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Recommandation of the Commission of the European Communities
On 30 April 2009, the Commission of the European Communities made a new recommendation amending those of 14 December 2004 and 15 February 2005, regarding the compensation package of executives.
Member States are invited to take the necessary measures to promote the implementation of this recommendation by 31 December 2009.
This recommendation comes in addition to diverse regulations in the different European countries, like the Combined Code in the UK or the AFEP-MEDEF recommendations in France.
This new recommendation of the Commission has not been commented on so far. And yet, it innovates in many ways.
Some examples :
Basic remuneration
- The fixed salary should be sufficient to allow the company "to allow the company to withhold variable components of remuneration when performance criteria are not met".
The Commission considers that the fixed salary must be adequate to allow the executives to maintain their standard of living in the absence of variable, to ensure a real variability in the bonus system of bonuses and to eventually sanction the lack of performance.
The Commission takes into account the fact that for several years in Europe, the weight of the variable remuneration in the package of executive compensation has considerably increased.
This recommendation is consistent with the US Administration point of view who wishes the package of executive compensation to be rebalanced in favor of basic remuneration.
Variable remuneration
- It should be linked to predetermined and measurable performance criteria, non-financial included, in order "to promote the long term sustainability of the company",
- It should be capped,
- The payment of a large portion of the variable salary should be deferred for some time, eg three to five years depending on performance requirements,
- Companies should be able to recover the variable components of remuneration paid "on the basis of data which proved to be manifestly misstated".
The Commission wants to review the systems of objectives, the performance criteria and the variable remuneration systems, in order to sustain the company, by promoting :
- The performance in the long term,
- The performance criteria covering all business stakes : strategic, social, environmental and societal, not just financial stakes.
Capping the variable remuneration is the counterpart for payment of a sufficient fixed salary. This compensation structure corresponds to the best practices of the European market that tend to balance the weight of the bonus and of the basic remuneration.
The Commission adds various "protection" systems to limit the risks for the company, in the absence of lasting result. Some of them are particularly complex to implement.
Shareholding
- Some stocks should be conserved by the executives during their term of office, eg up to two years' remuneration (fixed and variable components)
The AFEP-MEDEF recommendations propose the same principle, stating that the company officers must "conserve a large and growing number of shares".
Parachute
- The parachute should be limited to two years of basic remuneration, non-competition clause and notice period included.
The AFEP-MEDEF recommendations limit the parachute to two years' cash compensation (base + bonus), notice period excluded.
Corporate Governance
- At least one member of the Remuneration Committee should have experience and expertise in the field of remuneration,
- To avoid conflicting interests, the Remuneration Committee should have their exclusive consultants.
This last recommendation is consistent with our own reflections (even if the practices are different in France). The aim is to professionalize the Compensation Committees who are contracting authorities, and to avoid situations of conflicting interests, as well as all ambiguities and suspicions about the respective roles of executives and Council members.
These few examples show that the innovations are not without consequences.
It is up to the Board of Directors or Supervisory Board, with the involvement of their Remuneration Committee, to launch reflections, in order to (re) define the remuneration policy for executives, taking into account their context and company culture.