European perspective

Even if remuneration is not a real factor of motivation according to most of the recent research (Maslow, Herzberg), the salary is the first point in a remuneration strategy, because without a certain level of remuneration the primary needs of people are not satisfied, and if they are not satisfied, workers cannot be efficient. But in reality, is executive pay linked to company’s performance?     
 The typical result, produced in many studies, is that the correlation between executive pay and stock returns is small or weakly determined. Comparisons have been also made between director’s pay and annual average price and this analysis confirmed the opinion that there is no positive correlation between director’s pay and market prices. The results indicate that executive directors’ compensation is positively related to the shareholders funds, operating profits and company size (reflected by the sales). Pay performance link has not been established in the analysis of financial ratios such as return on total assets or return on equity and market price performance. As a consequence, remunerations committees have a lot to do in order to improve this situation in fixing a level of executive’s compensation link to the director’s performance.
As a matter of facts, the boards of directors of most public companies have established compensation committees to handle executive compensation matters. In many cases, the full board does not have adequate time to evaluate complex executive compensation issues. Having a remuneration committee helps to ensure that these issues receive the deliberation and attention that they deserve. In the aftermath of recent corporate scandals, such as Enron, WorldCom, and Tyco, the role and function of the compensation committee have come under increased scrutiny. There is a widespread view in the investment community that compensation committees have largely failed to serve as an effective and independent check on executive compensation practices. Many institutional investors view compensation as a “window“ to the overall quality of the company’s corporate governance practices, and the picture they see is not always pleasing. In this environment, the independence of Remuneration committee members has become a paramount concern of investors.
As we have seen before, the regulation of corporate governance is the province of the states. Each state has its own business corporation law that governs many aspects of corporate operation, from the issuance of shares to the structure and function of the board of directors and its committees. The legal obligations and potential liabilities of the compensation committee members for their decisions regarding executive compensation are generally determined by the laws of the company’s state incorporation.
In this article, we will focus on the European issue of remuneration committee. As a matter of facts, European law should integrate a chapter about Remuneration committee in order to standardize the situation in each country of the European Union. It will be necessary to bring more visibility for all the investors. There are a number of points we have to focus on in order to improve the efficiency of remuneration committee of listed companies all around Europe.

The essential measures should be the following:


·         Disclosure of information on companies’ remuneration policy, its structure and performance criteria in annual accounts

·         Shareholders’ vote on the remuneration policy at the general meeting: binding or advisory

·         Improve the independence of the committee in order to deserve shareholders interest

·         Disclosure of individual director’s remuneration package


What listed firms should do to improve the efficiency of their remuneration policy?


We will focus on the internal rules of listed companies in trying to find some solution to improve the efficiency of remuneration committee and compensation policy in general.                                  


1. The annual agenda

Actively managing the annual agenda is critical to enhancing governance because it determines the committee’s work for the year. We recommend comparing the agenda to the committee charter to ensure that all of the committee’s responsibilities are discharged over the year. It is also important that the time allotted is sufficient to cover the agenda items. If not, either move items to a less busy meeting or add a meeting to the calendar.


2. Time for judgment

Important decisions regarding compensation, equity strategy and shareholder approval warrant robust discussion. This may require two or even three meetings: one for information gathering, a second for in-depth discussion and preliminary consensus on direction, and a third to make final decisions and plan for implementation, including disclosure.


3. Context and specificities of the firm

The committee should be familiar with the industry practices as well as general market practices. In particular, peer company practices should serve as a touchstone for committee actions. This raises two important issues: First, the quality of the peer group is critical to the credibility of the story the data tell; it is worth investing the time to ensure the comparator market is appropriate. In some cases, this may mean using more than one peer group. Second, care must be taken in looking to the external market to identify new approaches. The external market should be used to inform decisions, not make them. In addition to the external market picture, the committee should understand the organization’s human resource philosophy, culture and practices. At a minimum, an annual update from the senior HR executive can provide the committee with valuable insight and a context for decision making.


4. Total remuneration/holistic approach

Review all the elements of the executive remuneration programme at the same time. It is difficult to implement a remuneration philosophy and to ensure that pay is linked to performance if decisions regarding salary, incentive opportunity, performance goals and equity awards are made at different points throughout the year. And don’t overlook executive benefits and perquisites. The committee should also review them annually against the remuneration philosophy, understand their competitiveness and ensure that proper disclosure is being made to shareholders. This annual review should include an update of the company’s current and projected costs – earnings expense, cash cost and accrued liabilities – and the executives’ benefits on an individual basis. Before implementing remuneration programme changes, committees should understand the implications (including costs) for any executive benefit or perquisite programmes.


5. The performance measurement process

Although linking pay to performance is the goal of most executive remuneration programmers, few have succeeded. Shareholders expect companies to be able to explain how they validate that pay, in fact, reflects company performance. And, the question is increasingly being posed in the context of relative performance against peers. Be prepared to hear from shareholders if your performance against your peer group is weak, especially if your executives’ compensation and benefits are relatively high. There are analytic tools that can help remuneration committees independently evaluate whether the company is focused on the right goals, whether there is sufficient stretch, and whether payouts will be appropriate for the performance achieved.