The Australian government and other governance stakeholders have introduced a plethora of additional executive pay law and governance guideline changes in the wake of the GFC. And the Labor government has recently announced more (see HERE). In this article we take a brief look at a few European developments.

The EU Commission and other European institutions have enabled and encouraged harmonization among member states, facilitating the convergence of rules across the continent. However, noteworthy differences remain and continue to impose a significant compliance cost on companies with cross-border business activities.

Performance-related remuneration

Performance-related remuneration has, since the crisis, come under scrutiny. The UK Corporate Governance Code introduced in May 2010 maintains the approach of the previous Combined Code that a significant proportion of executive directors’ remuneration should be structured so as to link rewards to performance, but gives increased weight to non-financial performance and risk management.

Payouts under incentive schemes should now be subject to “challenging performance criteria reflecting the company’s objectives, including non-financial performance metrics where appropriate. Remuneration incentives should be compatible with risk policies and systems.”

Previously, under the Combined Code, the focus was on designing the performance related elements of pay to “align the interests of executive directors with those of shareholders, and to give these directors keen incentives to perform at the highest levels”.

At this point, we feel obliged to point out again that inappropriate incentives did not CAUSE the GFC by inducing excessive risk taking (see HERE an HERE).

Other changes in the UK have recently been announced, including a binding vote on some pay matters (see HERE).

Other countries have been introducing restrictions on performance-related pay. Under the Swedish Code of Corporate Governance, for example, variable remuneration paid in cash must be subject to predetermined limits: these limits may take the form of maximum amounts but may also be expressed in other ways, including as a percentage of the fixed remuneration or based on the total dilution resulting from equity awards. According to guidelines adopted by the Swedish government, senior executives of state-controlled public companies have no right to any variable remuneration at all.

Comparable analyses

The corporate governance codes of most countries allow the remuneration levels in comparable companies to be taken into account when determining executive remuneration. The UK Code, for example, states that the remuneration committee should judge where to position their company relative to other companies, but urges caution in using such comparisons in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in performance.

The Spanish Unified Good Governance Code, however, advises companies not to use the average remuneration of peer companies as a benchmark for their own remuneration because the desire to converge with the average among those receiving less will not meet with any symmetrical effort from those receiving more.

 We trust this doesn’t mean you just have to think of a number in Spain – that would be altogether too hard to explain to shareholders!

Disclosure requirements

A comparison of European requirements reveals that, at the very least, a company’s annual report must provide information about its remuneration policies. In addition, in the case of a merger or takeover, the offer document must contain detailed information about the remuneration granted to the directors of the acquiring and target companies.

Judicial remedies

At least in theory there are various judicial remedies shareholders can use to oppose excessive or otherwise improper executive remuneration. In the Netherlands, for example, remuneration policies can be one of the elements taken into consideration in mismanagement proceedings initiated before the Enterprise Chamber of the Amsterdam Court of Appeal.

In Belgium, Germany, and France, a special expert can be appointed to investigate executive remuneration in a particular case (this must be a boon for remuneration consultants).

In the latter two countries, criminal sanctions can also be imposed for the abuse of corporate assets through excessive remuneration.

In some countries, an individual shareholder can bring a civil action to recover damages for a loss in the value of his or her shares as a result of excessive remuneration (a so-called derivative action).

Non-judicial remedies

In practice, however, these judicial remedies do not always prove effective due to the complexity and delays of the judicial systems. By contrast, non-judicial remedies appear more successful: for example, shareholder discontent often causes companies to think twice about proposed remuneration packages, even if shareholders have only an advisory vote.

The European Union’s Capital Requirement Directive III may also help to reduce excessive bonuses at credit institutions and investment firms without judicial intervention. In the event of disappointing or negative performance of an enterprise, the directive requires that the variable remuneration be substantially reduced, including through malus and clawback arrangements. This requirement may also have a deterrent effect.

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