
On the effect of jurisdiction of the European Court of Justice on the courts of member states; especially on the
effect of jurisdiction of the European Court of Justice on German labor courts, Schiefer, NJW 1995, p. 160 et
seq., 162 et seq.
830
European Court of Justice 8 November 1990 (case C-177/88) Elisabeth Johanna Pacifica Dekker vs. Stichting
Vormingscentrum vor Jong Volwassenen (VJV-Centrum) Plus, ECR I 1990, p. 3941, mn 2325; also European
Court of Justice, 10 April 1984 (case 14/83) Colson and Kamann vs. Land Nordrhein-Westfalen, ECR 1984,
1891
831
European Court of Justice of 10 April 1984 (case 14/83) Colson and Kamann vs. Land Nordrhein-Westfalen,
ECR 1984, 1891
832
European Court of Justice of 10 April 1984 (case 79/83) Doris Harz vs. Deutsche Tradax GmbH, ECR 1984,
p. 1921
76/207/EEC introduced sec. 611a GBG into German law. The court, however, came to the
conclusion that the penalty which was originally provided in sec. 611a BGB, i.e. the
compensation for a mere breach of faith, was not sufficient to avoid sex-related
discrimination in the forefront of labor relations.
An effective implementation of the Regulation 76/207/EWG requires a considerable
penalty to be imposed on the discriminating employer. The jurisdiction of the European
Court of Justice in the case Birds Eye Walls Limited833 makes clear when the requirement
of a considerable penalty is met: The European Court of Justice ruled that the Regulation
76/207/EEC had not been effectively implemented, even if national law provided a
compensation of 6.250 GBP.834
The European Court of Justice made the decision that the equal treatment of sexes does not
always have to be applied for the purpose of supporting women:
Kalanke; European Court of Justice (Case C-450/93) Eckhardt Kalanke vs. Hansestadt
Bremen
Mr. Kalanke applied simultaneously with a female applicant for a position with the Hansestadt
Bremen. As both applicants had the same or equivalent qualifications, the Hansestadt Bremen took its
decision in correspondence with sec. 4 of the Landesgleichstellungsgesetz der Hansestadt Bremen
(Act on Equal Treatment of the hanseatic city of Bremen) in favor of the employment of the female
applicant. Art. 4 Landesgleichstellungsgesetz regulates that in cases of same or equivalent
qualification of applicants women should be favored.
Mr. Kalanke felt discriminated due to his sex by the choice of the female applicant based
on the Landesgleichstellungsgesetz of Bremen.
58.3.2 Equal treatment in the determination of salary

Main purpose of sex-related equal treatment is to guarantee equal remuneration of men and
women for equal work.
833
European Court of Justice of 9 November 1993 (case C-132/92) Birds Eye Walls Limited vs. F. M. Roberts
834
The Jurisdiction of the European Court of Justice prompted the German legislator to fix compensation claims of
the employer in sec.611a BGB (Civil Code) sec 61b of the Arbeitsgerichtsgesetz (Labor Act). The amount of
compensation exceeds the possible amount for breach of trust by far. However, the German legislator has
determined caps for the compensation claims on the grounds of sex-related discrimination in the selection of
applicants. This cap amounts to 3 monthly salaries (611a subs. 2 BGB), to 6 monthly salaries (sec. 611a subs. 2
BGB, in connection with 61b subs. 2 ArbGG), as far as several employees are discriminated against or for
simultaneous advertisement of several vacancies 12 monthly salaries (sec. 611 a subs. 2 BGB in connection
with 61b subs. 2 ArbGG). With regard guidance value in the case Birds Eye Walls Limited one can have
doubts on whether the cap of 3 months is a serious punishment in the sense of the European Labor Law. The
limitation of damages with the help of caps encounters the purpose of the punishment in any case, Krimphove,
2001, p. 184 (with further references); European Court of Justice 2August1993 (case C-271/91) M. H. Marshall
vs. Southhampton and, South-West Hampshire Area Health Authority. The norms of the German legislator
encounter therefore the European Labor Law and are unlawful.
Jenkins; European Court of Justice 31/3/1981 (Case 96/80) J. P. Jenkins vs. Kingsgate
(Clothing Production) Ltd., ECR 1981, p. 911
Ms. Jenkins worked part-time for the company Kingsgate. Mostly women have a part-time labor
contract. Ms. Jenkins earned as all part-time employees a salary which was 10 percent lower than
the one of their male full-time colleagues.
The Court considered this in its judgment as indirect method of inadmissible

discrimination against female employees, because mostly women have part-time
employments.
58.3.3 Equal treatment in the context of termination of labor

relations
Also in case of termination of a labor contract, the question regarding equal treatment of
sexes has to be asked.835 In this case, this concerns especially facts which do not imply direct
discrimination against women. Mostly, the discrimination against women is indirect, because
they belong to a certain group of employees (here: part-time employees).
Kriesamer-Hack; European Court of Justice 30/11/1993 (Case C-189/91) P. Kriesamer-

Hack vs. Nurhan Sidal
For enterprises with up to 5 employees (small companies) the Kndigungsschutzgesetz
(German Dismissal Protection Act) does not apply in Germany. This means that the
employees do not enjoy the same dismissal protection as this would be the case for
companies with more staff in the Federal Republic of Germany.
Workers who work less than 10 hours a week are no employees in the sense of the law.
The enterprise of the respondent (dental office) employs exclusively female employees with
two full-time employees, one part-time employee (over 10 hours per week) and 4 part-time
employees with less than 10 hours.
When Ms. Krisammer-Hack received her notice of dismissal for insufficient work
performance she sued for dismissal protection before the labor court. The labor court
asked the European Court of Justice the question whether the statutory regulation under
which the dismissal protection for small companies is excluded constitutes a case of indirect
discrimination against women.
The European Court of Justice rightfully negated this: it could be true that nearly 90 percent
of all part-time workers are women. The exemption of employees due to the size of the
company, however, does not only affect women specifically.
835
On the special issues of social security and the different determination of age limits for pension entitlement see:
Krimphove, 2001, p. 226 (with further references)
Therefore, indirect discrimination could only be assumed if it was proved that especially
small companies employ considerably more women than men. This does not apply to the
underlying case.
58.3.4 Equal treatment in disability law as ground for dismissal

protection
Special importance under European Labor Law is not only given to youth protection, but also
to disability law, despite the fact that the European legislator has not created any
independent, explicit protection of disabled persons under labor law. From the variety of
directives which the national legislator has to implement into national law can be understood
that the protection of disabled people is given huge relevance under European Labor Law.
The jurisdiction of the European Court of Justice at least with regard to its practical effects
even provided the basis for dismissal protection for employees who care for a severely
handicapped person.
Coleman: European Court of Justice 17/7/2008 (Case C-303/06)836

Ms. Coleman cares for her handicapped son. Because of this care, she is regarded as little
flexible by her employer and even as lazy, because she often asks for holidays. She is subject
to different types of discriminating treatment by her employer. Ms. Coleman was especially
accused of using her child to receive special work conditions. She brings these arguments
forward in a procedure before labor court against the termination of her labor relation.
Basically, the litigation turned around the question whether the Equal Treatment Regulation
2000/78/EEC also protects people who are not handicapped themselves, but who, because of
their close connection to such people, are discriminated against by their employers in
comparison to their colleagues.
The European Court of Justice follows the Opinion of General Advocate Poiares Maduro.837
Also in a situation when a non-handicapped worker is discriminated against, because he has
to take care of his handicapped child, it is a case of inadmissible discrimination in the sense
of Art. 2 subs. 2a of Regulation 2000/78 and even an unlawful harassment in the sense of
Art. 2 subs. 3 Regulation 2000/78.
Taking a closer look on the consequences of the point of view presented in the Opinion, this
means for any person taking care of another that the employer has to take the care services of
the employee into consideration. Also less flexibility and availability of the caring person
may not be used as criterion for discrimination or harassment by the employer just like in
836
OJ C. 223 of 30 August 2008, p.6
837
Opinion oft he Advocate General 31 January 2008 (case C.-303/06) Coleman/Attridge Law, in: OJ C, N 237
30September2006, p. 6 et seq.
the case of handicapped persons themselves. This view leads to a considerable valorization
of care services for handicapped people. This principle, however, has certain limits: The
caring person is only subject to protection against discrimination if he has an especially close
connection to the handicapped person.
58.3.5 Excursion: Dismissal protection under European Labor

Law
There is currently no independent dismissal protection law under the European Labor Law.
This is astonishing, as it is essential from an economic point of view to quickly create a
standardized European Labor Law for several reasons: the Europeanization has already
covered many legal aspects, European member states are rapidly and continuously growing
together to a uniform European single market and further member states are possibly
integrated into the European Community. This applies especially to dismissal law. The
diversity of and differences between national dismissal protection rules lead to almost
insurmountable difficulties for companies with cross-border operations in connection with
their personnel management. This implies high information costs for the employer.
These costs lead to a reduction of entrepreneurial commitment on the European single
market and have negative effects on the international labor market. Consequently, they are
contra-productive with regard to an employment-supporting unification of European and
international labor conditions. Also employees who want to work abroad are deterred by the
highly different national regulations on dismissal protection. From a European point of view,
the existence of manifold, highly different national dismissal regulations limits the right to
free movement under Art. 39 EC.838
The jurisdiction of the European Court of Justice has made only few contributions to the
unification of the European dismissal law. It is true that the European Court of Justice has
developed a detailed jurisdiction on the dismissal possibilities of female employees,
especially in the cases Wepp839, Handels-og Kontorfunktionaerernes Forbund i
Danmark840, Larsson841 Mary Brown842, Seymour-Smith843 and in another context in the
838
See in detail: Krimphove, 2001, p. 110 et seq., 289 et seq. (with further references)
839
European Court of Justice 14 July 1994 (case C-32/93) Carole Louise Wepp vs. EMO Air Cargo (UK) (Ltd),
ECR I 1994, p. 3567
840
European Court of Justice 8 November 1990 (case C-179/88) Handels-og Kontorfunktionaerernes Forbund i
Danmark vs. Dansk Arbejdsgiverforening, ECR I 1990, p. 3979
841
European Court of Justice 29 May 1997 (case C-400/95) Handels-og Kontorfunktionaerernes Forbund i
Danmark representing Helle Elisabeth Larsson vs. Dansk Handel & Service as representative of Ftex
Supermarked A/S
842
European Court of Justice 30 June 1998 (case C-394/96) Mary Brown vs. Rentokil Ltd., ECR I 1998, p. 4185
843
European Court of Justice 9 February 1999 (case C-167/97) Regina vs. Secretary of State for Employment, ex
parte: Nicole Seymour-Smith and Laura Perez, ECR I 1999, p. 623
case Coleman844. However, this jurisdiction is not based on general dismissal protection, but
on the prohibition of discrimination of female workers in the sense of Art. 141 EC and Art. 5
of the Regulation 76/207/EEC.845 This means that the current jurisdiction of the European
Court of Justice is based on only one aspect of dismissal law.
Because of the lack of uniform, European dismissal rules one has to recur to the national
dismissal law for the individual case. This has very different forms:
For example the dismissal law in Great Britain, but also in France and Belgium is coined
by the duty of employer to comply with a formal procedure for dismissal (written
dismissal notice including reasons, previous hearing of the person to be dismissed,
determination of a financial settlement etc.).
Further systematic differences of national dismissal rules result from the fact like in
the case of Austria, Italy and Belgium that some legal systems are based on the
differentiation between workers and employees with regard to dismissal law, while in the
European Labor Law system this differentiation has only historic significance.
Generally the terminological and content-related categorization of the northern member
countries of the European Community deviates considerably from the one of southern
members. While the northern member states mostly distinguish between the terms
ordinary and extraordinary (and only afterwards categorize the dismissal into groups
conduct-related, person-related and business-related), the legal systems especially
in Italy and Portugal distinguish between objective and subjective dismissal.
Southern European legal systems know also dismissals to discipline employees. This
sounds like the extraordinary dismissal under German law, but in fact the content of this
dismissal law is very different to German dismissal law.
Especially the Spanish and Portuguese labor law knows the extraordinary dismissal only
formally and for the purpose of a disciplinary measure, while in other legal systems, for
example in German law an extraordinary dismissal can also be issued for person and
business-related reasons.
Portuguese labor law provides a comprehensive dismissal protection. This is connected
with the fact that even Art. 53 of the Portuguese constitution gives the employees an own
basic right for the protection of their workplace and thereby constitutionally guarantees
the dismissal protection846 A similar constitutionally guaranteed right exists in Art. 22
subs. 1 of the Greek constitution.847
844
OJ C. 223 of 30 August 2008, p.6
845
Directive 76/207/EEC of the Council of 9/2/1976 on the implementation of the principle of equal treatment for
men and women as regards access to employment, vocational training and promotion, and working conditions
[1976], N L39, p. 40.
846
Art. 53 Constitution of the Portuguese Republic (2/4/1976): The right of workers to job security is safeguarded.
Dismissals without just cause or for political or ideological reasons are forbidden.
847
Art. 22 Subs. 1 Constitution of the Greek Republic (9/6/1975): Work constitutes a right and shall enjoy the
protection of the State, which shall seek to create conditions of employment for all citizens and shall pursue the
moral and material advancement of the rural and urban working population
In principle, the possibility to terminate a labor relation by dismissal is not provided by

Portuguese labor law. Correspondingly, the dismissal protection of employees is very
strong. It consists among other things of the participation of state institutions if a
dismissal is necessary. The employer can call the supervisory authority to check the
dismissal. Furthermore, the limitations for dismissals to become collective redundancies
are very low,848 with the result that in practice the employer is obliged to take up
consultations with the Social Ministry almost in any case of business-related redundancy
(Art. 17 GD 64-A/89).
In contrast to the German legal system, the legal systems of Portugal and Italy offer a
statutory dismissal protection e.g. existent dismissal prohibitions by a factual dismissal
protection; i.e. determination of an obligation to pay a cash settlement and/or
compensation in case of dismissal by the employer. This form of factual dismissal
protection does not exclude the possibility of the employer to dismiss workers. However,
the employer has to compare the amount of the compensation and the possible
advantages of the termination of the labor relations. These compensation rules reduce the
possibilities of dismissal by the employer for economic reasons.
A highly different standard exists in the member countries with regard to protection of
pregnant women and women in childbed. The corresponding regulations in France are
very detailed and moreover even under penalty.
The dismissal law of groups of persons with special need of protection (old employees,
young persons and handicapped people) is very diverse, too. While the notice period
under Swedish law strongly depends from the age of the employee, other legal systems
do almost nothing to protect older workers from dismissal. An express dismissal
protection of handicapped people exists only in the legal systems of Germany, Austria
and France.
Because of the special labor law-related and economic importance of dismissal law for the
employers as well as employees, the most important national dismissal conditions of the
individual legal systems will subsequently be presented.
The labor law systems of the members states partially also know the termination of the labor
relation by:
mutual understanding,
expiration of the temporary work contract,
fulfillment of a condition,
completion of a task,
death of employee,
force Majeure and
special court termination.
848
2 employees for companies with 50 or less employees, 5 employees in companies with 51 or more employees
(Art. 16 GD 64-A/89)
For practical reasons the following part only presents the legal conditions in the normal
case of termination of a labor relation, i.e. of ordinary and extraordinary termination of the
labor relation by an employer or employee in a unlimited labor relation.
1. Germany
Rule Civil Code = Brgerliches Gesetzbuch/BGB; Protection against Unfair
Dismissal Act (25/8/1969) = Kndigungsschutzgesetz/KSchG;
Workplace Protection Act (14/4/1980) = Arbeitsplatzschutzgesetz/
ArbPlSchG; Maternity Protection Act (17/1/1997) = Mutterschutzgesetz/
MuSchG; works constitution act (23/12/1988) =
Betriebsverfassungsgesetz/BetrVG
Admissible ordinary (sec. 620 BGB), extraordinary (sec. 626 BGB)
grounds for extraordinary: compelling reason = taking all interests into account, further
termination employment and compliance with the period of notice cannot be reasonably
expected (sec. 626 BGB)
conduct-related: culpable misconduct of the employee; [necessary: warning
by the employer] (sec. 1 subs. 2 KSCHG)
person-related: objective reasons outside responsibility of the employee
(e.g. reduction of capability to perform, lack of eligibility, capability to
adjust); permanent illness, [necessary: negative prognosis (= unforeseeable
impossibility to use employee)] (sec.1 subs. 2 KSCHG)
business-related: urgent economic reasons (e.g.: lack of work, lack of
revenues, rationalization, limitation of production); [necessary: correct
social selection by the employer] (sec. 1 subs. 3 KSCHG)
Period of sec. 622 BGB (to the end of a calendar month)
notice 2 years 1 month
5 years 2 months
8 years 3 months
10 years 4 months
12 years 5 months
15 years 6 months
20 years 7 months
otherwise: collective agreements possible.
limited possibility of shorter periods in individual contracts (sec. 622 subs.
4, 5 BGB)
Extraordi- members of the work council: ordinary termination inadmissible: sec. 15
nary KSchG;
dismissal pregnant women/mothers: ordinary termination inadmissible: sec. 9
protection MuSchG; extraordinary (sec. 9 subs. 3 MuSchG): termination only with
consent of state authority
military/civil service: ordinary termination inadmissibly: sec. 2 subs. 1, 2
ArbPlSchG; sec. 2 subs. 3 ArbPlSchG
severely handicapped: ordinary termination inadmissible: sec. 21 SchwbG;
extraordinary: procedure of consent by state authority: sec. 15 SchwbG

trainees: ordinary dismissal by employer inadmissible: sec. 15 subs. 2
BBiG
collective redundancies: (sec. 17 KSchG = 5 employees in company with
2060 employees; 10 percent or > 25 employees in company with > 2060
employees; 30 employees in company with at least 300 employees):
consent of Federal Labor Authority (sec. 18 KSchG)
Participa- Information/ Advisory right
tion of consent to extraordinary termination by member of work council
Works
sec. 103 BetrVG
Council
Procedure Claim: Labor Court
Exclusion period: 3 weeks (sec. 4 KSchG)
in case of invalid termination unacceptable continuation; court termination
of labor relation with compensation sec. 9 et seq. KSchG, termination labor
relation with cash settlement sec. 9 et seq. KSchG
2. Austria
Rule Labor Constitution Act= Arbeitsverfassungsgesetz/ArbVerfG; Maternity
Protection Act = Mutterschutzgesetz/MuschG; Labor Market Support Act
= Arbeitsmarktfrderungsgesetz/AMFG; Vocational Formation Act =
Berufsausbildungsgesetz/BArbeitgeberG
Admissible written form only sec. 19 Guts-Angest.G; sec. 30 SchauspG, sec. 32
grounds for VertragsbedienstetenGBG (sec. 863 ABGB)
termination conduct-related: culpable violations of work or fidelity duties (e.g. insult,
assault against employer and/or colleagues)
person-related: lack of qualification and (physical) aptitude; illness;
permanent loss of employability by employer with (negative) prognosis of
continuance of limitation exceeding foreseeable time.
business-related:
verifiable permanent business incidents which obstruct further
employment (e.g.: economic difficulties, drop in orders); rightful social
selection by the employer (sec. 105 subs. 3 ArbVerfG)
Notice Generally sec. 1159 ABGB
period blue-collar workers:
employment < 3 months: 1 workday to end of week
tenure > 3 months: 4 weeks
extension possible; equal period of notice for blue-collar and white collar
workers sec. 1159 c ABGB
White collar-workers. 6 weeks to end of quarter
2 years 2 months
3 years 3 months
15 years 4 months
25 years 5 months
up to 5 months for 25
(sec. 20 AngG); other agreements for employer and employees with
different periods of notice possible
Special regulations:
[e.g.: sec. 8 InvEinstG 4 weeks; sec. 10 HausbO 1 months;
sec. 4 JornG, 3 months; 5 years 4 months; per further year 1 month; up
to 12 months;
sec. 77 GewO, sec. 17 RegieBArbeitgeber, sec. 201 ABG, sec. 15
HGehG, LandAO = 14 days
contractual extension possible
special inadmissible for reasons of membership in labor union (sec. 105 subs. 3
dismissal ArbVerfG); works council member up to 3 months after loss of position
protection without consent of labor court inadmissible (sec. 122 et subs.
ArbVerfG); dismissal for company constitution law-related activity ((sec.
130 et subs. 4 ArbVerfG)
pregnant women / mothers: 4 months after birth, or 4 weeks after end of
maternity leave dismissal inadmissible (sec. 10 MuschG; Adoption: sec.
15 subs. 5)
military service: (sec. 6 subs. 1 ArbPlSichG) from military draft to 1
month after termination of military service inadmissible
trainees: sec. 15 BArbeitgeber: dismissal only possible in first 2 months
(probation period)
handicapped dismissals: (employees whose earning capacity is reduced by
50 percent) dismissal only with consent of invalidity committee (12
InvEinstG); min. 4 weeks period of notice (sec. 8 InvEinstG)
collective redundancies: dismissal in 30 days
5 employees in company 20100 employees; 5 percent employees in
company 100600 employees; 30 employees in company 600
employees; or 5 employees over 50 years
(depending on Regulation sec. 45 a AMFG: VO BGBl. 1982/543 = in 4
weeks 5 percent of > 500 employees; in company > 1.000 employees = 50
employees)
dismissal void without consent of Employment Office
Participa- Information and hearing
tion Works consent = dismissal not rescindable
Council objection = possibility of works council to rescind dismissal before court
no statement = rescission by employee (sec. 105 ArbVerfG)
Procedure rescission of termination before labor court within 1 week (sec. 105
ArbVerfG)
3. Netherlands
Rule Burgerlijk Wetboek (BW)
Act on Flexibility and Security 1/1/1999 (FlexAct)
Buitengewoon Besluit Arbeitsverhoudingen 1945 (BBA)
Admissible Art. 7a: 1639g BW ordinary; Art. 7a: 1639o BW extraordinary
reasons for ordinary (Art. 7a: 1639g BW)
termination conduct-related: culpable violation of duties of labor relation
person-related: permanent impossibility of employment of employee;
illness: general prohibition of ordinary termination on grounds of illness
in first 2 years; not if: illness caused by employee; no application to
consent to termination (see below) before start of illness and no
emergency hospitalization of employee.
business-related: (FlexAct) necessary: consent to dismissal by state office,
Art. 6 BBA
extraordinary (Art. 7a: 1639o , 1639p; 1639q BW)
compelling reasons which make further collaboration impossible
in principle: consent necessary before dismissal by supervisor, regional
employment office.
possibility: dissolution of contract by court (Art. 7a: 1639x BW) for
compelling reasons (extraordinary reasons; business-related/economic
reasons [e.g.: necessary to save remuneration] 7a: 1639w BW, FlexAct,
court dissolution shorter than termination procedure, no special dismissal
protection: but compensation of employee
Period of employee: 1 month, (collective) agreement for shorter period of notice
notice possible, for employer twice as long as for employee
employer: (Art. 7a: 1639g BW)
< 5 years 1 month
510 years 2 months
1015 years 3 months
> = 15 years 4 months
(collective) agreement on extension possible
for weekly remuneration at least 1 week or
from 50 years 3 weeks
Special works council members: generally inadmissible with the exception:
dismissal winding up of company area in which works council member is
protection employed; formerly ordinary dismissal only with consent of judge;
labor union member: prohibition of dismissal for execution of labor union
activities (FlexAct)
pregnant women /mothers: (Art. 7a: 1639 subs. 4 BW) 12 weeks after
birth, dismissal inadmissible (if no objection by employee), right to
compensation
military service: dismissal inadmissible on grounds of military service
collective redundancy: (more than 20 employees): information and
authorization of responsible authority and works council. Information of

responsible labor union.
Participa- information on determination of general guidelines by employer
tion of consent to collective redundancies.
works
council
Procedure Claim before Lower Court
termination in case of pregnancy and illness in the sense of emergency
hospitalization within period of 8 days
4. France
Rule Code du Travail = Labor Act 1973 = CT
Act of 13/7/1973; Act of 3/1/1975; Act of 7/1/1981; Code Pnal = CP
Admissible Art. L 122-14-3 CT (factual compelling reason); ordinary
reasons for extraordinary (Art. L 122-9 CT = serious, culpable intentional/gross
termination negligent, damaging action)
person-related: Incapacity, in principle permanent disease only in case of
necessity of employee replacement (Special case for work-related causes
of disease or accident (see below))
conduct-related: culpable, serious violation of work duty (e.g.
inobservance of instructions by employer; responsibility for absence,
insobriety, concealment of material)
business-related: (Art. L 321-1 et seq. CT, Act of 3/1/1975) company
reorganization on grounds of economic or company-internal difficulties;
For all terminations: (Art. L 122-14-2 CT; Art. R 122-2-1 CT) compliance
with procedure: invitation to prior talks with employer, after min. 5 days,
or 2 months after knowledge of conduct-related grounds for dismissal
with statement of reason, possibility to bring assistant; requirement for
validity of dismissal procedure: notification of reasons for dismissal if
required by employee (within period of 10 days) (Art. L 122-14-2; R 122-
3 et seq. CT);
especially in case of business-related redundancy: hearing by
representative of employee (Art. L 321-2/3; Art. 432-1 CT); consent to
dismissal by authority (after expiration of 7 day-period dismissal is
deemed to be consented; reference to duty of reemployment of employer
within 4 weeks after dismissal (Art. L 321-14)
Period of Art. L 122-6 CT
notice < 6 months provisions of collective agreement or existing local habits
624 months 1 months
> 2 years 2 months
collective contracts and labor contracts regulating extension possible
Special members of the works council (Art. L 425-1 et seq.; L 436 et seq. CT):
dismissal hearing by the works council and consent of the commercial regulatory
protection authority (after information on decision by works council) (aftereffect 6
months after termination of employment)
pregnant women/mothers: Art. L 122-25 et seq. [equiv. adoption Art. L
122-27]: exclusion of any kind of termination (also in probation period). 6
weeks before and 10 weeks after birth (equal rights for fathers of 3
children and in case of death of pregnant woman (Art. 122-25-2);
exclusion ordinary dismissal. Pregnancy and 4 weeks after return to work
(effect only after end of maternity leave.). Suspension of labor relation
during maternity leave = 2 years (for 1 year employment in company with
100 employees) (Art. L 122-28); violation: compensation or penalty
10.000 to 20.000 EUR (Art. 131-13 CP)
handicapped persons: employee-termination-period max. 3 months with
possibility of collective agreements (Art. L 323-29 et seq. CT); penalty (2
years and/ or 30.000 EUR) for dismissal for grounds of handicap. (Art.
225-1/2 CP)
anomalies in case of work accidents or illness due to work (Act of
7/1/1981). Exclusion of illness-related dismissal (Art. L 122-32-2 CT); in
case of certification by company physician of incapacity of employee
offer of new workplace. For certified impossibility of reintegration of
employee dismissal possible.
military and civil service: (Art. L 122-18 et seq. CT) employees born
before 31/12/1978; otherwise termination of labor relation, claim for
reemployment
trainees: only in first 2 months possible with limitation. Afterwards
unanimously or by court order.
Participa- Information and hearing
tion of for business-related redundancy: Art. L 321-2/3; Art. 432-1 CT
works collective redundancy: Art. L 321-2 CT (10 employees in 30 days)
council consultation works council and state labor administration.
(violation: penalty per dismissal 3750 EUR Art. L 321-11 CT)
Dismissal Procedure before labor court (Art. L 516-1, R 516-0 CT);
protection conciliation hearing (Art. R 516-12)
procedure Exclusion period of dismissal-protection-clause only in case of abuse of
legal rights or 2 months in case of dispute on remuneration calculation
(Art. L 122-17)
unjustified and formally deficient dismissal compensation (Art. L 122-2 et
seq. CT
penalty in case of discriminating dismissal 2 years, 30.000 EUR (Art. 225-
1/2 CP)
dismissal without necessary consent by authority (per dismissal 3750 EUR
(Art. L 321-11 CT)
5. Belgium
Rule Labor Contract Act 3/7/1978, Company Constitution Act = Act of
20/9/1948 and Collective Agreement of 9/3/1972)
Admissible Ordinary
Reasons for conduct-related: violations of duties from labor relation
termination person-related: incapacity, missing or lost adequacy; illness: over 6
months (start of period of notice after recovery (compensation))
business-related: economic difficulties, dissolution of company,
reorganization of company, rationalization (as Force Majeure: war, natural
catastrophes) without dismissal and compensation. Work relation
dissoluble)
extraordinary: severe culpability and impossibility of working together.
(Art. 35 Labor Contract Act)
notification of extraordinary reasons for termination
written only dismissal of white-collar employees (Art. 37 Labor Contract
Act)
Period of BLUE-COLLAR WORKERS (Art. 59 Labor Contract Act):
notice employee-termination 14 days
employer-termination 28 days
in case tenure > 20 years:
employee-termination 28 days
employer-termination 56 days
employee less than 6 months in company agreement on period of
notice, not less than 7 days and notification period not shorter than half of
employer-dismissal period of notice
employee / WHITE-COLLAR WORKER (Art. 8284 Labor Contract
Act):
employee yearly income < 22.000 EUR, (1/5/1995):
< 5 years tenure 3 months
for each further 5 years tenure further 3 months
yearly income of employee > 22.000 EUR agreement or determination
by judge (generally dependent on tenure and age)
for 1. and 2.: employer-dismissal not below above mentioned terms;
employee-termination: income 22.00044.000 EUR max. 4 months;
> 44.000 EUR max. 6 months
Purpose: retirement (65 years):
employee-termination 3 months employer-dismissal 6 months;
shorter periods for termination for new workplace:
< 22.000 EUR 1 month;
22.000 EUR44.000 EUR 3 months
> 44.000 EUR determination by judge (see above)
Special member of works council.: in principle dismissal inadmissible: (Act of
dismissal 19/3/1991); in time: 30 days before notification of election assumption
protection of office by other member of works council (4-years period); dismissal for
urgent technical and/or economic reasons ( business-related) possible, as

far as committee with equal representation of employers/employees
(otherwise: labor court) recognizes above mentioned reasons
member of labor union: dismissal inadmissible because of membership of
or activity in labor union (Collective Agreement of 24/5/1971)
pregnant women/mothers: before notification of pregnancy to 1 months
after end of maternity leave (=8 or14 weeks after birth) dismissal because
of pregnancy/maternity inadmissible
military service: inadmissible dismissal for military service (Art. 38 sec. 3
Labor Contract Act)
employee, who via complaint or claim remind sex-related equal treatment
(Art. 136 Act of 4/8/1978)
collective redundancy: (Collective Agreement of 8/5/1973) business-
related redundancy in 60 days of
10 employees, in company with 20100 employees
10 percent of employees, in company with 100300 employees
300 employees, 30 employees
Notification of and advise by company council (if not previously labor
union or staff) Collective Agreement N24 of 2/10/1975; Collective
Agreement N 24 of 21/12/1993; information to director of local
employment office, termination only after 30 days possible (royal decree
of 24/5/1976) (punishable)
Participa- information and advisory right (Art. 15 et subs. Act of 20/9/1948 and
tion works Collective Agreement 9/3/1972) in case of determination of general
council termination directives by employer
Procedure Act of 10/10/1967 arbitration procedure before labor court procedure Art.
734 Act of 10/10/1967 without justification (especially without reason for
justification) compensation Art 39 sec. 1, 62 et seq., 54 Labor Contract
Act)
6. Italy
Rule Codice Civile = CC; Codice di procedura Civile = CPC; L 223/91;
Costitutione della Repubblica Italiana = Cost.;
Employee Statute = Stat. Lav
Contratto Collettivo Nazionale di Lavoro per i Dipendentio di Aziende
Commerciali 1/2/1983 = Collective Agreement; 1983; Contratto
Collettivo Nazionale di Lavoro per i Dipendentio di Aziende Commerciali
22/12/1981 = Collective Agreement 1981; L 604/66; L 108/90; L 533/73;
TV 29/4/1965
Admissible Ordinary, extraordinary 2118 CC
reasons for Employee termination: ordinary: voluntary termination (personal
termination reasons) 2118 CC; extraordinary: compelling reasons (= employer
violation of duty e.g. belated payment of remuneration or social security
contributions, insult, request of work performance contra bonos mores)
Employer termination: (Art. 2118 et seq. CC, L 604/66, Art. 18 Stat
Lav, L 108/90: (differentiation between subjective and objective reasons

for dismissal)
[ordinary] dismissal ad nutum without reason. Possible: trainees at end
of training period, managing employees, Domestic Workers, professional
sportsmen, employees over 60 with entitlement to pension benefits,
temporary work relations (Art. 2195 f CC Art. 10 L 604/66).
[extraordinary] dismissal: (Art. 2119 CC): serious culpable violation of
duties endangering or damaging goods of the employer
Conduct-related per giusta causa
Person-related- and business-related: per giustificato motive: (Art. 3 L
604/66);
before procedure for conduct-related dismissal warning, statement of
employee; on request with labor union (Art. 7 Stat. Lav.)
exemption: disease related termination (work accident, work-related
disease) possible with considerable notice period Art. 2110 CC in
connection with the company habits
collective redundancy: (L 223/91) (min. 5 of 15 employees within 21
days) rightful social selection of employees by employer
Period of minimum regulations under collective agreement; deviating individual
notice contracts.
Blue- and White-Collar Employees. Collective Agreement 1983
Level of remuneration + activities: I super + I:
up to 5 years 60 days
> 10 years 120 days
Level of remuneration + activities: II + III:
> 10 years 60 days
Level of remuneration + activities: IV + V:
> 10 years 45 days
Level of remuneration + activities: VI + VIII:
> 10 years 20 days
managing personnel collective agreement 1981
up to 2 years 6 months
> 10 years 12 months
illness-related dismissal: employer/employee: 180 days with
remuneration, prolongation 120 days without remuneration; managing
personnel: 12 months with remuneration, extension 6 months without

remuneration; work accident dismissal only after recovery
Special works council member: no express special dismissal protection, Art. 22,
dismissal Art. 22 Stat. Lav. prohibition hostile employer conduct towards works
protection council. Prohibition discriminating dismissal because of exercise of labor
union-related activity or membership: Art. 4 L 604/66, Art. 15, 18 Stat.
Lav., Art. 13 L 903/77, L 108/90
Reemployment of works council or labor union representatives in
dismissal protection procedure by judge (Act 300)
marriage: before asking until 1 year after marriage Art. 1 L 7/63: dismissal
for reasons of marriage inadmissible and void
pregnant women/mothers: begin of pregnancy first year of age of child,
person-related dismissal for pregnancy, maternity inadmissible;
2 months before and 3 months after birth: ordinary dismissal needs
consent of labor authority (inspetto del lavoro); exception business-related
redundancy (Art. 2 L1204/71)
military/civil service: (L 772/72):
ordinary termination inadmissible (L 653/40 and L 370/55)
collective redundancy: anal. collective agreement 5/5/1965 only with
consent of labor union and labor office
Participa- Usually none

tion of
works
council
Procedure L 604/66; L 108/90; L 533/73
Collective Agreement 29/4/1965 arbitration process
Art 6 L 604/66 Local Court Art. 409 et seq. CPC
Rescission of dismissal period of notice 60 days;
damages in case of non-compliance with notice period
Art. 2120 CC (sec. 56 L 297 29/5/1982: cash settlement also in case or
rightful dismissal ca.: 1 monthly salary.
7. Spain
Rule Codigo Civil = CC; Estatuto de los Trabajadores (employee statute) 1980
= ET; Ley de Contrato de Trabajo (Employment Contract Act) = LCT;
Ley de Procedimiento laboral (Labor Procedure Act) = LPL
Admissible Art. 49 ET no differentiation ordinary/extraordinary termination; but
grounds for differentiation (employer-dismissal): disciplinary = subjective Art. 49
termination subs. 11; Art. 5456 ET culpable serious violation of work duties [work
performance, disciplinary violation, breach of fiduciary duty] ( conduct-
related); (conduct related extraordinary)
objective Art. 52, 53. = economic, technical, organizational, work
performance. Impossibility by Force Majeure Art. 51 ET ( business-

related and person-related) grounds; person-related: lack of
appropriateness of employee, also for disease-related impediment Art. 49
subs. 5 ET), lack of adjustment to necessary technical changes, absence
times (beyond responsibility; but not legal: strike, activity as
representative of employees, work accident, disease, leave, vacation) in 2
succeeding months 20 percent in 4 of 12 months 25 percent, for > 5
percent than average rate of absence time in company;
business-related. (if not collective redundancy (see below) economic crisis
procedure: written dismissal notification with reason; offer of
compensation Art. 53 subs., 53 subs. 1 b ET; no compensation for
disciplinary = subjective dismissal Art. 49 subs. 11; Art. 5456 ET (
conduct-related)
collective redundancy: (Art. 51; 49 subs. 9, 2c ET) 10 employees for
companies with up to 100 employees, 10 percent of employees for 100
300 employees, 30 employees for > 300 employees, permanent production
decline and/or economic difficulties, necessary termination of business,
Force Majeure
Procedure I (Force Majeure): Determination of Force Majeure and
consent to termination by authority in charge (= Director provincial de
trabajo / Director General de Empleo) Art 51 subs. 121 ET; Art. 6.1 BD
696/80
Procedure II (Force Majeure): Notification works council and
Employment Office (with employer plan for crisis-management),
consultation representatives of employees (30 days); in case of agreement:
approval to agreement by authority (no agreement = approval)
Art. 51 subs. 5 ET; No agreement = decision of authority over termination
by employer
Period of disciplinary = subjective Art. 49 subs. 11; Art. 5456 ET
notice objective reasons ( business-related and person-related) 30 days
[or compensation payment]
Special Member of works council Art. 68 c ET: ordinary dismissal in connection
dismissal with office during activity and one year after inadmissible.
protection For disciplinary termination hearing by and consent of works council Art.
68 a ET
Labor union membership: prohibition of discriminating dismissal
No explicit dismissal protection for pregnancy and maternity.
Legal practice: prohibition of dismissal because pregnancy or maternity
(generally 16 weeks suspension of labor contract comp. Art. 45 subs. 1d
ET)
Military service: suspension of labor contract; reemployment 30 days after
end of military service
Participa- Right to information and hearing

tion Works Consent in case of disciplinary dismissal by works council members
Council
Counseling for employer (30 days) collective redundancy for economic
reason
Procedure Ley de Procedimiento Laboral (LPL) Decree 521/90 27/4/1990
Dismissal protection claim before labor court within 20 days Art. 130
LPL
8. Portugal
Rules Art. Constitution, Decreto-Lei 49.408 = Labor Contract Act; Decreto-Lei
64-A/89 27/2/1989 in connection with Decreto-Lei 400/91, 403/91
16/10/1991; DL 64/89 = Dismissal Protection Act
Admissible Employee-termination
Reasons for ordinary (Art. 38 DL 64-A/89);
termination extraordinary (Art. 35 DL 64-A/89) culpable violation of labor contract
duties of the employer
Employer-termination
No differentiation ordinary/extraordinary dismissal only for serious reason
and compliance with dismissal process, differentiation subjective (
conduct-related) and objective ( person-related/ business-related)
reasons:
business-related: Art. 26 DL 64-A/89 proved reduction of sales, necessary
technical reforms or necessary change of business activity
person-related = dismissal for non-adjustment of employee to necessary
change of workplace; (temporary illness = suspension of labor relation)
generally compensation of employee 27 DG 64-A/89)
extraordinary dismissal: Art. 10 Nr. 1 DG 64-A/89 conduct-related reason:
impossible continuation of labor relation (e.g. counteracting work
instructions; violence; opposition against employer; repetitive conflicts
with colleagues, unauthorized absence causing damage (in one year 5
continuous days or 10 days in total); considerable reduction of
productivity of employee, deception on reason for absence)
conduct-related dismissal without warning!
Procedure: written with reasons and preliminary talks with employer;
notification of employer, works council and supervisory authority by
employer within 5 days after intervention employee and/or works council;
dismissal: date of termination, reasons for dismissal, evidence for
impossibility of further employment, compensation amount and further
payment conditions.
Notice Employee termination
period Art. 38 DL 64-A/89
< 2 years = 30 days;
> 2 years = 60 days

Employer termination
Collective redundancy (= company related dismissal for structural,
technological and economic reasons already from 2 employee for = 50
employees; 5 employees for = 51 employees (Art. 16 GD 64-A/89) after
termination of consultation procedure 60 days
Special Termination because of membership in labor union or works council
dismissal inadmissible; in case of other admissible dismissal labor union members
protection higher compensation (Art. 58 LCCT in connection with 35 DL 215-B/75;
Art. 16 L 46/79)
Prohibition of dismissal because of pregnancy, maternity
(maternity leave 98 days of which 60 after birth)
Handicapped only in case of disablement caused by work accident in
company with more than 10 employees, handicap temporary or less than
50 percent
Civil service: (Art. 276 subs. 7 suspension of labor contract)
Participa- Information/counseling right
tion Works Initiation of procedure before supervisory authority within 3 days Art. 27,
Council 29 GD 64-A/89 (consequence = possibly monetary penalty, not
declaration invalidness of dismissal)
Collective redundancy: (see above) (Art. 16 GD 64-A/89)
consultation employer, works council or labor union and Social Ministry
Art. 17 GD 64-A/89
Procedure Labor court: preliminary conciliation hearing (Art. 54 et seq. Labor Court
Act)
Employee termination: ordinary (Art. 38 DL 64-A/89) application with
labor court
Dissolution of work relation and consent of compensation of employer
Employer termination
Employee application (within 5 days after notification of employer) before
court, temporary suspension of dismissal, (company related dismissal:
claim within 1 year Art. 32, 38 GD 49.408;
Reemployment or compensation in case of wrongful dismissal Art. 13 GD
64-A/89
Dismissal for non-adjustment of employee to necessary change of
workplace (person-related)
Conduct-related dismissal: preliminary evidence procurement procedure
employer/ labor union (temporary) suspension of dismissal by court
aversion of temporary suspension by employer caution money (6 months-
salary)
Collective redundancy protection claim before labor court 90 days
period of notice (Art. 25 subs. 2 GD 64-A/89)
9. Greece
Rule Art. 22 Constitution, Act 3198/1955; Act 21/12/1920, Royal Decree
16/18.7.1920
Admissible Written (Art. 5 subs. 3 law 3198/1955);
reasons for Notification of termination at local labor office and police within 8 days
termination (no requirement for validity, but omission punishable) Art. 9 Act
3198/1955)
ordinary termination
person-related: incapacity, in case of illness suspension of labor contract,
notice period (depending on tenure) 1 month (for 4 years) 6 months
(for 15 years)
conduct-related: (Art. 673 ZGB) compensation by damaging person
business -related: serious, provable economic reasons in the sense of
change of financial circumstances of employer; social selection (in acc.
with jurisdiction no prerequisite for validity of dismissal);
appropriate compensation of employee by employer (Art. 674 ZGB)
extraordinary dismissal for especially serious reason for conduct-
related termination (sentence for crime, considerable culpable violation
of duty) or for Force Majeure ( company related)
collective redundancy: company with more than 50 employees. Monthly
dismissal for economic/ company-related reasons exceeding percentage
determined by employment ministry (2-3 percent); max. 30 employees.
Notification to employees and employment ministry (reason, number of
employees, selection), attempt to negotiate with employees. If
negotiations fail confirmation of dismissal by employment ministry
within 10 days (law 1387/1983; 1767/1988); simultaneous dismissal of
more than 30 employees inadmissible
Period of Employer termination: Art. 1 Act 2112/1920:
Notice 2 months 1 year 1 month
24 years 2 months
46 years 3 months etc.
max.: 28 years 24 months
agreements on longer periods possible
for employees: no notice period in case of compensation payment
2 months 1 year 1 monthly salary
12 years 2 monthly salaries
23 years 3 monthly salaries etc.
28 years 24 months
Employee termination
notice period of employer termination, max. 3 months
Employee compensation ( usual compensation (see below) for
termination over 15 years activity and/or pension age (Art. 5 subs. 1 Act
435/1976)
Special labor union members (anal. for members of works council): inadmissible
dismissal ordinary dismissal during office and 1 year after. Extraordinary dismissal
protection with consent of special committee (1 judge, 1 representative employee +
1 representative employer) Art. 15 Act 1264/1982
inadmissible any unlawful discriminating dismissal Art 281 ZGB; Act
1767/1988; concerns:
activity in labor union,
employees: demanding support by labor union/ works council
pregnancy/maternity: inadmissible dismissal during pregnancy and
maternity (up to 1 year after birth)
military service: after 6 months tenure principally inadmissible also 1
year after resumption of work (dismissal admissible if special
committee consents (Art. 7 Act 244/1936)
war veteran and handicapped ex-service person and family members of
persons killed in war : dismissal only for defamation or incapacity for
certain work position and impossibility of employee to continue to
employ person (Art. 7 Act 244/1936)
Participation Notification by employer
works council (as substitute for lack of labor union:
information and counseling)
Procedure claim (exclusion) period
against termination= 3 months;
for compensation = 6 months (Art. 5 subs. 3 Act 3198/1955)
claim to compensation of the dismissed employee (Art. 2 subs. 1 Act
3198/1955) (to be made available by employer in fund) except conduct-
related dismissal or unlawfully provoked compensation; Force Majeure,
possible 2/3 insurance sum; after bankruptcy (Art. 2, 6 Act 3198/1955)
compensation different for white-collar employees (Art. 4, 5 subs. 1 law
3198/1955) and blue-collar employees Art. 5 subs. 1 Royal Decree 16/18
7. 1920
10. England
Rule Employment Protection (Consideration) Act 1978) = EPA;
Trade Union and Labor Relations (Consolidation) Act (1992) = TULRA;
Employment Rights Act. (1996) = ERA;
Employment Relations Act (1999) ErelA
Admissible ordinary, extraordinary dismal (Summary Dismissal)
reasons for [as long as dismissal not discriminating; no dismissal protection for
dismissal employment under 2 years]
person-related: sec. 57.2, 57.2 EPA: loss of capacity, incapability,
disease (in case of repeated absence from work and no other employment
possibility)
conduct-related: (e.g.: theft, acceptance of bribe money, insobriety and
drug abuse at workplace, defamation, betrayal of company secrets,
unauthorized access to data bases, unauthorized absence from workplace,
absence for unagreed vacation, inappropriate work cloths)

business-related: (Redundancy): durable serious economic reasons,
rightful social selection under documentation and consistent application
of all criteria;
also if further employment breach of law, if employer cannot further
legally employ employee
condition for all dismissal reasons = compliance with special procedure
by employers Fairness of Procedure
Hearing of employee, with assistance, equal treatment, consideration of
all circumstances (constitution of employee and his former performance)
in case of conduct-related dismissal renewed misconduct despite
warning, alternative disciplinary possibilities exhausted,
extraordinary dismissal for essential unjustified violation of contractual
duties (breach of contract) with fundamental impairment of mutual trust.
Period of < 1 months
notice > 1 months 1 weak
2 years 2 weeks
3 years 3 weeks
each further year of occupation a further weak of notice period
until 12 years 12 weeks
Special employee representatives: exclusion of dismissal of member of
dismissal independent labor union, participation (intent) in activities of labor union
protection sec. 152 TULRA
pregnancy/ maternity: sec. 60 EPA: dismissal for pregnancy/ maternity
inadmissible. But dismissal in the sense of suspension possible in case of
health risks of job or night turns, and not other employment of employee
possible
Participation Right of employee to assistance by labor union which represents
Works majority of employees in company
Council Information and counseling duty of employer with labor union or
company employee representatives in case of redundancy dismissals.
collective redundancies: (dismissals of more than 20 employees in 90
days) consultation with employee representatives (generally labor union)
Procedure Unfair Dismissal Claim (for unjustified dismissal or violation of
procedure) wrongful dismissal (for non-compliance with notice period or
lack of notification of employee)
Redundancy Payment Claim
payment of a workplace compensation sum in case of admissible
redundancy (not disappearance of possibility to use employee for
technical reasons or if a employee does not fulfill an admissible
alternative of employment) sec. 81 et seq., 87 EPA)
claim exclusion period: generally 3 months
extension of period possible in case of illness of employee, wrong

information of employee by labor or local court, belated notification,
new evidence
11. Ireland
Rule Unfair Dismissal Act (1977)= UDA;
Minimum Notice and Terms of Employment Act (1973) = MNTEA;
Maternity Protection of Employees Act (1987) = MPEA; Protection
Employment Act (1977) = PEA;
Parental Leave Act = PLA;
Worker Protection Act = WPA
Admissible ordinary, extraordinary (Summary Dismissal)
reasons for sec.6.4 a-d UDA
termination person-related: incapacity, permanent disease sec 2.4 a UDA
conduct-related: culpable violation of duty to work and ancillary duties
business-related: e.g.: use of capacity too low, rationalization,
restructuring
duty to pay compensation if employee min. 2 years continuously
employed
Also breach of law in case of further employment of employee if
employer cannot legally continue to employ employee.
Condition dismissal = compliance with special procedure by employer
Fairness of Procedure
Hearing of employee, if necessary with assistance, equal treatment,
consideration of all circumstances (constitution of employee and former
activity); in case of conduct-related new misconduct despite warning and
alternative disciplinary measures exhausted
collective redundancy: (dismissals in 30 days: 5 employees for 2050
employees; 10 employees for 50-100 employees; 10 percent for 100300
employees; 30 > 3000 employees) sec. 6.1 PEA: 30 days before
dismissal notification to Labor Ministry (sec. 12 PEA) and information
to and counseling of employee representative (generally labor union) and
consultation works council
Period of sec. 4.2. MNTEA
notice 13 weeks 2 years 11 weeks
25 years 2 weeks
510 years 4 weeks
1015 years 6 weeks
> 15 years 8 weeks
Special Dismissal for membership and activity in labor union inadmissible (sec.
dismissal 14 UAD)
protection pregnancy: sec. 6 PLA maternity leave (14 weeks); exemption of
dismissal (sec. 2.2 UDA)
Participation Information and hearing in collective redundancies

of works
council
Procedure recommendation of Rights Commissioners (6 Weeks) appeal to
Employment Appeals Tribunal sec. 8-10 UDA
(or directly to Employment Appeals Tribunal);
sec. 8.2 UDA
notice period: against ordinary termination 6 months
against extraordinary dismissal 12 months
12. Denmark
Rule Work Condition Act (1976) = AML;
Employees Act (1971) = FUL; Equal Treatment Act (1990) = LBHL;
Bankruptcy Act = KKL
Admissible ordinary, extraordinary sec. 26 MHL
reasons for conduct-related: culpable misconduct of employee;
termination person-related: lasting incapacity, [disease sec. 2 FUL, sec. 16 MHL,
disease over 1 month];
business-related: [Force Majeure], serious economic and technical
difficulties
(notification of reasons for dismissal only after 9 months)
extraordinary dismissal by employer:
e.g.: crime of employee, causing considerable damages in violation of
labor duties sec. 20 22 MHL; unauthorized absence with serious
economic consequences for employer
termination by employee: default to pay remuneration in case of
previous warning by employee, sec. 26 MHL
serious company-related beyond responsibility Force Majeure (e.g.
destruction of company)
Period of Act (sec. 20 et seq. MHL) and collective agreement
Notice Differentiation blue-collar and white-collar worker:
blue-collar worker: without collective/ individual agreement
period of notice of white-collar workers considered as appropriate (= 3
months)
employer dismissal: depending on collective agreement
up to 9 months 1421 days
36 years 49 days
> 6 years 70 days
employees over 50
> 9 years 90 days
> 12 years 120 days
employee termination: depending on collective agreement
from 9 months 7 days
36 years 14 days
69 years 21 days
> 9 years 28 days

White-collar employees (sec. 2.12.4, 2.7, 6) FUL):
up to 6 months 1 months
from 6 months 3 months
36 years 4 months
69 years 5 months
> 9 years 6 months
special members of labor union and works council (depending on collective
dismissal contract = exclusion of ordinary dismissal, extension of notice period)
protection (sec. 2, 10 FUL; sec. 10.2 AML; 15 Dismissal Protection Act of Labor
Union Members
maternity
inadmissible dismissal for pregnancy and maternity (sec.16, 7, 9
Adjustment LBHL; 7 FUL; sec. 19a MHL; sec. 58 EUL); compensation
for violation up to 78 weekly salaries
trainees
exclusion dismissal sec. 60 EUL
military / civil service
exclusion of employer-dismissal after 9 month tenure (sec. 1, 2 VPL;
sec. 6 FUL; sec. 35 MHL)
collective redundancy: (min. 10 employees within 30 days in company
with 20100 employees
10 percent of employees in company with 100300 employees
30 employees in company with min. employees (notification
employment office) sec. 2.6 FUL notification of and negotiations with
employee representatives and employment office
Participation Information and counseling duty
Works
Council
Procedure With participation of labor union (arbitration court procedure)
negotiation over reasons of dismissal and dismissal
decision: Board of Dismissal (as arbitrary court) otherwise claim before
court before possibility: (compensation, cash settlement)
13. Sweden
Rule Work Protection Act 1982
Admissible employee termination, ordinary.: sec. 11 Work Protection Act;
reasons for extraordinary employee termination serious misbehavior by employer
termination (e.g. insult, sexual assault, default of payment of salary employee only
right to refuse work)
employer dismissal: written notice (sec. 8, 16, 19 Work Protection
Act) and on demand by employees objective reasons (sec. 7 Work
Protection Act):
person-related: incapacity, alcohol: danger to safety and/ or image of
employer; disease only permanent, essential reduction of capacity to work
conduct-related.: repeated, gross violation of behavioral duties of

employee towards employer and/or colleagues
business-related.: provable durable lack of work, social selection (sec.
22 Work Protection Act), [principle: last in / first out] claim for
reemployment of employee sec. 25 et seq. Work Protection Act);
employees with longer tenure: preferred reemployment
- general no dismissal if further employment in other position possible
extraordinary dismissal (sec. 18 subs. 1 Work Protection Act) [culpable,
considerable] gross violation of duty in the sense of crimes (e.g.:
concealment, violence)
procedure: person-related dismissal: information to employees 2 weeks
before dismissal, in case of existence of trade unions information also
to trade union. On demand of employee and/or trade union
explanatory hearing (sec. 30 Work Protection Act)
company-related: duty to negotiate (sec.11 et seq. Work Protection Act)
Notice Period employee termination: 1 month before declaration of termination (sec.
11 Work Protection Act), prolongation by collective agreement
possible; employee period of notice shorter than employer period of
notice
employer termination: min. 1 month after 6 months or continuous 12
months in 2 years. Period depends on age of employee (sec. 11 Work
Protection Act):
from 25 years 2 months
Special Trade Union Members previous negotiation trade union employer
Dismissal (sec. 8 Co-Determination Act)
Protection Pregnancy/ Maternity (sec. 25 Equal Treatment Act)
Civil service: inadmissible dismissal (Work Protection Act 1939)
dismissal inadmissible for ethic reasons (sec. 7 Work Protection Act,
lag 1994:134)
collective redundancies: (5 employees in case of dismissal for lack of
work) notification of local employment office 6 months before
dismissal; duty of employer to negotiate with trade union before
measure is taken (sec. 1114 Co-Determination Act)
Participation Consultation with trade union (if employees organized) (sec. 10, 15 et
of council seq. Work Protection Act)
Procedure District Court
Dismissal suspension (sec. 34 Work Protection Act);
period: 2 weeks (sec. 40 Work Protection Act) in case reasons for
dismissal not stated (on demand of employee) 4 weeks
in case of unlawful or void dismissal compensation claim (sec. 38 Work
Protection Act) until reemployment of employee (ordinary termination
2.200 EUR; extraordinary. = 3.300 EUR

employer also invalid dismissal right to rescind labor contract with
cash settlement (sec. 39 Work Protection Act)
14. Finland
Rule Tysopismuslaki (320/1970) Labor Contract Act
Laki ammatillisesta koulutusesta (630/1998) Training Act
Laki palvelukseen kutsutun asevelvollisen ty tai virkasuhteen
jatkumisesta (570/1961) Workplace Protection Act
Co-Determination Act
Admissible ordinary Art. 38 Labor Contract Act; extraordinary Art. 43 Labor
reasons for Contract Act
termination person-related (Art. 37 subs. 2 Labor Contract Act)
[disease: considerable durable deterioration of work results; jurisdiction
duration of disease 1 year]
conduct-related (Art. 43 Labor Contract Act)
deceit when entering into labor contract,
culpable endangering jeopardizing at workplace
Gross violation, violation non-competition clause or company secrets;
mal-performance, after corresponding warning by employer
company-related (Art. 37 a, 40 et seq. Labor Contract Act)
essential permanent reduction of work and impossibility of employment
of employee at other workplace (employer duty consideration of
dismissed person in planned new employments Art. 42 a Labor
Contract Act)
company restructuring: as far as compulsory to avoid bankruptcy
(termination period 2 months)
Extraordinary Art. 43 Labor Contract Act. If serious reasons make
compliance with notice period impossible
Period of Dependent on agreement in individual contract otherwise (employer-
Notice dismissal min.) up to 1 year
up to 1 year. 1 months
15 years. 2 months
68 years 3 months
911 years 4 months
1214 years 5 months
> 15 years 6 months
Special Employees of works council: Art. 53 subs. 2 Labor Contract Act:
dismissal dismissal only with consent of majority of staff possible
Protection Pregnancy/ Maternity Art. 37 subs. 5 Labor Contract Act: inadmissible
dismissal on grounds of pregnancy or to avoid maternity leave
handicapped persons: Art. 37 subs. 2, 17 subs. 3 Labor Contract Act:
Only special consideration in case of selection of several employees to
be dismissed
Military and civil service Art. 2 Workplace Protection Act: exclusion

dismissal during service
Trainees Art. 17, 18 Training Act: exemption ordinary dismissal
Participation Information and counseling right under Co-Determination Act
Works Collective redundancy: Art. 37a Labor Contract Act (min 10 among 20
Council employees concerned)
Hearing and consultation of employee representatives
Procedure Possibility of statement of employee Art. 47 b Labor Contract Act
Dismissal Protection Claim (District Court)
period for claim = 2 years Art. 47 e subs. 1 Labor Contract Act
possibility for compensation payment (Art. 47 et seq. Labor Contract
Act)
Table 58.1: Termination possibilities in the individual labor law systems of European member states
58.4 Consequences of technical work protection

in Europe on labor relations
Especially comprehensive labor protection regulations imply high costs for the employer.
The European legislator created numerous rules in this field of law.849
The European legislator abandoned its original legislative method in the field of European
technical work protection.850 This method consisted in giving detailed information with
regard to the admissibility of certain tools (pressure containers, floor-borne vehicles, lifting
vehicles, safety devices in construction machines) in the European source of law itself.851
The implementation of such directives, however, made rather slow progress. Furthermore,
detailed norms bear the danger to be unable to react appropriately to future innovations and
deviations.852
The European Legislator has taken its decision in favor of the following systematic: General
minimum requirements which apply equally to any labor relation form the basic elements
of the European technical work protection. Special regulations complete these general
principles.
General rules of European technical work protection are:
849
Details in: Krimphove, 2001, p. 231 et seq. (with further references)
850
Comp. Council Resolution of 7 May 1985, OJ C1985, N 136, p. 1; Joerges, Festschrift fr Steindorff, p. 1252
et seq. (with further references)
851
Wlotzke, NZA 1990, p. 418 (with further references)
852
Comp. BVerfG (Federal Consitutional Court), NJW 1979, p. 359
- Council Directive 92/104/ EEC of 3 December 1992 on the minimum

requirements for improving the safety and health protection of workers in surface
and underground mineral-extracting industries (twelfth individual Directive
within the meaning of Article 16 (1) of Directive 89/391/EEC)853
- Council Directive 89/391/EEC of 12 June 1989 on the introduction of measures
to encourage improvements in the safety and health of workers at work 854/855/856
853
OJ L 404 of 31/12/1992, p. 10 et seq.
854
OJ 1989, N L 183, p. 1
855
The following rules are based on these General Provisions:
-Council Directive 89/654/EEC of 30 November1989 concerning the minimum safety and health requirements
for the workplace (first individual directive within the meaning of Article 16 (1) of Directive 89/391/EEC) (OJ
1989, N L 393, p. 1)
- Council Directive 89/655/EEC of 30 November 1989 concerning the minimum safety and health requirements
for the use of work equipment by workers at work (second individual Directive within the meaning of Article
16 (1) of Directive 89/391/EEC) (OJ 1989, N L 393, p. 13)
-Council Directive 89/656/EEC of 30 November 1989 on the minimum health and safety requirements for the
use by workers of personal protective equipment at the workplace (third individual directive within the meaning
of Article 16 (1) of Directive 89/391/EEC) (89/656/EEC)
-Council Directive 90/679/EEC of 26 November 1990 on the protection of workers from risks related to
exposure to biological agents at work (seventh individual Directive within the meaning of Article 16 (1) of
Directive 89/391/EEC) ( OJ 1990, N L 374, p. 1)
-Council Directive 93/88/EEC of 12 October 1993 amending Directive 90/679/EEC on the protection of
workers from risks related to exposure to biological agents at work (seventh individual Directive within the
meaning of Article 16 (1) of Directive 89/391/EEC) (OJ 1993, N L 268, p. 71)
- Council Directive 92/57/EEC of 24 June 1992 on the implementation of minimum safety and health
requirements at temporary or mobile constructions sites (eighth individual Directive within the meaning of
Article 16 (1) of Directive 89/391/EEC) (OJ 1992, N L 245, p. 6)
-Council Directive 92/58/EEC of 24 June 1992 on the minimum requirements for the provision of safety and/or
health signs at work (ninth individual Directive within the meaning of Article 16 (1) of Directive 89/391/EEC)
-Council Directive 92/85/EEC of 19 October 1992 on the introduction of measures to encourage improvements
in the safety and health at work of pregnant workers and workers who have recently given birth or are
breastfeeding (tenth individual Directive within the meaning of Article 16 (1) of Directive 89/391/EEC) (OJ
1992, N L 348, p. 1)
-Council Directive 92/91/EEC of 3 November 1992 concerning the minimum requirements for improving the
safety and health protection of workers in the mineral-extracting industries through drilling (eleventh individual
Directive within the meaning of Article 16 (1) of Directive 89/391/EEC)
-Council Directive 92/104/ EEC of 3 December 1992 on the minimum requirements for improving the safety
and health protection of workers in surface and underground mineral-extracting industries (twelfth individual
Directive within the meaning of Article 16 (1) of Directive 89/391/EEC) (OJ 1992, N L 404, p. 10)
-Council Directive 93/103/EC of 23 November 1993 concerning the minimum safety and health requirements
for work on board fishing vessels (thirteenth individual Directive within the meaning of Article 16 (1) of
Directive 89/391/EEC) (OJ 1993, N L 307, p. 1)
856
Directive 89/391/EEC is not yet implemented into national labor law by the German legislator. The
implementation by a Work Protection Act is being prepared, see below, part II. Fig. XVI a
- Council Directive 80/1107/EEC of 27 November 1980 on the protection of

workers from the risks related to exposure to chemical, physical and
biological agents at work857
- Council Directive of 16 December 1988 amending Directive 80/1107/EEC on the

protection of workers from the risks related to exposure to chemical, physical and
biological agents at work (88/642/EEC) (88/642/EEC) 858/859/860
Besides the European legislator had implemented numerous special work protection norms:
These norms refer to the dangers of a special activity (production procedure):
- Council Directive 78/610/EEC of 29 June 1978 on the approximation of the laws,

regulations and administrative provisions of the Member States on the protection of the
health of workers exposed to vinyl chloride monomer 861
- Council Directive 90/269/EEC of 29 May 1990 on the minimum health and safety
requirements for the manual handling of loads where there is a risk particularly of back
injury to workers (fourth individual Directive within the meaning of Article 16 (1) of
Directive 89/391/EEC)862
or to dangers at the workplace:
857
OJ 1980; N L 327, p. 8; revised version: OJ 1995, N L 1, p. 1
858
OJ 1988, N L 356, p. 74
859 The following rules are based on these General Provisions:
-Council Directive of 28 July 1982 on the protection of workers from the risks related to exposure to metallic
lead and its ionic compounds at work (first individual Directive within the meaning of Article 8 of Directive
80/1107/EEC) (82/605/EEC (OJ 1982, N L 247, p. 12)
-Council Directive 83/477/EEC of 19 September 1983 on the protection of workers from the risks related to
exposure to asbestos at work (second individual Directive within the meaning of Article 8 of Directive
80/1107/EEC) (OJ 1983, N L 263, p. 25)
-Council Directive 91/382/EEC of 25 June 1991 amending Directive 83/477/EEC on the protection of workers
from the risks related to exposure to asbestos at work (second individual Directive within the meaning of
Article 8 of Directive 80/1107/EEC)(OJ 1991, N L 206, p. 16)
- Council Directive 88/364/EEC of 9 June 1988 on the protection of workers by the banning of certain specified
agents and/or certain work activities (Fourth individual Directive within the meaning of Article 8 of Directive
80/1107/EEC) (OJ 1988, N L179, p. 44)
-Commission Directive 91/322/EEC of 29 May 1991 on establishing indicative limit values by implementing
Council Directive 80/1107/EEC on the protection of workers from the risks related to exposure to chemical,
physical and biological agents at work (OJ 1991, N L 177, p. 22)
860
The German legislator implemented Directive 80/1107/EEC with the Gefahrstoffverordnung (Regulation on
Hazardous Material) of 26/8/1986 BGBl (German Federal Gazette) I, p. 1470) and the Second Regulation on
the Amendment of the Regulation on Hazardous Material of 23/4/1990 into valid German law; see above, part
II. Fig. XVI a
861
OJ 1978, N L 197, p. 12
862
OJ 1990, N L 156, p. 9
- Council Directive 86/188/EEC of 12 May 1986 on the protection of workers from the risks
related to exposure to noise at work 863
- Council Directive 92/29/EWG of 31 March 1992 on the minimum safety and health
requirements for improved medical treatment on board vessels864
- Council Directive 92/57/EEC on the implementation of minimum safety and health
requirements at temporary or mobile construction sites (eighth individual Directive within
the meaning of Art. 16 (1) of Directive 89/391/EEC)865
- Council Directive 83/477/EEC of 19 September 1983 on the protection of workers from the
risks related to exposure to asbestos at work (second individual Directive within the meaning
of Article 8 of Directive 80/1107/EEC)866
- Council Directive 91/382/EEC of 25 June 1991 amending Directive 83/477/EEC on the
protection of workers from the risks related to exposure to asbestos at work (second
individual Directive within the meaning of Article 8 of Directive 80/1107/EEC))867
or
to the existence of special dangers from the tools:
Council Directive 90/270/EEC of 29 May 1990 on the minimum safety and health
requirements for work with display screen equipment (fifth individual Directive within the
meaning of Article 16 (1) of Directive 89/391/EEC)868
Council Directive 89/392/EEC of 14 June 1989 on the approximation of the laws of the
Member States relating to machinery 869
Council Directive 91/368/EEC of 20 June 1991 amending Directive (89/392/EEC) on the
approximation of the laws of the Member States relating to machinery870
Council Directive 93/44/EEC of 14 June 1993 amending Directive 89/392/EEC on the
approximation of the laws of the Member States relating to machinery871
Council Directive 93/68/EEC of 22 June 1993 amending Directive 89/392/EEC
(machinery)872
863
OJ 1986, N L 137, p. 28
864
OJ 1992, N L 113, p. 19
865
OJ 1992, N L 245, p. 6
866
OJ 1983, N L 263, p. 25
867
OJ 1991, N L 206, p. 16
868
OJ 1990, N L 156, p. 14
869
OJ 1989, N L 183, p. 9
870
OJ 1991, N L 198, p. 16
871
OJ 1993, N L 175, p. 12
Council Directive 82/605/EEC of 28 July 1982 on the protection of workers from the risks
related to exposure to metallic lead and its ionic compounds at work (first individual
Directive within the meaning of Article 8 of Directive 80/1107/EEC)873
The European legislator currently pays special attention to work protection in road traffic
and transportation of dangerous substances in road traffic:
- Amending Commission Proposal (Com [93] 421 fin. SYN 420) of 1 October 1993 for a
Council Directive concerning minimum standards for safety and health protection in
transport activities as well as at the workplace in vehicles874
- Commission Proposal (Com [91] 4 fin.) of l9 June l991 for a Council Directive on the
appointment of an officer for the prevention of the risks inherent in the carriage of
dangerous goods in undertakings which transport such goods875
Also international treaties determine European rules on the technical work protection on
roads in this context:876
- European Agreement concerning the Work of Crews of Vehicles Engaged in

International Road Transport (AETR) of 1 July 1970877
The directives of the European danger protection law are, however, only reluctantly
implemented into national law by the national legislators.
58.5 Operational impacts of European social work

protection
The European Labor Law has to overcome many different national ideas in the area of
social work protection:
Only three essential sets of rules could be issued so far:
- Council
Directive 75/129/EEC of 17 February 1975 on the approximation of the laws of the
Member States relating to collective redundancies 878
872
OJ 1993, N L 220, p. 1
873
OJ 1982, N L 247, p. 12
874
OJ 1993, N C 294, p. 4
875
OJ 1991, N C 185, p. 5
876
On the position of European Labor Law in the system of public and private international law see above, Part I.
Chapter D. I.
877
BGBl (German Federal Gazette) II 1985, p. 889
- Council Directive 92/56/EEC of 24 June 1992 amending Directive 75/129/EEC on the

approximation of the laws of the Member States relating to collective redundancies 879
- Council Directive 77/187/EEC of 14 February 1977 on the approximation of the laws of the
Member States relating to the safeguarding of employees rights in the event of transfers of
undertakings, businesses or parts of businesses880
- Council Directive 80/987/EEC of 20 October 1980 on the approximation of the laws of the
Member States relating to the protection of employees in the event of the insolvency of their
employer 881
Especially the Council Directive 77/187/EEC of 14 February 1977 on the approximation of

the laws of the Member States relating to the safeguarding of employees rights in the event
of transfers of undertakings, businesses or parts of businesses882 has lead the European Court
of Justice to making various and controversial judgments:883
Christel Schmidt, European Court of Justice of 14 April 1994 (Case C-329/92) Christel
Schmidt vs. Spar- und Leihkasse der frheren mter Bordesholm, Kiel and Cornshagen,
ECR I 1994, p. 1311
The Spar- und Leihkasse dismissed Ms. Schmidt who was employed as only cleaning worker
in the subsidiary in Wacken. The Spar- und Leihkasse stated as reason for the dismissal that
a constructional enlargement of the subsidiary in Wacken was planned and that after that,
the necessary cleaning work should be transferred to an independent cleaning business.
The cleaning company offered Ms. Schmidt the conclusion of a labor contract after
termination of construction works in the Spar- und Leihkasse Kiel und Cornshagen. There
should not be any essential changes with regard to the working tasks of Ms. Schmidt. Ms.
Schmidt was meant to fulfill the same cleaning tasks in the premises of the Spar- and
Leihkasse Kiel and Cornshagen for her new employer.
Ms. Schmidt rejected the offer, because the cleaning area in the subsidiary Wacken had
grown after the reconstruction and turned against her former employer Spar- und Leihkasse
because of her dismissal. Ms. Schmidt referred to the prohibition of dismissal in connection
with transfers of undertakings.
The European Court of Justice assumed a transfer of undertakings if (only) partial functions
(here: cleaning tasks) which were carried out by an individual employee are contractually
transferred to another employer.
878
OJ 1975, N L 48, p. 29
879
OJ 1992, N L 245, p. 3
880
OJ 1977, N L 61, p. 26
881
OJ 1980, N L 283, p. 23
882
OJ 1977, N L 61, p. 26
883
Comp. Krimphove, 2001, p. 363 et seq., 373 et seq. (with further references)
As the transfer of Ms. Schmidt to the cleaning company was a case of transfer of
undertakings in the sense of Art. 1 of Directive 77/187/EEC, the European Court of Justice
affirmed the prohibition of dismissal in favor of Ms. Schmidt.
Ms. Schmidts former employer, Spar- and Leihkasse, was not allowed to dismiss Ms.
Schmidt because of the transfer of cleaning work to a cleaning company in accordance with
Art. 4 subs. 1 Directive 77/187/EEC.
With this judgment the European Court of Justice recognized the so called functional
succession as element of change of company identity and therefore as individual form of
transfer of undertakings in the sense of Directive 77/187/EEC.884
This jurisprudence of the European Court of Justice would have the consequence that any
company transfer of tasks to other, individually managed and organized company units,
would constitute a transfer of undertakings (outsourcing).
Now the European Court of Justice limits this broad interpretation in its decision in the case
Ayse Szen again:
Ayse Szen, European Court of Justice 11 March 1997 (Case C-13/95) Ayse Szen vs.
Zehnacker-Gebudereinigung GmbH Krankenhausservice
The Zehnacker Gebudereinigung GmbH used her employee Ms. Ayse Szen for cleaning a
secondary school. As the operator of the secondary school terminated the cleaning contract
between the Zehnacker-Gebudereinigung GmbH and the operator and assigned the
cleaning tasks to another company instead, the Zehnacker Gebudereinigung GmbH
dismisses Ms. Szen.
Ms. Szen assumed her dismissal to be ineffective because the change of cleaning companies
constitutes a business transfer, which would give her a special dismissal protection in the
sense of Art. 4 subs. 1 of directive 77/187/EEC.
The European Court of Justice rejected a transfer of undertakings in the sense of Directive
77/187/EEC and therefore a special dismissal protection. Charging another company with a
certain task would constitute a change of contractual partners. In principle, this would not
affect the identity of the business. Therefore this would not be a case of transfer of
undertakings.
58.6 Collective European Labor Law

Even though the European Labor Law recognizes the right to coalition and collective
actions of employees and their co-determination rights in company issues in principle,885
884
See also already: European Court of Justice 12 November 1992 (case C-209/91) Anne Watson Rask, Kirsten
Christensen vs. ISS Kantinenservice A/S, ECR I 1992, p. 5755 mn 15
up to now only questions regarding European law on collective contracts886 and the works
constitution of European-wide operating companies887 could be bindingly clarified:
Subject of norm Norm
Formation of Art. 11 of the Convention of the Protection of Human Rights and
coalitions Fundamental Freedoms888, Art. 5 of the European Social Charter of
18 October 1961889, N 11 of the Community Charter of the
Fundamental Social Rights of Workers of 9 December 1989890.
Workers from another European member state may participate in
the works council activities of their place of employment actively or
by making use of their voting rights. Art. 8 of Regulation
1612/67/EEC on the freedom of movement of workers in the
Community.891
Entering into Art. 6 European Social Charter892; Art. 4 of the Agreement on
commitments Social Policy
from collective
contracts
Freedom of strike Art. 6 N 3 of the European Social Charter (of 18 October 1961)
and N 13 of the Community Charter of Social Fundamental Rights
of workers (of 9 December 1989)
Table 58.2: Rules of the collective European Labor Law
885
See in detail: Krimphove, 2001, p. 387 et seq., 407 et seq., 412414, 421423 (each with further references)
886
Ibid, p. 390 (with further references)
887
Ibid, p. 395 et seq. (with further references)
888
BGBl (German Federal Gazette) II 1952, p. 686, 953; comp. European Court of Human Rights 27 October
1975 (file number 1/1974/12/19 Syndicat national de la police belge vs. Belgian State; Publications de la Cour
Europenne des Droits de l Homme, Srie A, Vol. 19.; European Court of Human Rights 13 August 1981 and
18 October 1982 (file number 2/1980/33/49-50) Young, James and Webster vs. United Kingdom, Publications
de la Cour Europenne des Droits de lHomme, Srie A, Vol. 44
889
BGBl (German Federal Gazette) II 1964, p. 1262
890
Com [89] 248 fin.
891
OJ 1968, N L 257, p. 1; on the function of this regulation see above.
892
On the problems regarding European collective agreements comp. Krimphove, 2001, p. 390 et seq. (with further
references)
58.6.1 European law on collective contracts

Art. 3. and especially Art. 4 of the Convention of Social Policy provide the social partners
in the context of European Primary Law with comprehensive rights in the creation of
European Labor Law regulations.893 The social partners have a right to be heard in any
legislative procedure of the European legislator (Art. 3 Social Policy Convention). The social
partners are also entitled to submit themselves by way of collective agreements to labor
law regulations (Art. 4 Social Policy Convention).
The legal character of these regulations, however, is controversial.894 The wording and the
teleological interpretation of Art. 4 Social Policy Convention indicate in the authors
opinion only a contractual and not a normative effect of the agreements made between the
social partners.895 Therefore, the legal situation after the conclusion of the Social Policy
Convention does not exceed the regulation of Art. 118 EC. Art. 4 Social Policy Convention
has not introduced a real European collective contract.
58.6.2 European Works Constitution Law

In practice the European Works Constitution Law is far more important for the company
work relations:
With the
- Council Directive 94/45/EEC of 22 September 1994 on the establishment of a European

Works Council or a procedure in Community-scale undertakings and Community-scale
groups of undertakings for the purposes of informing and consulting employees
the European legislator provides the possibility of employee representation in Community-

scale undertakings.
893
See Krimphove, 2001, p. 39 et seq. (with further references); 390 et seq. (with further references)
894
See Krimphove, 2001, p. 390 et seq. (with further references)
895
Ibid, p. 390 et seq.
Employees representatives or, (if no employee representatives exist) totality of

the employees of the undertaking in question
Select Committee
European Works Council
Agreements regarding: If no agreement

- affected companies, undertakings (subsidiary rgulations)
- composition - affected companies:
- number of members European-scale undertakings and companygroups
- allocation of seats - composition:
- duration of office employees of the company
- authorities - number of members:
- procedure of notification and hearing 3-30
- place, cycle and frequency of meetings - allocation of seats:
- financing of European Works Council first: one member for each affected member
- runtime of agreements country
than: additional seats according to numbers of
employee groups
- duration of office:
4 years
- authorities:
notification and right to be heard
- procedure of notification and right to be
heard:
in emergency cases by select committee
- location, cycle and frequency of meetings:
once per year
- financing of European Works Council:
by central company management
Fig. 58.1: European Works Council
The European Works Council is above all an information and advisory board.896 There are
no own, real co-determination rights of the European Works Council at all.
The establishment and organization of the European Works Council is primarily a matter of
negotiation between the employer and the employees. If the negotiations do not come to any
conclusion, the minimum requirements on the organization of the European Works Council
in accordance with the European Works Council Directive apply. Often the establishment of
896
Comp. Krimphove, 2001, p. 396 et seq. (with further references)
the European Works Council resorts to the existence of diverse national regulations.897
Especially the combination of negotiation rules, national Works Constitution Acts and the
European Works Council Regulation opens the possibility to strategically influence the
functionality of the European Works Council.898
58.6.3 Labor Law and company size

Labor law rules are not applicable to any company to the same extent. The German legislator
differentiates the validity of labor law regulations in connection with the size of the company
and the number of the regularly active employees of an undertaking or a company
The German legislator starts from the consideration that a differentiation of the applicability
of labor law serves to protect medium-sized business, which shall not be put under the
pressure or not under the same pressure of large companies or industrial establishments.
The differentiation with regard to company size to the contrary of general belief does not
only concern questions of collective labor law, as the selection and composition of the
works council, the release of its members or the appointment of the executive board,
management and supervisory board by employee representatives. The question regarding the
number of employees also has influence on individual labor law, for example the possibility
to shorten notice periods or the selection of (person-related) reasons for dismissals and even
on the design of company notices899 or of recreation rooms of employees.
The German system is very complex in contrast to other European member states.900
Especially small and medium-sized companies partially have no knowledge on the diverse
applicability of labor law. In this context the question is: when and which labor law
regulations are applicable for me and my enterprise?
The following overview shall close this informational gap and shall give a compact overview
over the most important regulations depending on the number of persons employed to
employers as well as employees for the individual areas of personnel management.
Employees Area Content of Regulation Rule
1 to 20 Dismissal Notice periods can be shortened sec. 622 subs. 5,
sentence 1 BGB
1 to 20 Health insurance Duty of Continued Pay Insurance sec. 10 subs. 1
LohnForzG
897
See Krimphove, 2001, p. 406 (with further references)
898
See Krimphove, 2000, p. 505 et seq.
899
On the general comprehensive duty of notices comp. also: sec. 8 TVG (collective agreements); sec. 11
(minimum labor conditions). These obligations apply independent from the number of employees in a company
900
Comp. Krimphove, 2001

Duty of 80 percent of refund of sec. 10 subs. 1
health insurance LohnforzG
employer has to provide sec. 10 subs. 5;
necessary information sec. 11
LohnforzG
3 and more Notice Notice on work time (incl. break sec. 48
(young people) times) JArbSchG
5 to 20 Works Council 1 representative sec. 9 BetrVG

5 to 20 Youth 1 representative sec. 62 BetrVG
representation
5 to 50 Election of works Simplified election process sec. 14 a
council possible BetrVG
5 and more Works council Possibility of employees to sec. 1 BetrVG
establish works council
more than 5 Dismissal Application of the sec. 23 subs. 1
Kndigungsschutzgesetzes KSchG
(Dismissal Protection Act)
more than 5 Dismissal Military service as business- sec. 2 subs. 3
related reason for redundancy ArbPlSchG
more than 5 Notice Notice of statutory regulations Art. 9 GleiBG
with regard to sex-related
discrimination under sec. 611a,
611b, 612 subs. 3, 612a BGB and
61g ArbGG
10 Tax Company annual tax declaration sec. 42 b EstG
possible
more than 10 Breaks Installation of recreation rooms sec. 29 subs. 1
necessary ArbeitsstttVO
20 Severely Obligatory workplaces for sec. 71 SBG IX
handicapped severely handicapped people
persons
more than 20 Unemployment Obligation of employer to sec. 147 a subs.
benefits reimburse unemployment benefits 1 SGB III)
paid by the social security

authority for a 58 old unemployed
person who was occupied in the
company for at least 4 years.
more than 20 Participation of Notification of employment, sec. 99 BetrVG
works council classification or re-classification,
relocations
21 to 50 Number of works 3 works council members sec. 9 BetrVG
council members
21 to 50 Youth 3 youth representatives sec. 62 BetrVG
representation
council members
51 to 150 Youth 5 representatives sec. 62 BetrVG
representation
more than 100 Information to Establishment of Economic and sec. 106 BetrVG
employees Financial Committee
more than 100 Economic and min. once per quarter sec. 106 BetrVG
Financial
in agreement with committee
Committee
written notification of all
employees over economic matters
(situation and development) in the
company
council members
representation
200 to 500 Release 1 works council members sec. 38 BetrVG
council members
representation
council members

more than 500 Participation Works council can ask for sec. 95 BetrVG
Works Council establishment of personnel
selection guidelines
more than 500 Company co- In publicly listed corporations and sec. 76 BetrVG
determination partnerships limited by shares 1/3 52
employee participation in
supervisory board
501 to 900 Dismissal 2 works council members sec. 38 BetrVG
council members
representation
901 to 1500 Release of works 3 works council members sec. 38 BetrVG
council members
council members
more than 1000 Youth 15 representatives sec. 62 BetrVG
representation
more than 1000 Company co- mining companies in form of sec. 1 subs. 1
determination (in stock-listed companies, GmbH and 2 Montan-
executive and (limited partnership), bergrechtl. MitbestG
supervisory Gewerkschaft (mining union)
board)
participation in supervisory board
sec. 12 et seq.
and executive board = labor Montan-
director MitbestG
1501 to 2000 Dismissal 4 works council members sec. 38 BetrVG
council members

2000 und more Company co- mining companies in form of sec. 1, sec. 7 et
determination (in stock-listed companies, GmbH seq. MitbestG
executive and (limited partnership), bergrechtl.
supervisory Gewerkschaft (mining union),
board) cooperative society
participation in supervisory board sec. 33
and representation labor director MitbestG
also for non mining companies (in sec. 1 Montan-

form of stock-listed companies, MitBestErgG
limited partnerships, mining
unions), if they dominate those
mining companies, subject to co-
determination obligations, which
earn more than of the group
revenues
council members
council members
council members
council members
council members
council members
council members

council members
council members
from 9001 Number of works Addition of 2 members per each sec. 9 BetrVG
council members additional fraction of 3,000
employees to the 35 works
council members
9001 to 10.000 Release 12 works council members sec. 38 BetrVG
from 10.000 Release 1 further member of the works sec. 38 BetrVG
council released for each
additional fraction of 2,000
employees in addition to 12
released works council members
Table 58.3: Meaning of number of employees in Works Constitution law
There is no uniform way of counting the number of employees. It depends:

1. on calculation parameters of the workplace (undertakings or businesses) and under
certain circumstances also on the
2. employment relation which the employees have (part-time employees, home-workers,
trainees etc.)
Concerning 1): In principle the number of employees of the business in question is decisive
for issues concerning works constitution law and individual labor law. If questions arise with
regard to organizational areas of work relations; e.g. for existence of the co-determination
right of employees in the supervisory board or executive board of a legal person (corporation
or association), the number of active employees is decisive.
Concerning 2): In principle the number of employees comprises also those employees who
are employed as part-time employees, external workers, home workers or trainees901 by the
undertaking or business.
901
Comp. sec. 5 subs. 1 BetrVG (Works Council Constitution Act)
59 Conclusion 369
Exceptions, however, are possible. For example sec. 622 subs. 5 sentence 2 BGB and sec. 2
subs. 3 sentence 3 ArbPlSchG limit the necessity to attribute part-time workers to the group
of employees, in the sense that part-time employees with regular weekly working hours of
not more than 20 hours are counted as 0.5 employees and those working not more than 30
hours are counted as 0.75 employees.
59 Conclusion
Especially labor law aspects of personnel policy confirm the coherence and consequence of
the economic personnel cost approach. In this context it is less international labor law, but
rather European and national labor law which has considerable influence on personnel
management practice and cost advantages. Especially the jurisdiction of the European Court
of Justice makes the immense influence clear which the European Labor Law has these days
on managerial practice.
The significance of European Labor Law will grow because of the efforts of the European
legislator to approximate the laws and harmonize the economic and competitive
circumstances in order to establish a uniform European Economic Area. Also the changing
structure of European companies promotes the development of European Labor Law: groups
with cross-border activities need uniform law already for organizational reasons. At the same
time a Europe-scale enterprise entails a Europe-wide coalition of employees to secure and
exercise employee rights.
With the advancement of the above mentioned trends. the pressure for innovation of labor
law increases. It has to be adjusted in order to be able to do justice to the current and future
requirements. Not only questions regarding the financial and economic crisis, but also
problems of growing unemployment point the necessity of a cost-economic personnel policy
out. Not only the European legislator and the jurisdiction of the European Court of Justice
have to offer adequate instruments for cost-efficient personnel management. Also the
employers, employees and their associations need to know the instruments in order to be able
to make an independent choice of the most efficient alternative.
XIV Conclusion
With the book International Human Resource Management and International Labor Law a
trilogy in the competence and research field Finance-oriented Personnel Management has
been developed. This trilogy has started with the book Finance-oriented Human Resource
Management and as subsequent volume with the book Controlling and the Berlin Balanced
Scorecard Approach. The authors wanted to prove that personnel management, practiced
and taught under managerial aspects, is a functional instrument. The theoretical crisis of
the last 25 years can neither be overcome by borrowings from economics (labor economic
and human resource economic approach) nor from psychology (behavioral personnel
management). It can only happen with its own strengths which are obtained from classical
business management especially from accounting, financing and investment theory in
connection with jurisprudence. Since more than 100 years the German business management
theory is coined by professors like Schmalenbach, Gutenberg, Kosiol, Whe, Baetge,
Coenenberg, Haller, Kting/Weber, Pellens, Weber/Schffer to mention only some. On their
fundaments and from their basic understanding the instruments of finance-oriented human
resource-management were created. Examples are the personnel management logic, the
Berlin Balanced Scorecard Approach, the Innovation Success Calculation, International
Human Resource Controlling and the Berlin Human Capital Assessment Model as elements
of the remuneration management systems with and without stock-option programs. The basic
philosophy is the shareholder-value approach with the basic model of company assessment
as an application of the decision-oriented company management theory.
372 XIV Conclusion
Economics theory/business ethics - fundaments Theory (school of thouught)

Friske, C./Bartsch, E./ Schmeisser, W.: Einfhrung in die Schmeisser, W. Finanzorientierte Personalwirtschaft; Oldenbourg
Unternehmensethik: Erste theoretische , normative und praktische Verlag, Munich 2008.
Aspekte. Lehrbuch fr Studium und Praxis. Rainer Hampp Schmeisser, W./Clausen, L. Controlling and Berlin Balanced
Verlag, Munich und Mering 2005. Scorecard Approach, Oldenbourg Verlag, Munich 2011.
Schmeisser W. Wissenschaftstheoretische und methodologische Schmeisser, W./Krimphove, D. International Human Resource
Vorberlegungen, In: Schmeisser W.: Finanzorientierte Management and International Labor Law, Oldenbourg
Personalwirtschaft. Oldenbourg Verlag 2008, p. 1-8. Verlag, Munich 2012.
Schmeisser, W.: Personalpolitik mit Anreizsystemen im Spiegel Further Literature:
des Shareholder Value Ansatzes, in: Litkemann, J.: Schmeisser, W. et. al.
Beteiligungscontrolling 2nd edition, Neue Wirtschafts- Innovationserfolgsrechnung, Springer Verlag
Briefe, Berlin 2009, p. 2219-2226. VDI, Berlin/Heidelberg 2008
Schmeisser W./ Rnsch, M./ Zilch, I.: Shareholder Value Schmeisser, W./Clausen, L. et al.
Approach versus Corporate Social Responsibility: Eine Humankapitalbewertungsmodelle, Rainer Hampp Verlag
unternehmensethische Einfhrung in zwei kontrre Anstze. Rainer Munich and Mering 2009.
Hampp Verlag, Munich and Mering 2009.
Field of competence
Finance-Oriented
Human Resource Management
Empiricism Practical application

Schmeisser, W./Eckstein, P./Boche, M. Die Finanzorientierte Business projects: e. g. Muehlhahn AG, Bayer AG
Personalwirtschaft auf dem empirischen Prfstand; Rainer Hampp Human Capital seminars etc.
Verlag, Mnchen und Mering 2009 (national).
Schmeisser, W./Eckstein, P./Heger, G. Die Finanzorientierte
Personalwirtschaft auf dem empirischen, internationalen Prfstand
(project application).
Fig. 59.1 Field of competence and research of Finance-Oriented Human Resource Management
To say it in Kants words: each academic research and each partial discipline needs to have
fundaments from normative-ethics and economic theory and to give theoretical evidence in
form of stable models as well as empiric support. As business management is to be
considered as applied science, it has to provide both statistic-empirical proof and the
applicability of the models in companies as organizational recommendations.
Thanks to the Muehlhan AG, as reference company with its Financial and Human Resource
Manager Carsten Ennemann and the Head of HR Olaf Drewicke, we succeeded to do so.
Therefore, it is obvious that the second book of the trilogy Controlling and Berlin Balanced
Scorecard Approach is also published in our names by the Oldenbourg Wissenschaftsverlag
in English language. The book Corporate Finance und Risk Management shall equally
provide basics for finance-oriented human resource management, because in the bank and
insurance sector, in the health sector and in innovative industry such models will be more
requested in future.
We have been improving the Berlin Balanced Scorecard Approach for years and prove that
any perspective of the Balanced Scorecard can be calculated either with instruments of
XIV Conclusion 373
internal and/or external accountancy. Moreover we demonstrated that all perspectives can be
connected and that the Berlin Balanced Scorecard can be dynamized for Strategic
Management in the course of years with help of company assessment.
The Berlin Balanced Scorecard Approach renders e.g. strategy calculations equally as
possible as innovation success calculations and the calculation of Human Capital. From the
learning and potential perspective of the Balanced Scorecard the Berlin Balanced Scorecard
Approach, the Berlin Human Capital Assessment model is deducted. It proves in theory and
practice with an example from the Federal Soccer League and the Bank sector how human
capital can be calculated with and without utility analysis.
The Berlin Human Capital Assessment model gives a first instruction how to manage
international subsidiaries with regard to personnel management and controlling. Business
management research, financial personnel aspects and analogies in practical application are
combined under this approach.
Perspectives of Human Capital

Assessment
Psychological-organizational Labor Economical and Finance-oriented or
approach (motivation Personnel Economical Business-Management
oriented) Approach Approach: innovation,
strategy and cost and
- Internal employee - Sum of investments into
revenue orientation of HR
interview: does the business-internal and
management
company have a well- external training activities
being, cuddly of an economy - Berlin Human Capital
organization to increase Assessment Model
- forced integration of
motivation?
quantitative/ qualitative - HR reporting in Human
- Internal competence Human Capital into the Resource and
survey within a potential labor market (Hartz 4) Performance Reports
form survey: personnel
- Basis: Finance-oriented
management as
logic and Berlin Balanced
competence management?
Scorecard Approach
- External interviews of
other companies: e.g. via
psychonomics, do you
take Human Capital into
consideration?
Fig. 59.2: Perspectives of Human Capital Assessment

374 XIV Conclusion
Of course, psychological-organizational as well as labor economic models will be further

analyzed by us. They help us to make practical and theoretical improvements especially also
in connection to legal requirements and to look for new application possibilities.
The next consequent step will be the elaboration of a human capital index which will only be
calculable with the help of the Berlin Human Capital Assessment approach. The calculation
of the Basel II Approach as analogy of rating approaches provides a perfect model in this
context. The fundamental classic business management knowledge in accountancy and law
are indispensible in this area.
BBSC productivity Index

for hospitals and
Subsidiary/
rehabilitation clinics:
Management Index
Health, revenue and break-
even orientation
Berlin BSC Human

Potential Index: e.g. for:
Component of credit rating Element of an innovation and

index of businesses credit rating index
Fig. 59.3: Berlin BSC-Human-Potential-Indexes

XIV Conclusion 375
Literature
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Komparativen Institutionenkonomik, Lohmar, 2006.
Krimphove, D.: Europisches Arbeitsrecht. 2nd edition, Munich 2001.
Krimphove, D.(a): Rechtstheoretische Aspekte der Neuen konomischen Theorie des
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Subject Index
A disclosures 113
absolute performance target 78 dislocation agreement 130
AGG 281, 287 disposition rights 252
application layer 205 diversity management 281
architecture 197 Diversity Management 281
Ausstrahlung 138 double tax agreements 134
authorized capital increase 92
E
B e-administration 195
bank human capital assessment model EEC regulation n1408/71 38
165, 172 Electronic Recruiting (E-Recruiting) 212
base price 76 elements of discrimination 294
binomial options pricing model 109 equity classified awards 116
Black Scholes model 109 equity-settled share-based transaction
Business Process Reengineering 195 107
e-recruiting 195
C e-relationship management 196
central strategy 10 ethnocentric 7
checklist 29 European Labor Law 313, 318
collective European Labor Law 360 European Works Constitution Law 361
communication of culture 248 exercise period 85
company culture 243 External personnel selection procedures
conditional increase in capital 90 235
convertible bonds 68 external selection of personnel 233
Corporate Governance 57
Country Culture 243 F
country research at the example of South fair value 108
Africa 255 federal strategy 10
free movement of workers 321
D
data management layer 204 G
data protection 200 GCGC 57
delegation agreement 31 General Equal Treatment Act (AGG) 287
delegation and its social security aspects geocentric strategy 8
137 German Corporate Governance Codex
delegation and mobility bonus 21 57
digital interview 238 global model 6
dilution effect 88 globalization 1
direct discrimination 294
378 Subject Index
H O
harassment 295 online recruiting games 218
holding periods 85 ordinary capital increase 94
Human-Resources-Websites 215
P
I passive contract 131
IFRS 105 performance conditions 108, 110
indirect discrimination 295 performance shares 73
instruction to discriminate 296 performance units 73
Instruments of Electronic Recruiting 212 personnel leasing 226
integration system 207 Personnel selection process 229
international information systems 193 phantom shares 72
International Labor Law 315 polycentric strategy 7
international personnel controlling 175 positive action 297
International personnel recruitment and presentation system 207
selection 211 principal-agent theory 46
internationalization strategies 6
Internet job boards 213 R
intrinsic value 108 real equity settlement 107
IT systems 195 relative performance target 80
repurchase 95
K restricted stock 73
key figure based performance targets 82 restricted stock units 73
KonTraG 175
S
L SAR 72
labor contract 127 scouting 222
labor contract abroad 34 Scouting 222
Labor Law 318 sexual harassment 296
layer model 197 SFAS 123 (R) 115
liability classified awards 116 shareholder value 43
limited tax duty 132 social work protection 357
local strategy 10 stock appreciation rights 100
lock-up period 84 Stock Appreciation Rights 72
M T
market conditions 108, 110 technical work protection 353
Monte-Carlo simulation 110 telephone interview 238
multinational model 5 territory principle 138
transnational model 6
N
naked warrants 70 U
national model 5 unlimited tax duty 132
newsgroups 219 US-GAAP 115
Subject Index 379
V W
virtual equity instruments 111 warrant bond 69
virtual recruiting fairs 217 work contracts abroad 34
VorstAG 65
VorstOG 63

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List of Abbreviations XXIII

I Finance oriented Human Resource Management for the support

2 Differentiation of international and national human resource management 2

3 Problems and aims of international HR management 3

4 Options of personnel policy in international personnel management 4

5 Internationalization strategies in personnel management 6

II International remuneration system 15

7 International delegation of executive managers exemplified by BASF 16

III Stock-option programs as part of the remuneration management system 43

8 Basic considerations on economic philosophy and ethics 43

9 Changes in the remuneration structure in Germany 52

10 Categorization of Stock-option Programs 67

10.1.2 Naked warrants.........................................................................................................70

11 Criteria for the arrangement of stock-options programs 75

12 Possibilities of financing stock-option programs 88

13 Execution of a stock-option program in the company 101

14 Accountancy of stock-option programs 105

15 Aspects concerning labor contracts 127

16 Tax law aspects 132

17 Social security aspects 137

17.7 Provisions in the case of lack of insurance obligation............................................148

V International remuneration systems for companies listed

VI Application of the Berlin Human Capital Assessment Model

19 Bank internal controlling data as basis 159

20 Selected key figures and their weighting 160

21 On the calculability of the bank human capital assessment model 165

22 Results of the bank human capital assessment 167

23 Bank-Human Capital Assessment Model in the context of remuneration

VII Development of a human resource information system of international

24 About the description and definition of international personnel controlling 176

25 Targets of international personnel controlling 177

26 Use of personnel information systems 178

27 Obtaining personnel information 180

28 Design of personnel information systems 187

28.2 Functional design of an international personnel controlling system ...................... 189

VIII Design, functionality and application fields of information systems in HR 193

29 International personnel information systems 193

31 Structure, functionality and application area 201

IX International external personnel recruitment and staff selection 211

33 Internet as medium of international personnel recruitment 211

34 Instruments of Electronic Recruitment 212

36 Personnel leasing 226

37 Personnel selection process 229

38 External procedures of selection of personnel and instruments 235

X Company culture and country culture 243

39 Factors in the company environment 244

40 Company-internal factors 245

41 Cultural values 245

42 Communication of culture 248

43 Formation of company culture 251

43.3 Disposition rights ...................................................................................................252