A common EU approach to say on pay for all types of listed companies
Say on Pay is one of the most tangible and successful provision of the landmark reform law, the 900 pages Dodd-Frank Act of 2010. Many regulatory compliance observers believe that the nonbinding shareholder vote on executive compensation has opened the door to a wider discussion on other governance topics.
European Commission recently approved a corporate governance package that gives shareholders veto power over directors' pay levels. The commission's 'one size fits all' remuneration policy is probably a copy-and-paste from Dodd-Frank and is part of the transparency, harmonization and globalization initiative. The final version may be flexible enough to give space to an effective remuneration policy that is tailored to the individual corporate objectives in each company, with a primary focus on the financial and non-financial performance criteria.
Binding Shareholder Votes on Executive Pay Plans
A key provision in the Commission's proposed Shareholder Rights Directive, is a binding vote on the company's remuneration policy every three years, supplemented by the annual advisory votes. The paper that is presented to the shareholders must include a maximum level of pay to the senior executives, as well as information on the ratio between executive compensation and the average employee compensation.
The current Internal Market and Services Commissioner Michel Barnier, who has some rather clear opinions on the financial crisis and the compensation they received in spite of the calamities they caused advocates a stronger shareholder engagement in the companies they invest in.
Governance of executive remuneration
A decisive factor for the success of the directive is how this compulsory European Say on Pay will affect the role that board members play in the governance of executive remuneration as a major part of their responsibility
As long as the final directives stresses that the board of directors will continue have the ownership, monitoring and oversight of the executive remuneration of executives the directive will achieve its purpose.
Risk and moral hazard vs. the long term success
Let us then recap the executive remuneration responsibilities of the Board of directors from a previous newsletter:
- Gets the recommendations from the remuneration committee, composed of independent non-executive directors
- Aware of the potential conflicts of interest if all independence criteria are not met
- The recommended remuneration program is aligned with the vision and strategic goals of the company
- The charter of the remuneration committee must clearly state the remuneration policy must take into consideration key potential risk and moral hazard effects combined with the long term success of the company -for each of the relevant executive
- The charter of the remuneration committee must clearly state the remuneration policy is consistent both in policy and practice
- It is the boards of director's responsibility to ensure proper shareholder communication and support for the long-term success of the corporation
- Clearly the monitoring and accountability of director and executive remuneration post the financial crisis is attracting more attention than ever before. There is a need for shareholders to express their opinion and vote on remuneration policy
Clearly the monitoring and accountability of director and executive remuneration post the financial crisis is attracting more attention than ever before. There is a need for shareholders to express their opinion and vote on remuneration policy.
This is a 3 part series on Say on Pay. In the next issue:
Will a mandatory say-on-pay encourage management to be more responsive to shareholder concerns on other corporate governance issues?
