Commission guidance on directors' remuneration

29 April 2009

The Recommendation focuses on certain aspects of the structure of directors' remuneration and the process of determining directors´ remuneration, including shareholder supervision.

The Commission adopted a Recommendation on the regime for the remuneration of directors of listed companies. The existing Directors' remuneration Recommendation is based on the idea of pay for performance through disclosure of the remuneration policy. The new Recommendation will give further guidance by setting out best practices for the design of an appropriate remuneration policy.

 

It focuses on certain aspects of the structure of directors' remuneration and the process of determining directors´ remuneration, including shareholder supervision. The Commission has also adopted a Recommendation on remuneration policy in the financial services sector.

 

On structure of directors' remuneration, the Recommendation invites Member States to:

Ø       set a limit (2 years maximum of fixed component of directors' pay) on severance pay (golden parachutes) and to ban severance pay in case of failure.

Ø       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.

Ø       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.

Ø       allow companies to reclaim variable pay paid on the basis of data, which proved to be manifestly mis-stated ("clawback").

 

On the process of determining Directors' remuneration, the Recommendation invites Member States to:

Ø       extend certain disclosure requirements contained in the existing Recommendation to improve shareholder oversight of remuneration policies;

Ø       ensure that shareholders, in particular institutional investors, attend general meetings where appropriate and make considered use of their votes regarding directors´ remuneration;

Ø       provide that non-executives should not receive share options as part of their remuneration to avoid conflict of interests;

Ø       strengthen the role and operation of the remuneration committee through new principles on (i) the composition of remuneration committees; (ii) 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; (iii) avoiding conflicts of remuneration consultants.

 

The full text of the Recommendation will be available on the Commission website soon.

 

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