Today, the European Commission announced that had adopted two sets of recommendations which invite Member States to adopt measures relating to compensation. The first sets out guidance on compensation for directors of listed companies. The second sets out similar guidance for “risk-taking” staff in financial institutions.
For listed companies, the European Commission is now recommending new structural and procedural limits to director compensation:
- Limiting severance pay, including a ban on severance pay in the case of a failure of a listed company.
- Requiring balance between fixed and variable pay, with variable pay linked to predetermined and measurable performance criteria.
- Balancing between long and short term performance criteria, deferments, minimum vesting periods, and holding requirements for equity compensation.
- Extending disclosure requirements to improve shareholder oversight.
- Ensuring that shareholders, particularly institutional investors, attend shareholder meetings and make considered use of their votes on matters relating to director compensation.
- Banning share options for non-executives.
- Increasing the role and strength of compensation committees.
For “risk-taking” staff in financial institutions, the European Commission recommends that Member States take certain steps to promote “sound and effective risk-management” including:
- Balancing the level of core pay and the level of bonus, with bonus pay deferred to account for risks underlying performance and subject to claw-back for misstated data.
- Ensuring internal transparency of compensation policies, with design and operation of compensation policy carried out by independent board members and staff.
- Adequately disclosing compensation policy to shareholders in a clear and easily understandable.
- Applying compensation principles to the largest extent possible through the use of existing supervisory tools, taking into account the nature and scale of the financial institution and the complexity of its activities.
The new recommendations are not binding on EU Member States, but are intended to “promote greater convergence within the European Union towards best practices.”