EC Releases Guidance On Disclosure Of Directors' Pay

by Ulrika Lomas, for LawAndTax-News.com, Brussels

08 October 2004

The European Commission on Wednesday announced that it has adopted a Recommendation on directors’ remuneration, urging member states to ensure that listed companies disclose their policy on directors’ remuneration and tell shareholders how much individual directors are earning and in what form, and to ensure that shareholders are given adequate control over these matters and over share-based remuneration schemes.

The four areas in which member states are invited to adopt measures are:

• Remuneration Policy. In this area, the EC recommends that all listed companies should release a statement of their policy on directors’ remuneration for the following year. It should include information on the breakdown of fixed and variable remuneration, on performance criteria and on the parameters for annual bonus schemes or non-cash benefits. It should also explain the company’s contract policy. The company should not have to disclose commercially-sensitive information.
• Shareholders meetings. According to the Commission, remuneration policy for directors should be on the agenda of the shareholders’ general meeting. To increase accountability, it should be submitted to a vote which may be either binding or advisory. An advisory vote would require neither directors’ contractual entitlement nor remuneration policy to be amended.
• Disclosure of the remuneration of individual directors. The EC suggests that this should include detailed information about: the remuneration and/or emoluments of individual directors; the shares or rights to share options granted to them; their contribution to supplementary pension schemes; and any loans, advances or guarantees to each director.
• Approval of share and share option schemes. The Recommendation states that variable remuneration schemes under which directors are paid in shares, share options or any other right to acquire shares should be subject to prior approval of the Annual General Meeting of Shareholders. The approval relates to the system of remuneration and the rules applied to establish individual remuneration under the scheme. It would not relate to the individual remuneration of directors.

Explaining the reasoning behind the guidance, Internal Market Commissioner Frits Bolkestein observed that:

“There is a conflict of interest when executive directors take part in setting their own pay. Shareholders should be better informed - they are the company, not the management. They must make sure remuneration policy gives enough incentive to directors and is right for the company."

"Member States should ensure that companies get remuneration policy right and are seen to do so by investors. Proper disclosure and giving shareholders effective control are essential to restore confidence in EU companies and securities markets."

He concluded by stating that:

"We are not interfering in companies’ internal affairs or individual decisions on remuneration. This is about providing guidance to Member States in ensuring that shareholders know what is going on and can get things changed if they do not like them.”

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