Friday 15 May 2009

European Union: Directors’ pay

The financial and economic mess continues to claim victims, including in the financial services sector and among company directors, but in some cases their remuneration has been excessive with regard to results and geared towards shortsighted targets.

The public has been called on to bail out companies by billions in any currency, while many continue to join the ranks of the unemployed.

Politicians have felt the need to show some consideration for the apprehension felt by voters.

Two European level recommendations have now been published.


Remuneration in financial institutions

Based on Article 211 of the Treaty establishing the European Community (TEC) on the Commission’s responsiblities concerning the proper functioning of the common market (internal market), the Commission has issued:

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector, published in the Official Journal of the European Union (OJEU) 15.5.2009 L 120/22.

This text with EEA relevance points out that excessive risk-taking in the financial services industry and in particular in banks and investment firms has contributed to the failure of financial undertakings and to systemic problems in the Member States and globally. These problems have spread to the rest of the economy and led to high costs for society. Whilst not the main cause of the financial crisis that unfolded in 2007 and 2008, there is a widespread consensus that inappropriate remuneration practices in the financial services industry also induced excessive risk-taking and thus contributed to significant losses of major financial undertakings.

The Recommendation is directed at the EU member states:

Scope and definitions

1. Scope

1.1. Member States should ensure that the principles contained in sections II, III and IV apply to all financial undertakings having their registered office or their head office in their territory.

1.2. Member States should ensure that the principles contained in sections II, III and IV apply to the remuneration of those categories of staff whose professional activities have a material impact on the risk profile of the financial undertaking.

1.3. When taking measures to ensure that financial undertakings implement those principles, Member States should take into account the nature, the size as well as the specific scope of activities of the financial undertakings concerned.

1.4. Member States should apply the principles contained in sections II, III and IV to financial undertakings on an individual basis and on a consolidated basis. Principles on sound remuneration policy should apply at group level to the parent undertaking and to its subsidiaries, including those established in offshore financial centres.

1.5. This Recommendation does not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities.


Directors’ pay in listed companies

On the same internal market basis and in the same OJEU issue, the Commission has published another recommenndation:

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.

As an internal market measure, this text too has EEA relevance, and it starts with the presumption that experience over the last years, and more recently in relation to the financial crisis, has shown that remuneration structures have become increasingly complex, too focused on short-term achievements and in some cases led to excessive remuneration, which was not justified by performance.

The briefest look at the scope of the Recommendation. The crux of the matter lies in the additions to existing recommendations:

Scope and definitions
1. Scope

1.1. The scope of section II of this Recommendation corresponds to that of Recommendation 2004/913/EC. The scope of section III of this Recommendation corresponds to that of Recommendation 2005/162/EC.

1.2. Member States should take all appropriate measures to ensure that listed companies, to which Recommendations 2004/913/EC and 2005/162/EC are applicable, have regard to this Recommendation.

2. Definitions in addition to those laid down in Recommendations 2004/913/EC and 2005/162/EC

2.1. ‘Variable components of remuneration’ means components of directors’ remuneration entitlement which are awarded on the basis of performance criteria, including bonuses.

2.2. ‘Termination payments’ means any payment linked to early termination of contracts for executive or managing directors, including payments related to the duration of a notice period or a non-competition clause included in the contract.

Ralf Grahn

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