In conjunction with a separate recommendation on banker pay, the European Commission (EC) has also finalised a recommendation for “director” pay (this means executive directors in most cases).

The recommendation is not a law. It is a recommendation to member states to harmonise frameworks across the European Union. Nevertheless, in light of Australia’s Productivity Commission work, it is worth noting where the Europeans are heading.

On the structure of “directors’” remuneration, the recommendation invites member states to:

• set a limit (maximum of 2 years of the fixed component of a director’s pay) on severance pay (golden parachutes) and to ban severance pay in case of failure.
• require a balance between fixed and variable pay and link variable pay to predetermined and measurable performance criteria to strengthen the link between performance and pay.
• promote the long term sustainability of companies through a balance between long and short term performance criteria of directors’ remuneration, deferment of variable pay, a minimum vesting period for stock options and shares (at least three years); retention of part of shares until the end of employment.
• allow companies to reclaim variable pay paid on the basis of data which proved to be manifestly misstated (“clawback”). On the process of determining directors’ remuneration, the recommendation invites Member States to:
• extend certain disclosure requirements contained in the existing Recommendation to improve shareholder oversight of remuneration policies;
• ensure that shareholders, in particular institutional investors, attend general meetings where appropriate and make considered use of their votes regarding directors´ remuneration;
• provide that non-executives should not receive share options as part of their remuneration to avoid conflict of interests;
• strengthen the role and operation of the remuneration committee through new principles on:

1. the composition of remuneration committees;
2. the obligation for the members of the remuneration committee to be present at the general meeting where the remuneration policy is discussed in order to provide explanations to shareholders;
3. avoiding conflicts of remuneration consultants.

The recommendation takes due account of efforts already made by several member states in the context of the financial crisis and aims to foster these developments by identifying best practices to ensure greater convergence in the EU.

The Commission will closely monitor the application of the recommendation and make its finding public through scoreboards. After one year, the Commission will submit an evaluation report on member states’ application of the recommendation.

The recommendation can be found HERE.

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