Brussels, 29th April 2009
Directors’ pay: Commission sets out
further guidance on structure and determination of directors'
The European Commission has adopted a
Recommendation on the regime for the remuneration of directors of listed
companies, complementing previous Recommendations 2004/913/EC and 2005/162/EC.
An appropriate remuneration policy should ensure pay for performance and
stimulate directors to ensure the medium and long term sustainability of the
company. The existing Directors' remuneration Recommendation is based on the
idea of pay for performance through disclosure of the remuneration policy. The
new Recommendation will give further guidance on achieving this by setting out
best practices for the design of an appropriate remuneration policy. To this
end, it focuses on certain aspects of the structure of directors' remuneration
and the process of determining directors´ remuneration, including
shareholder supervision. The Commission has also adopted a Recommendation on
remuneration policy in the financial services sector (see IP/09/674).
Internal Market & Services Commissioner Charlie McCreevy said:
“Incentive systems for executive directors in listed companies have led
too often to excessively short-term management actions and sometimes 'pay for
failure'. The existing EU rules need to be supplemented by additional guidance
on certain key aspects of the structure of directors' remuneration. We have also
strengthened the processes for determining directors' remuneration, including
shareholder supervision. Our message is very clear: directors' remuneration must
be clearly linked to performance and should not reward failure."
On structure of directors' remuneration, the Recommendation invites
Member States to:
- set a limit (2 years maximum of fixed component of directors' pay) on
severance pay (golden parachutes) and to ban severance pay in case of
- require a balance between fixed and variable pay and link variable pay to
predetermined and measurable performance criteria to strengthen the link between
performance and pay.
- promote the long term sustainability of companies through a balance between
long and short term performance criteria of directors' remuneration, deferment
of variable pay, a minimum vesting period for stock options and shares (at least
three years); retention of part of shares until the end of employment.
- allow companies to reclaim variable pay paid on the basis of data, which
proved to be manifestly misstated ("clawback").
On the process
of determining Directors' remuneration, the Recommendation invites Member
- extend certain disclosure requirements contained in the existing
Recommendation to improve shareholder oversight of remuneration policies;
- ensure that shareholders, in particular institutional investors, attend
general meetings where appropriate and make considered use of their votes
regarding directors´ remuneration;
- provide that non-executives should not receive share options as part of
their remuneration to avoid conflict of interests;
- strengthen the role and operation of the remuneration committee through new
principles on (i) the composition of remuneration committees; (ii) the
obligation for the members of the remuneration committee to be present at the
general meeting where the remuneration policy is discussed in order to provide
explanations to shareholders; (iii) avoiding conflicts of remuneration
The Recommendation takes due account of efforts
already made by several Member States in the context of the financial crisis and
aims to foster these developments by identifying best practices to ensure
greater convergence in the EU. The Commission will closely monitor the
application of the Recommendation and make its finding public through
After one year, the Commission will examine both Recommendations in the light
of the experience acquired and of the outcome of the monitoring and will submit
an evaluation report on Member States' application of both Recommendations.
The full text of the Recommendation is available at: