They say imitation is the sincerest form of flattery. The European Commission has announced proposals to overhaul shareholder powers on executive pay, with several provisions seeming to imitate the new regulations that apply to UK incorporated companies that are listed on the Stock Exchange. Did the Commission really mean to flatter the UK government?
The Commission’s pay proposals are part of a pack of revisions to the Shareholder Rights Directive. If introduced, the proposals will see an EU listed company’s remuneration policy be subject to a binding shareholder vote every three years (sound familiar?), with payments in breach of a shareholder approved policy being prohibited (also familiar?). Both of these concepts mimic the provisions already in force in the UK. In addition, reports on the implementation of the remuneration policy are to be subject to a separate shareholder vote, again mirroring the rules that now apply to UK incorporated listed companies.
Amongst other familiar aspects for UK companies are requirement for reports to:
- set out the performance measures for variable remuneration;
- disclose the maximum amounts of each element of remuneration; and
- disclose the main terms of directors’ contracts.
Slightly different to the UK is the Commission’s proposal to require the inclusion of a ratio between the directors’ average remuneration and the full time employees’ average remuneration. Yes, that old chestnut! That ratio will be mandatory other than in “exceptional circumstances” (a term which isn’t, as yet, expanded on). Could this be a reaction to some groups’ concerns that UK companies are getting away with boilerplate disclosures as to how pay and employment conditions of the wider employee force are taken into account?
The proposals permit companies to deviate from the shareholder approved policy when recruiting, but the new hire’s package will be provisional until formally approved by shareholders – a different approach to the UK, where there is a requirement to include a specific policy for recruitment. Perhaps the Commission has learned something from the UK’s pioneering exploits in this regard – exploits which have resulted in numerous clarifying addenda (most recently by Pearson) following investors’ responses to the discretion afforded.
Shareholders will also have a vote on the implementation report, with companies being required to explain in the next report whether (and how) a negative shareholder vote was taken into account.
The proposals don’t include a cap on maximum pay, and the level of detail found in the UK regulations isn’t, as yet, replicated.
More information will undoubtedly be required in order for European companies to be able to draft adequate remuneration reports, but the proposals will first be submitted to the Council and European Parliament for consideration and possible formal adoption. Companies already following the UK’s regulations probably won’t be too concerned with these proposals, but those that have escaped may now need to start to consider how their remuneration practices will need to be adjusted given the increased disclosure and shareholder powers suggested by the Commission.