Regime for the remuneration of directors of listed companies

SUMMARY OF:

Recommendation 2009/385/EC in regard to the remuneration of company directors

WHAT IS THE AIM OF THE RECOMMENDATION?

It supplements existing EU guidance by giving additional recommendations on the way in which best practices can be defined in order to prepare an appropriate remuneration policy for directors of companies listed on the stock exchange. To this end, it deals with some aspects of the structure of the remuneration of directors and governance thereof.

KEY POINTS

Remuneration policy

Structure of the policy on directors’ remuneration

In order to ensure that remuneration is performance-related, the new recommendation requires a balance to be established between fixed and variable remuneration and makes the allocation of the variable component conditional upon predetermined and measurable performance criteria.

In order to promote the long-term sustainability of companies, the recommendation also provides for:

a balance between long-term and short-term performance criteria;
deferment of payment of the variable component;
a minimum period for the vesting of share options and shares (the time for which a director must serve a company in order to fully own their options and shares);
the retention of a minimum number of shares until the end of the mandate.

Termination payments (‘golden parachutes’) are also subject to quantified limitations and should not be paid in the event of failure. It is suggested that payments do not exceed the equivalent of 2 years of the non-variable component of the remuneration.

The recommendation also introduces the principle of proportionality of remuneration within the company. That would be a rating which compares the remuneration of directors to that of other executive directors on the board and employees or executives of the company.

As a last resort, companies should reclaim variable components of remuneration which were paid on the basis of data which later proves to be manifestly misstated.

Governance of the policy on directors’ remuneration

Disclosure of the policy on directors’ remuneration

This recommendation is based on Recommendation 2004/913/EC which stipulates that each listed company must publish a statement on its remuneration policy. The new recommendation goes further by stating that this statement must be clear and easily understandable.

The statement on remunerations should also provide information on:

the choice of performance criteria;
the methods applied to determine whether performance criteria have been fulfilled;
the payment of variable components of the remuneration;
the payment of termination payments;
the vesting of share-based rights to remuneration;
the policy on the retention of shares (fixed, for example, at twice the total annual remuneration);
the composition of peer groups of companies whose remuneration policy has been examined in relation to the establishment of the remuneration policy of the company concerned.

Shareholders’ vote

In order to improve transparency, shareholders should participate in board meetings and use their voting rights with regard to directors’ remuneration.

Remuneration committees

Remuneration committees play a key role in establishing a responsible remuneration policy. In order to strengthen the functioning and responsibility of the remuneration committee, the recommendation suggests that at least one of its members should have sufficient expertise in remuneration matters.

The recommendation also contains an obligation for members of the remuneration committee to attend the board meeting at which the statement on remuneration is on the agenda in order to be able to provide explanations to shareholders.

Lastly, in order to avoid conflicts of interests for remuneration consultants, it requires that consultants who advise the remuneration committee must not also advise other departments of the company.

Remuneration of non-executive directors or members of the supervisory board

In order to avoid conflicts of interests, the recommendation provides that the remuneration of non-executive board members or members of the supervisory board should not include share options.

BACKGROUND

The financial crisis of October 2008 revealed more and more complex remuneration structures. They are often based on short-term performance, which can lead to excessive remuneration of directors, not justified by performance. This recommendation complements and strengthens Recommendations 2004/913/EC and 2005/162/EC, which constitute the EU’s set of rules for the remuneration of directors of listed companies. It was published in parallel with Recommendation 2009/384/EC on remuneration policies in the financial sector.

For more information, see:

Corporate governance (European Commission).

MAIN DOCUMENT

Commission Recommendation 2009/385/EC of 30 April 2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies (OJ L 120, 15.5.2009, pp. 28-31)