Worldwide, corporate governance principles require investors to vote on the compensation of the top executives of listed companies, which, as underlined by a recent academic study, does not necessarily result in a reduction of said compensation. Shareholder vote on executive compensation, however, differs in reach, and can be binding or advisory in nature.

Last April, the European Commission put forward a proposal for revising the Shareholder Rights Directive. As a result, for the first time, a European “say on pay” would be introduced. The proposal would oblige companies to disclose clear, comparable, and comprehensive information on their remuneration policies and how they play out in practice. On the EU level, there would be no binding cap on remuneration, but each company would need to introduce its remuneration policy to a binding shareholder vote. The policy would include a maximum executive remuneration amount. It would also need to explain how it contributes to the company’s long-term interests and sustainability. Finally, it would need to set out how the pay and employment conditions of employees of the company were taken into account when negotiating the policy, including clarifying the ratio between average employees and executive pay.

The rationale behind the proposed revision of the Shareholder Rights Directive lies in the European Commission’s suggestion that there is an insufficient link between management remuneration and performance, which would in turn encourage harmful short-term tendencies. Too often, as the crisis has demonstrated, shareholders supported managers’ excessive short-term risk-taking and did not monitor closely the companies they invested in.

The same rationale applies to the broad range of measures adopted by the EU in 2013, which were designed to enhance the regulation and stability of its financial institutions. In particular, it was considered that the design of the remuneration schemes within these institutions was one of the major contributors to the crisis. Often involving sizeable bonus pay-outs in comparison to salaries, this encouraged employees to engage in excessive risk-taking in order to share in the banks’ short term profits, but not in the cost of their failures; which unfortunately, in the most serious cases, were borne by the taxpayer. As a result, the European Union adopted legislation that imposes a set ratio between the fixed remuneration (basic salary) and variable remuneration (bonus) for individuals whose professional activities may have an impact on the risk profile of their financial institutions. It should be noted that this legislation was opposed by the United Kingdom, which attempted to annul it by bringing an action before the European Union Court of Justice (“EUCJ”). As reported in this newsletter, on November 20, 2014, the Advocate General for the EUCJ recommended that the Court dismiss the U.K.’s challenge to the EU’s rules implementing financial institution compensation limits. While the Advocate General’s opinion is not binding on the EUCJ, it is his role to propose to the EUCJ, an independent, legal solution to the cases for which he is responsible for. The judgment in this case will be issued at a later date.