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Brussels, 29th April 2009

Directors’ pay: Commission sets out further guidance on structure and determination of directors' remuneration

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 failure.
  • 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 States to:

  • 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 consultants.

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 scoreboards.

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:


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