European remuneration practices: shareholders, watch out!

How many ‘Say on Pay’ resolutions will shareholders file this year and how many remuneration reports will they reject during the 2010 proxy season? Two years after the start of the financial crisis, a few consultations and new codes later, RBS and Shell’s remuneration reports voted down in the UK, and five contracts arrangements rejected in France in 2009, European companies should have understood one basic equation by now: pay must be aligned with performance. The most reactive remuneration committees could change their strategies recognising that pay packages should be designed to avoid excessive risk-taking and short-termism. But let’s be honest, these might be unrealistic expectations. Add the inclusion of non-financial measures for a more sustainable approach, and we are away with the fairies.
For asset owners investing in the stock market all over the world and therefore voting their shares in various countries, the fact that remuneration practices within European borders are completely different can be disconcerting. How should we compare remuneration practices on a European level, for example, byindustry sectors when corporate governance models are already so diverse? How should investors vote considering local differences? That is providing, of course, that the remuneration policy is actually being put to the vote. The composition of remuneration committees itself looks like a colour spectrum. Shareholders and employees sit on the remuneration committees of German companies whereas Portuguese remuneration committees are composed of external lawyers. This year’s proxy season has already started with quite an unusual resolution: Portugal Telecom is proposing the creation of a committee that would decide on the remuneration committee’s remuneration! Two weeks ago, we also saw the first trial in France related to excessive remuneration. Antoine Zacharias, previously Chairman & Chief Executive of the group Vinci was accused of misuse of the company’s assets as he left the company with €12.8 m excluding share options and pension payments. He has been relaxed until the second trial because the judge acknowledged that the package was signed off by the remuneration committee and

approved by the board and also at the AGM. ‘Affaire à suivre’ (to be continued) as we say in France. Talking money, since the level of transparency varies massively from one country to another, it would not be accurate to compare the full incentive remuneration of executives across Europe. For instance, share option awards are detailed in the UK with the date of the award and the exercise prices for all directors. Conversely, in Spain share based awards made to directors are simply not disclosed for most companies. In France, shareholders might only access information on the top executives, and pensions arrangements are still obscure. However, using information available to shareholders it is now possible to compare cash remuneration across countries. Cash remuneration comprises fixed salaries, bonuses and benefits in kind. Proxinvest, a member of ECGS (the European Corporate Governance Service) has published a report comparing directors’ cash remuneration between eight European countries. The study shows surprising statistics on the top executive directors. In which country would you think the CEO receives the highest cash remuneration? Based on information published in the 2009 remuneration reports, the winner or loser, depending on your point of view, isSpain with €4.47m cash on average, just behind Switzerland with €4.52m. In France, non-executive chairmen are paid much more than in other European countries: the average compensation for non-executive chairmen in the CAC 40 companies is €864,225. Investors and directors will soon be able to play online with a ‘remuneration simulator’ that Proxinvest has created. Enter any basic salary figure, roughly choose how many percent you wish for your bonus, pick your performance criteria and you magically get all the figures that your remuneration package might be made of (other benefits, pensions, severance payments, share options awards, etc). Shareholders need to use their voice to avoid the next crisis, especially since they might have to disclose how they vote at AGMs, for instance in France and in the UK. Although there is an interest for common European regulation, for example regarding ‘say on pay’, it is important to accept local specificities and to learn from the various governance models and practices. Even though a couple of directors might abandon their bonuses, the 2010 proxy season is still going to witness excessive payouts across Europe.
Laureen Tessier is a corporate governance analyst at Proxinvest in Paris.