Executive incentive compensation in Denmark

Incentive compensation

What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?

There are many types of incentive scheme. In Denmark, cash-based incentive schemes are the most prevalent. Equity-based incentive schemes are, however, also often used by listed companies as well as some non-listed companies. Incentive schemes will often be based on achievement of not only one or more financial performance criteria but also on one or more non-financial criteria. It is normal to apply both one-year and multiyear incentive schemes and often both types are used concurrently.

The types and structures of incentives depend on a number of factors, including level and type of organisation.

Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?

There are no general statutory limits on or guidelines governing the payment of incentive compensation and there are no limits that adversely affect the tax treatment of the compensation relative to the employer or the executive. Typically, incentives are agreed as part of the service agreement or employment contract.

Other than for individuals working in the financial sector who are regarded as risk takers, including members of the executive board and members of the board of directors, there are no rules limiting how much employers may offer their employees in incentives.

The level of incentives varies a great deal, from relatively small amounts up to millions of Danish kroner. For some years, there has been an increased focus on the level of and criteria for granting bonuses and incentives, and employers across many different sectors have reconsidered their incentive schemes.

Individuals working in the financial sector who are regarded as risk takers, including members of the executive board and members of the board of directors, may be awarded incentives only if the incentive scheme complies with a number of rules on variable remuneration. The rules in question provide, inter alia, that the amount of any variable remuneration must be subject to a certain maximum; that a certain part of any amount of variable remuneration must be paid out in various financial instruments; and that a certain part of any amount of variable remuneration must be deferred for later payment.

The Financial Business Act bans incentives to employees covered by the Markets in Financial Instruments Directive where such incentives are based on the employee achieving a certain volume of sales to retail customers.

Under the Companies Act, the amount of fixed or variable remuneration received by the management of a limited liability company must not exceed an amount deemed to be usual, taking into account the nature and extent of duties, and an amount deemed reasonable with regard to the financial position of the limited liability company.

In addition, the Corporate Governance Recommendations set out various recommendations, including that:

• members of the board of directors should not be remunerated with stock options;
• if members of the executive board receive equity-based compensation, the equity plans should be revolving plans and any rights under the plans should not be exercisable until at least three years after the grant; and
• it must be ensured that variable remuneration not only consists of short-term incentive plans and that long-term incentive plans have an earning and maturity period of at least three years.

Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?

Deferral and vesting of incentive awards are generally permissible and there are no limits on the length or type of vesting and deferral provisions.

The Financial Business Act contains certain provisions regarding vesting and deferral for individuals working in a financial institution who are regarded as risk takers, including members of the executive board and the board of directors. The Act provides, inter alia, that a certain part of the variable remuneration must be deferred for a vesting period of at least four years (and, in some cases, at least five years) for members of the board of directors and employees who are registered with the Danish Business Authority as members of the executive board and for a period of at least three years for other risk takers.

For employees covered by the Salaried Employees Act (and thus normally not CEOs), provisions having the effect that, on termination of employment, the employee will forfeit his or her entitlement to any cash-based incentive awards will normally not be valid.

Further, as regards equity incentive plans established before 1 January 2019, provisions having the effect that, on termination of employment, employees (and thus normally not CEOs) will forfeit the entitlement to any equity compensation awards will only be valid in those situations that, under the Stock Options Act, are considered bad-leaver situations (see question 16).

It should be noted that there may be a number of tax issues involved in deferral.

Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?

There are no statutory restrictions and, thus, all employees can be awarded incentive compensation, including both cash and equity-based incentive compensation.

Except with regard to rights on termination of employment (see question 16), there are no aspects of the arrangements that can only be extended to certain groups of employees.

Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?

Yes. In Denmark, it does not take much for recurrent incentive compensation to become a contractual entitlement and it will thus be difficult to rebut when the employee has an expectation based on previous years’ practice.

Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?

No, not in general.

Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?

In some situations, it is possible to require repayment (or clawback) of incentive compensation if the incentive compensation was awarded on the basis of data that have subsequently turned out to be misstated or inaccurate and if the employee knows or should have known this. To improve the chances of success in a claim for repayment, it is generally advisable to agree on a clawback clause in writing.

Incentive compensation awarded to individuals working in a financial institution who are regarded as risk takers, including members of the executive board and the board of directors, must be subject to a written clawback clause. In some situations, the financial institution will be required to enforce a clawback clause in order to be compliant with its obligations under the Financial Business Act.

Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?

For employees covered by the Salaried Employees Act (and thus normally not CEOs), a provision under a cash-based incentive plan pursuant to which payment is conditioned on continued employment until the payment date will generally not be valid. The Act provides that when employees leave their positions, whether following dismissal or resignation, the employees will be entitled to a pro rata part of the expected or agreed bonus for the relevant accrual year.

The Stock Options Act regulates the use of stock option plans for employees (and thus normally not CEOs). As regards stock option plans established before 1 January 2019, employees have certain rights on termination of employment in the absence of more favourable rights under a stock option scheme. An employee will retain his or her rights to any non-exercised options on the same terms as if he or she was still employed, if the employment is terminated (good-leaver situations):

• by the employer other than for breach;
• by the employee with immediate effect because of the employer’s material breach; or
• because the employee has reached the usual retirement age in the industry or with the employer in question, or qualifies for the state old-age pension or a retirement pension from the employer.

Further, in these situations, the employee will be entitled, based on length of service in the financial year in question, to a pro rata part of the stock options that he or she would have received if still employed at the end of the financial year or at the date of the grant.

With effect from the effective date of termination, the employee will forfeit his or her rights to any non-exercised options if the employment is terminated (bad-leaver situations):

• by the employee other than for the employer’s material breach or having reached retirement age; or
• by the employer for the employee’s breach.

In these situations, the employee will also forfeit the right to receive any options granted after termination.

As regards stock option plans established after 1 January 2019, the employer and the employee will generally be free to agree on the terms applicable to non-exercised options in connection with termination of employment. Thus, the parties may inter alia agree that the employee’s rights to non-exercised options will lapse, notwithstanding the reason for the termination, or that non-exercised options may only be exercised for a short period of time after the effective date of termination and only in relation to the part of the options having vested at the effective date of termination. However, under Danish contract law, the provisions governing the employee’s rights on termination of employment may be set aside by a Danish court if, from a fairness perspective, the provisions are considered very unfair.

Depending on various factors, there is a risk that provisions on buy-back of shares acquired on exercise of options will not be enforceable.

The Stock Options Act applies not only to stock options but also to other forms of equity-based compensation where an employee has been awarded an entitlement to acquire shares at a later point in time (eg, deferred share awards free of charge (also, depending on their nature, known as restricted stock unit awards or performance share unit awards)).

For CEOs who are not covered by the Salaried Employees Act (see question 1), a provision pursuant to which payment is conditioned on continued employment until the payment date will generally not be valid - and this applies to both a cash-based and an equity-based incentive plan.