EU proposal for companies to put their remuneration policy to a binding shareholder vote
12/04/2014
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It is probably a good idea to keep track on overseas developments, given the trend for a convergence on several aspects of company governance among OECD countries.

On April 10 the European Commission proposed a binding “say on pay” policy that would apply to around 10, 000 companies listed on Europe’s stock exchanges. The proposal is part of a Commission package intended to boost shareholder power and control executive pay.

Interestingly, the Commission’s proposals go further than the recent UK law on a binding vote of pay (see HERE).  The move is the latest by European lawmakers to be more prescriptive on executive pay, after earlier laws prescribing the nature of pay in financial services.

Financial services – bankers and hedge fund pay

Since the global financial crisis began in 2007-08, the EU has agreed to ban banker bonuses of more than twice the level of fixed pay (see HERE).

In February 2014 the EU also introduced pay rules for managers of hedge funds and other EU investment vehicles.

The new hedge fund remuneration rules, which are set to become law in 2016, mean fund managers will be paid half of their bonuses in units of the funds they manage, in a bid to better align the interests of investment managers and investors.

                         

Fund managers will also have to defer 40 per cent of their bonuses for at least three years, or 60 per cent if the bonus is unusually high.

This means pay restrictions for mainstream fund managers will be on par with rules for Europe’s hedge fund and private equity fund managers. Unlike European banking staff, however, senior fund managers will not be subject to a pay cap. 

The rules also introduce stricter liability provisions for depositories to prevent a repetition of the Bernie Madoff fraud, as well as stronger sanctions for fund companies.

Maximum pay levels binding

The new European “say on pay” proposals would oblige companies to disclose “clear, comparable and comprehensive information on their remuneration policies and how they were put into practice”.

The pay policy would need to clearly indicate the set maximum level for executive pay at each individual company.  It would also need to explain how the policy contributes to the long-term interests and sustainability of the company.

In addition, it would need to explain how the pay and employment conditions of employees of the company were taken into account when setting the executive pay policy – including indicating what the ratio was between average employees’ and top executives’ rewards.

But investors “encouraged” to be more transparent

Key elements of the new European Commission proposals include stronger transparency requirements for institutional investors and asset managers on their investment and engagement policies regarding the companies in which they invest as well as a framework to make it easier to identify shareholders so they can more easily exercise their rights (e.g. voting rights), in particular in cross-border situations (44% of shareholders are from another EU Member State or foreign). Proxy advisors would also have to provide more information on the methodologies they use to prepare their voting recommendations and on how they manage conflicts of interests.

UK investors not so keen

Many UK institutional investors have criticised the new rules, based on the benefit of the long and thorough UK debate on a binding vote. Their view is that any changes to the rights and responsibilities of shareholders that blur their roles with those of company boards and management will result in inefficient micro-management by shareholders. That is, it should not be the responsibility of shareholders to set specific pay levels or vote on pay ratios.

More information can be found HERE. © Guerdon Associates 2021
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