‘Say on pay’ proposals from Europe
The European Commissioner for Internal Market and Services has proposed new EU rules on providing shareholders with a ‘say on pay’. Many EU countries (such as Belgium and the UK) already have such rules. The proposed directive would impose minimum requirements for each member state.
For Belgian companies, there is good news: the proposed new rules are not that different from the Belgian rules. Some additional disclosure (e.g. on the ratio of director to employee pay) is likely to be required but it should be possible to implement the directive with only some limited tweaks to the current rules.
Which companies will these rules apply to?
The proposals will only affect EU-registered companies which have a listing on an EU-regulated market.
What are the new requirements?
Companies will have to produce:
- a forward-looking remuneration policy every three years which will explain how they intend to pay directors for the period of the policy; and
- a backward-looking remuneration report every year which sets out how and how much they have paid each director in the last year
Director means any member of the management or supervising bodies of a company.
- The remuneration policy must be put to a shareholder vote every three years and companies can only pay remuneration in accordance with an approved policy. This looks a bit like a binding vote but, if shareholders vote against the policy, the company only has to organise a general meeting to vote on a revised policy ‘without delay’. It is not clear whether and, if so, what the directors can be paid in the meantime.
- The backward-looking remuneration report has to be put to a shareholder vote every year. If shareholders vote against it, the company has to explain in the next report how the vote against has been taken into account.
- The policy and the report have to be clear, understandable and comprehensive and the policy has to be ‘in line with the business strategy, objectives, values and long-term interests of the company’.
The policy must include:
- details of how fixed and variable remuneration and termination and recruitment payments will be determined including an explanation of performance conditions and how they align with strategy;
- maximum amounts which can be awarded;
- an envisaged ratio between director and full-time employee remuneration and why that ratio is considered appropriate. However, in exceptional circumstances the ratio need not be set out, but the company must explain why and how the company is instead taking general employees’ pay into account when setting directors’ pay and remuneration policy.
- The report must include individualised details of pay, bonus and long-term incentives and a comparison of director pay over the last three years with share price and with full-time employee pay.
When will it happen?
Not for a while. Due to the European elections, the legislative process in Europe will only start around October, so the new directive is not likely to come into force before December next year or January 2016. Even then, it will not have direct effect: member states will have to implement it into their own law and will have a further 18 months to do that.
If the Belgian experience is anything to go by, a ‘say on pay’ vote will encourage greater engagement with shareholders in relation to remuneration and doing so should strengthen the alignment between directors and shareholders. Companies would wish to avoid a significant vote against remuneration policy or payments. The new individualised disclosure requirements will mean that directors in some countries will have to get used to a great deal more public scrutiny than they have been accustomed to.
In view of the long timetable, there are no immediate steps to take. If you would like more information, please contact Jean-Pierre Blumberg, Thierry L’Homme, Ilse Brouwers or your usual Linklaters contact.