SAP's management faces questions on succession planning and pay

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(Bloomberg) -- German software maker SAP SE is facing questions on two fronts heading into its annual meeting on Wednesday: the future of its co-founder and chairman Hasso Plattner, and the pay packet of chief executive officer Bill McDermott.

Plattner, who built the company into a corporate computing power, is 73 -- two years short of SAP’s suggested retirement date for directors -- and an essential figure without a clear replacement.

At the beginning of the year, former co-CEO Jim Hagemann-Snabe, a respected Danish executive who ran the company with current CEO Bill McDermott for four years and now sits on the supervisory board, seemed poised to inherit the job. In addition to 27 years at SAP, Snabe is on the board of the World Economic Forum, and has advised German chancellor Angela Merkel and other business and government leaders on technology policy.

But in February Siemens AG announced Snabe, 51, as its next chairman. He is poised to leave SAP’s supervisory board no later than July 13, according to proxy materials released May 3 by insurer Allianz, where he also sits as a director.

"He would have been the born successor and we would have welcomed that," said Ingo Speich, a portfolio manager at Union Investment in Frankfurt, a top-20 shareholder. "Now this hole isn’t filled yet. The succession question is completely open."

Plattner, like his rival Larry Ellison at Oracle Corp. owns a big chunk of SAP’s shares and still exerts an outsize influence in his seventies. His term ends in 2019, and SAP’s governance policy says supervisory board members should "shouldn’t be older than 75 as a general rule."

A spokeswoman from SAP declined to comment on Plattner’s succession.

"Hasso’s thumb print is on everything SAP does," said Ross MacMillan, an analyst at RBC Capital Markets. "Tech companies usually thrive when founder-owners are running them. The same will be said when Larry Ellison is no longer at Oracle."

Pay Problem

Shareholders are also preparing to vote Wednesday at the company’s annual meeting and are expected to deliver SAP a rebuke over Chief Executive Officer Bill McDermott’s $15 million compensation, which made him corporate Germany’s best paid CEO.

Proxy advisers Institutional Shareholder Services and Glass Lewis both recommend an "against" vote on the supervisory board’s 2016 actions because SAP hasn’t responded to concerns about executive pay, despite a slap from shareholders on the issue a year ago.

"The supervisory board’s unwillingness to acknowledge any need for improvement," ISS said in an April report to shareholders, "shows a serious lack of good governance practice at the supervisory board level."

In response to the pressure, McDermott said the company’s long-term executive pay system is tied to “audacious” goals including tripling of its share price, out-performance of its peer group by 25 percent and market cap of over 250 billion euros ($273 billion), according to a copy of a memo he sent to global staff Monday and obtained by Bloomberg. SAP’s current market cap is about 116 billion euros.

SAP’s sales have grown every year since the financial crisis and are on track for an estimated $26 billion this year. Its stock is up 40 percent over the past year in the midst of a major upgrade cycle that’s offering customers choices between running its software themselves or outsourcing the job to SAP’s cloud.

“Let’s just tell it like it is: we have a pay for performance culture,” McDermott wrote in the email.

Yet SAP’s profit margins have been up and down the past six years. A tepid operating margin took some of the wind out of SAP’s first-quarter report April 25, and analysts worry whether selling cloud-computing software can be as profitable as SAP’s traditional business programs, especially as it competes with Oracle Corp., Microsoft Corp. and Inc. for contracts.

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