25 March 2009

European Corporate Governance Forum sets out best practices for directors' pay

The Forum suggests a directive as appropriate to ensure that listed companies disclose the remuneration policy and pay of individual directors. Rules should distinguish between executive pay in listed companies and the financial services sector.

The Forum issued a public statement concerning the main principles that should govern the remuneration of executive directors. It suggests that a directive would be appropriate to ensure that listed companies disclose their remuneration policy and the pay of individual directors.

 

Any rules should distinguish between executive pay in listed companies in general and remuneration in the financial services sector due to the potential high earning of non-board members in the latter, the Forum notes, underlining that variable pay schemes have become increasingly complex and lead to excessive remuneration and manipulation.

 

Disclosure of the remuneration policy of listed companies and of the individual remuneration of directors and any material change to it should be mandatory for all listed companies in the EU, the Forum proposes. Also, executive directors should have no involvement whatsoever in setting executive director remuneration.

 

However, the substance of director remuneration should not be regulated in a mandatory way at EU level, but based on on a set of general best practices.

 

Examples of the best practices that the Forum lists in its statement are:

Ø       That the level of variable pay should be reasonable in relation to total pay level;

Ø       That variable pay should be linked to factors that represent real growth of the company and real creation of wealth for the company and its shareholders;

Ø       That shares granted to executive directors under long-term incentive plans should vest only after a period during which performance conditions are met;

Ø       That severance pay for executive directors should be restricted to two years of annual remuneration and should not be paid if the termination is for poor performance.

 

Press release

 

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