Following escalating pay levels and an increased focus on justifying executive pay practices, shareholders in Europe are demanding more comprehensive information on the pay levels, compensation package designs and performance assessments for key executives.

This Perspective provides a brief overview of the EU Commission recommendations on  disclosure, the current disclosure practices across Europe, anticipated changes over the coming years, and steps required to becoming  disclosure-ready.

In this issue, answers to:

• What are the key EU Commission recommendations on executive compensation disclosure? 

• What are the current executive compensation disclosure practices across Europe?

• What  changes to executive compensation disclosure are expected over the coming years?  

• How does Mercer recommend that companies in Europe become disclosure-ready?

European executive compensation disclosure at a glance

The EU Commission (October 2004) recommended that companies disclose their policy on directors’ remuneration as well as the levels  and form of individual directors’ pay, to ensure that shareholders are given adequate control over pay and share-based remuneration schemes.

While there is no deadline attached to these recommendations, and they are not legally binding, we anticipate that the recent changes to US disclosure and increased shareholder reactions to pay levels in Europe may help accelerate the implementation of EU Commission recommendations.

The following table indicates the current level of disclosure against the EU recommendations and anticipated changes:

The key EU Commission recommendations on executive compensation disclosure

In October 2004, the EU Commission adopted a recommendation on directors’ remuneration. It recommended that Member States ensure that listed companies each disclose their directors’ remuneration policy to better inform shareholders on the levels and form of individual director pay, and that shareholders have adequate control over executive pay and share-based remuneration schemes.

The Commission stated that “ Proper disclosure and giving shareholders effective control are essential to restore confidence in EU companies and securities markets. But 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.”

While the recommendations are not legally binding, and do not have any timeframe specified, the Commission stated that they would closely monitor the application of the recommendations to identify whether additional measures might be desirable in the medium term.

The recommendations cover the following four areas:

• Remuneration Policy. All listed companies should release a statement of their policy on directors’ remuneration for the following year. The information should include a breakdown of fixed and variable remuneration, performance criteria and the parameters for annual bonus schemes or non-cash benefits. The statement should also explain  the company’s contract policy, but companies do not have to disclose commercially-sensitive information.

• Shareholders’ meeting. Directors’ remuneration policy should be on the agenda of the shareholders’ general meeting. To increase account-ability, the policy should be submitted to a vote, which may be either binding or advisory. An advisory vote would not require directors’ contractual entitlements or remuneration policies to be amended.

• Disclosure of the remuneration of individual directors. 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  
  –   Any loans, advances or guarantees to each director

• Approval of share and share option schemes. Variable remuneration schemes under which directors are paid in shares, share options or any other entitlement 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.

Current executive compensation disclosure practices across Europe

Because the EU left it up to the individual Member States to consider the provisions in the recommendations and then to introduce them into their national framework, taking into account national specificities, disclosure practices across Europe vary significantly.

Countries such as UK, Ireland, the Netherlands and France provide individual board disclosure and policy information, while countries such as Finland, Spain, Portugal, and Denmark provide aggregate compensation disclosure with limited policy information. The table capturing some of the current disclosure regimes across Europe is only available in the PDF that can be downloaded (right column)

Almost all relevant organisations are complying with the current levels of disclosure required. There are typically no exemptions for disclosure across Europe. Where companies have a dual listing (such as on NYSE), they provide information to meet the requirements of both.

Anticipated changes to executive compensation disclosure over the coming years

There has been increased focus on disclosure following a significant number of shareholder reactions to excessive executive pay (and  post-employment pay) in nearly every major European market in 2006. This is similar to the US trend in recent years, and it is expected to continue  in 2007. New rules adopted by the SEC in 2006 in the US may also drive changes in some European countries. The US changes primarily led to increased disclosure requirements and a focus on executive earnings during the year, with more detail demanded about how and why compensation was awarded and more transparency regarding peer groups used  for benchmarking. For countries that already require a high degree of transparency, it is expected a greater focus on providing evidence of pay for performance, and a clear understanding of policies for current and past executives’ remuneration, and peer group selection.

For countries that currently require disclosure only of aggregate figures, with limited supporting information provided, we expect to see dramatic changes over the next few years as these markets introduce reforms aimed at attracting institutional investments at a time when there is increasing scrutiny of corporate governance practices.

Larger companies in certain industries will possibly take the lead and voluntarily provide a greater level of disclosure, in anticipation of the eventual requirement to do so.

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