For an downgrade I would at least expect to get the fare difference between the cheapest business ticket and the cheapest economy ticket plus a compensation on top of this.
LH must think that $1600 covers the difference between discounted business and full fare Y plus leave room for a compensation. But IMHO this doesn't adequately reflect reality.
OZ was offering me a few hundred dollars in cash because they were overbooked and they asked me to fly KA business within 15 minutes of my booked flight. Or the example of getting a free C ticket as compensation. But $1600 wouldn't make me change to Y.