In the time of COVID-19, everything is changing and many people’s job are at risk and this, understandably translates into pressure on boards to keep a handle on the pay of senior executives. But at the same time, the challenges faced by companies – even just to keep afloat – require significant navigation skills and it is only fair to compensate executives in a way that reflects their efforts and achievements. That balancing act is a significant challenge for company boards across the world.
In order to take a closer look at the trends, we asked lawyers across 15 Ius Laboris countries to tell us about how executive pay is handled in their countries, including in the financial sector, where regulation was tightened following the 2008 financial crisis. We also asked them about the representation of women on boards and about the all-important impact of COVID-19 on executive pay.
What follows summarises our findings and covers: Argentina, Austria, Belgium, Brazil, Germany, Italy, Ireland, Luxembourg, Netherlands, Russia, Spain, Sweden, Turkey, the United Kingdom and the United States.
This report was put together by Jan van Gysegem, partner, and Thomas Douillet, attorney, in the Ius Laboris Belgian firm, Claeys & Engels. Jan regularly advises on executive compensation and also litigates cases in these areas. He has a specific expertise in the regulatory aspects of remuneration in banks, insurance companies, and listed companies.
Executive pay regulation has been a trending topic for a while, especially for listed companies and in the financial industry, as there has been increasing pressure for sound governance in the area of compensation. The purpose of the rules on pay is usually to attract, reward, and retain talent, but as the financial crisis revealed, shareholders are sometimes confronted with excessive short-term risk-taking by management. The regulation of executive pay is a way to encourage some of these behaviours to change. Executive pay policy is also about promoting strategic objectives and about creating value in a sustainable way.
The following summarises what we found in our enquiry into 15 countries around the world:
Figure A: Rates of executive pay over the last five years
Our lawyers across 15 Ius Laboris countries report that executive pay at CEO level seems to have gone up over the five last years. None of the countries we surveyed reported a decrease in compensation.
The increase seems to be largely due the competitiveness of the market and benchmarking exercises conducted by companies, but the increases seem to have come from higher variable components, rather than increases in fixed remuneration.
In those countries in which pay levels have reportedly remained the same (Italy, UK, and Germany), statutory obligations to disclose executive pay in those countries may have played a role.
One thing is clear: the increased governance and transparency requirements around executive pay have not resulted in pay decreases.
1.2 Statutory limits on the amount of remuneration
Generally, pay is freely agreed between the parties and there is no cap either on fixed or variable pay.
Some countries reported caps on fixed pay in specific sectors, such as the public sector (e.g. in the Netherlands, there is a cap on senior executives in hospitals, schools, housing corporations, etc. at EUR 194,000 in 2019). For the financial sector, see section 3 below.
A general cap regardless of sector, is very exceptional. Amongst the country surveyed, only Argentina reported a general cap for senior executives at board level. This amounts to 25% of the company’s income if profits are distributed and 5% if no distributions have taken place.
1.3 Pay ratio
‘Pay ratio’ is a requirement for a maximum ratio between the pay of an executive (or CEO) and either the pay of the median average employee or the lowest paid employee – and it is controversial. There are two aspects to this: (1) whether there is a pay ratio (either mandatory or encouraged); and (2) whether companies have to disclose the pay ratio within the company or group. What our survey revealed was this:
There was no general mandatory pay ratio required between executive pay and average employee pay in the countries we looked at.
Recommendations (‘best practice’) are also unusual. Only Germany reported that a pay ratio is encouraged in listed companies: there is no mandatory cap, but both the Stock Corporation Act and the German Corporate Governance Code (DCGK) for listed companies encourage the pay of executives to be ‘in reasonable proportion to their duties and performance and in reasonable proportion to the pay of senior key employees and the workforce more generally’. The Austrian Stock Corporation Act and the Austrian Corporate Governance Code for listed companies also contain a requirement of proportionality.
In terms of disclosure of the pay ratios within a company or group, the EU recently looked at this as regards listed companies. The recent EU Shareholders’ Rights Directive II (Directive 2017/828 concerning the encouragement of long-term shareholder engagement, sometimes referred to as ‘SRD II’) included some key changes to the governance of listed companies, but no direct obligation to disclose ratios. During the debates on the Directive in the European Parliament, there were proposals to oblige listed companies, not only to disclose, but also justify the ratio. The proposals failed and a compromise was found in the form of five-year comparative data on executive pay with that of the average employee and with the performance of the company.
In Belgium, a mandatory pay ratio disclosure was introduced for listed companies in the implementation of SRD II, but no justification obligation was added.
Again for listed companies, in the UK since the beginning of 2020, larger listed companies are required to report publicly on the ratio of CEO pay to the median salary (and quartile salaries) in the company but, again this is simply reporting, not a cap. Some organisations are voluntarily publishing ratio data now, as a matter of good practice, and some may have a target or aspirational ratios aimed at avoiding negative publicity, but this is not yet commonplace.
Also noteworthy is the Spanish comment, which reported a link between the increase in executive pay and pay ratios. In Spain (where there is no mandatory pay ratio), studies by consultancy companies showed that ratios continue to widen:
“The widening gap in salaries is largely attributable to the fact that different salary models are used for different employees. Executives and middle managers often have variable salary packages based on their results and this has led to a greater increase in pay than other workers have enjoyed, as their salaries are simply linked to the Consumer Price Index. To correct this, the possibility of extending variable pay to all employees is being assessed, but it would require a sea change in the mindset of the unions and employers’ organisations.”
‘Pay ratio’ is not a uniform concept. The mandatory disclosure requirement in Belgium looks at CEO pay as compared to that of the lowest-paid worker, but in the UK, the comparison is made with median salary, which of course yields a very different result. In Austria, listed companies must disclose the development of executive pay as well as the development of the median salary in the company.
1.4 General Assembly involvement
Figure B: How general assemblies are involved in pay decisions
There is much variation across jurisdictions as to how the general assembly of shareholders is involved in decisions regarding CEO pay.
Not all countries give the general assembly a ‘say-on-pay’ to set or approve CEO packages. Having said that, this happens more often in listed companies, perhaps furthering their objective of transparency, which should serve to increase the confidence of potential or new investors.
At EU level, the Shareholders’ Rights Directive II recently introduced ‘say on pay’ rules for listed companies and this could also explain why the level of positive answers we received on the involvement of the general assembly was high. However, the SRD II rule itself is only about the approval of a company-wide pay policy for executives, and does not touch on individual pay, which is still decided by the remuneration committee and board of directors.
In some countries, it is not only listed companies that have ‘say-on-pay’ rules (binding or otherwise).
It is worth noting that in the UK, both for listed and unlisted companies, the directors’ pay policy is subject to a binding shareholder vote every 3 years along with an annual Directors’ Remuneration Report detailing Directors’ pay in the previous year, including severance payments and proposed ways in which policy will be complied with over the next year. This latter is subject to an annual advisory shareholder vote. Institutional shareholders and proxy advisors may also exert pressure in other ways, for example, through voting guidelines on remuneration policy or remuneration reports, which influence executive pay.
In the Netherlands, in listed companies, the supervisory board is responsible for setting the pay policy for executive board members, whilst the General Assembly of shareholders is in charge of this in private companies. The Board of Directors is responsible for setting the pay of senior executives employed by the company.
Outside Europe, the Russian legal framework is noteworthy: in limited liability companies the power of the general assembly of shareholders or board of directors to approve the pay of executives (CEO or Management Board members) may be included in the company charter. Russian law does not require the same of joint stock companies. Existing Russian court practice may treat employment contracts with CEOs and other employees or provisions of employment contracts setting out their pay and benefits, including bonuses, incentive schemes and severance pay as “major transactions or interested-party transactions”. These require prior corporate approval by the general assembly of shareholders or the board of directors. An employment contract may need to be treated as a major transaction if it provides for severance upon termination or periodical payments of at least 25% of the balance sheet value of the assets of the company or if the total pay under an employment contract exceeds this threshold. An interested-party transaction does not require the mandatory prior approval of the shareholders. However, a company should inform the general assembly of shareholders and the board of directors about such a transaction no later than 15 days before entering into one. Shareholders holding at least 1% of the shares, members of the board of directors or the CEO may request the transaction be approved by the general assembly of shareholders or board of directors.
1.5 Status of executives
Figure C: How are executives normally classed?
We asked the 15 countries participating in our survey how executives tend to be classed, from an employment/independence perspective. This is what they told us:
2.1 Public pay reporting
At EU level, beyond the introduction of ‘say-on-pay’, Shareholders’ Rights Directive II aims to ensure investors are properly informed about executive pay. The starting point of the Directive is that public disclosure of information on executive pay can have a positive impact on investor awareness, it may help the ultimate beneficiaries optimise their investment decisions, it should facilitate dialogue between companies and their shareholders, encourage shareholder engagement and strengthen their accountability to stakeholders and to society as a whole.
SRD II therefore regulates the information to be provided and offers the right to a vote on the pay report. The EU Commission is currently developing “Guidelines on the standardized presentation of the remuneration report”, which would apply to all listed companies throughout the EU. A draft of these guidelines was submitted for public consultation in March 2019. Publication of the final guidelines can be expected any time soon. The draft guidelines call for presentation of most of the required information in table form and the guidelines will contain further specifications of the publication requirements, but will not be legally binding.
Of course, pay reporting in listed companies is not solely to be found within the EU: all the countries surveyed except Turkey reported that listed companies must disclose their remuneration practices for executives.
For example, in the US, publicly held entities must file information about a company’s executive compensation policies and practices with the Securities and Exchange Commission. In Russia, a listed company must include a pay report in every quarterly and annual report and the Corporate Governance Code specifies the information to be provided publicly as regards pay. Also public joint-stock companies and certain non-public joint-stock companies are obliged to disclose information on the compensation of executives.
Where a pay report must be disclosed, it normally has to include a description of the executive pay policy but whether pay needs to be disclosed on an individual or company-wide basis varies, with the UK, Germany, Russia and Argentina, for example, requiring individual level disclosure and Italy and Sweden favouring the company-wide approach. Most countries stated that the disclosures should also include the principles on which variable pay are based, as well as the characteristics of any performance bonuses offered as shares or other instruments.
However, not all the countries mandate disclosure of the key provisions of executives’ contracts, such as severance arrangements (Belgium, Austria, Italy, Sweden, the US and the UK do but Argentina, Sweden, Luxembourg, the Netherlands, Germany, Ireland and Brazil do not).
Both the UK and Belgium point out that the requirements “relate to directors rather than broader categories of executives”. At the EU level, the term ‘director’ (whose pay must be disclosed) is broadly defined in the Directive as the CEO, the deputy CEO, and any member of the administrative, management or supervisory bodies of a company. The Directive leaves it to the Member States to determine whether others performing similar functions should also be considered as ‘directors’. This can be significant in countries such as Belgium, where many listed companies are managed via informal executive committees where not all members are ‘directors’.
2.2 Implementation of SRD II – challenges
SRD II has now been implemented by the EU countries involved in our survey, but not all the countries have made the deadline of 10 June 2019 (e.g. Belgium, Ireland, Netherlands and Sweden).
Among the new requirements to be implemented under SRD II, the right to vote on pay policy (‘say on pay’) is considered the most significant change for most jurisdictions.
The European Commission believes shareholders should have the right to hold either an advisory or binding vote on pay policy, based on a clear, easy to understand and comprehensive overview of the company’s pay policy. Whether the vote should be binding is left to Member States to decide (e.g. it is legally binding in Belgium but not in Austria).
As to the challenges this brings, this depends on what already existed beforehand. In some jurisdictions, such as Luxembourg, the say on pay rule was already effectively in place, whilst in others, such as Belgium and Ireland, it is a significant change.
In addition, the new content of the pay report is bringing some challenges:
The UK has reported that SRD II was implemented in the UK in 2019 even though much of it was already part of UK law and practice anyway.
Beyond the EU, in Brazil, a similar concern is noticeable. Our lawyers state that the security exchange commission, the CVM (Comissão de Valores Mobiliários), has recently issued a regulation on executive compensation that aims to enhance transparency. In Russia, regulations to disclose pay on an individual basis have been in force for quite some time, but it should be noted that a company can refuse to disclose such information on the grounds of loss of competitive advantage or the protection of commercial secrets. In the EU, this is no longer a valid excuse under SRD II; on the contrary, disclosure about how executive pay is linked to the company’s long-term strategy is also required.
This topic continues to be an area where legislative proposals are debated and planned in many countries and the direction of travel is clearly towards greater transparency and pressure through information and reporting, as well as, more exceptionally, caps and limits. Much depends on the political environment and government composition.
Transparency already exists in most countries, so the next step would be the introduction of pay ratios. Pay ratio reporting may reveal wildly different ratios, giving some companies more public relations difficulties, especially where a large proportion of the workforce earns only the minimum wae or low wages.
3.1 Specific requirements on variable pay
Apart from listed companies, credit institutions and financial sector companies (e.g. investment companies) are also subject to increasing regulation on executive pay. The focus is less on transparency and more on sound and effective risk management.
In the EU, the Capital Requirements Directive (‘CRD’ for credit institutions) and the Undertakings for Collective Investment in Transferable Securities (‘UCITS’ for investment firms) introduces a number of pay principles aimed at discouraging excessive risk-taking and short termism in credit institutions and investment firms. Among the requirements are:
Based on CRD IV, all EU countries we surveyed reported a cap on variable pay for credit institutions. The level of the cap differed significantly from one country to another. For example:
Some countries, such as Sweden, have not introduced an absolute limit but report that in general, if variable remuneration exceeds 50% of total remuneration, “it will be questionable.”
Outside the EU, among the countries involved, only Russia reported a similar cap of 100% (with the possibility of 200%), while other countries do not report any cap at all (e.g. Argentina, US and Turkey).
Most of the countries involved in our survey reported at least one of the other requirements. For example, in Russia the rate of an employee’s salary in the credit and financial sector is defined taking into account the level of risk to which such an organisation has been exposed. Russia has introduced (in addition to a cap) a deferral period. The deferral depends on the financial results of the organisation’s operations for at least three years and at least 40% of the variable component should be deferred and subject to adjustment. This means that variable remuneration may be reduced or cancelled at a future point if the company suffers negative financial results. In Brazil, there is no cap on variable pay but a deferral of at least 40% of the variable remuneration for three years or more.
At the EU level, in May 2019, the European Parliament and the Council adopted legislative proposals amending the current legal framework. CRD V will be implemented by Member States by 1 January 2021 into national law. CRD V will be supplemented by the new European Banking Authority (EBA) guidelines on sound remuneration policies.
The Commission’s report on the assessment of pay rules under CRD IV revealed that smaller entities find the requirements on deferral and pay-out in instruments set out in CRD IV burdensome and disproportionate. Similarly, the cost of applying the rules was also disproportionate in relation to staff with low levels of variable remuneration, as those levels of variable pay produce little or no incentive for staff to take excessive risk. For these reasons, there is an exemption for smaller institutions and staff with low levels of variable pay from the rules. Major changes therefore relate to proportionality, the identification of material risk-takers and the minimum deferral period (from 3 to 4 years). CRD V also introduces a requirement for pay policies to be gender neutral.
3.2 Caps on severance arrangements
Figure D: Severance pay caps
A cap on severance arrangements is not directly required by the regulations. Requirements about this are usually quite general: that severance should reflect performance achieved over time and not reward failure or misconduct.
Even so, three of the EU countries we surveyed (Belgium, Italy and the Netherlands) reported a mandatory limit on severance arrangements for executives in the financial sector.
Three additional countries reported that capping severance is recommended as good practice (Austria, Germany and Sweden). The caps are usually set at one or a maximum of two years of annual compensation.
In terms of those EU countries with a mandatory or recommended cap:
3.3 Impact on practice
The requirements related to variable executive pay in the financial sector have led to real transformation. When asked about the consequences of implementing the requirements and our lawyers said:
Clearly, the major impact of the combination of caps and deferrals in the financial industry is that variable pay is becoming less variable and more spread out over time, thereby losing part of its incentive value.
Figure E: Statutory quotas for the representation of women
Equal pay, irrespective of gender, is protected by law in each of the countries involved in our survey. Putting aside whether this legal protection is sufficient to avoid a gender pay gap (as it most certainly is not, in virtually every country), another significant issue is the representation of women on decision-making bodies and how to ensure more equality in that regard.
So far, there are only a few countries with a mandatory gender quota: we identified Belgium, Austria, Italy and Germany. All of these countries reported the same ratio, of 1/3, and the rules mainly concern listed companies.
It is interesting to note that in all the countries concerned, the rules relate to the board of directors in its supervisory function, but not the executive committees (i.e. the ‘full’ board of directors, including non-executive members in Belgium and Italy; and the ‘supervisory board’ in Austria and Germany). There is therefore still much room for improvement in how well women are represented in executive bodies – arguably the level that matters most.
In Austria, the rules apply to non-listed companies as well, by means of a ratio requirement. The quota only applies to non-listed companies with over 1,000 employees.
It is quite common to have an obligation to publish the effective ratio of women on boards in the annual report and this doesn’t just apply to listed companies (disclosure may then have to be made to the authorities, for example).
For countries with no formal gender quotas, this is sometimes recommended as ‘best practice’. This is the case in the Netherlands.
Finally, there are some measures other than the number of women represented on boards that aim to ensure women are represented. These include mandatory gender pay gap reporting, as in the UK (not only for listed companies, but generally for companies with more than 250 employees), but these reports are company-wide and do not focus on executive pay. US figures for CEO pay tend to show that women CEOs out-earn their male colleagues, but there are still considerably fewer women CEOs than men, and the higher earnings may reflect that female CEOs tend to run (on average) larger companies.
At the time of writing this report, the COVID-19 pandemic is in full swing. Executive compensation is a sensitive subject at the best of times, but all the more so now, when when companies are facing layoffs, wage decreases and restructurings, along with a generalised sense of uncertainty about the future. But that does not mean that the issue of pay goes away. It will certainly be part of the agenda of the boards and of the general assemblies across the globe as they grapple with the challenges facing them.
In Belgium, the supervisory authorities for specific insitutions such as banks and insurance have encouraged companies to set variable remuneration at a ‘conservative level’, and to defer a larger proportion of it for a longer period, in order to promote sound and effective risk management, given the current situation.
There are also examples of a reaction to the pandemic in sectors outside the supervised ones, with some private companies having decided to reduce pay for board members and executives. A notable example is the Belgian listed company Solvay, which has introduced a solidarity fund to support employees affected by the crisis. In addition, its top 30 executives committed to reduce salary by 15%. The company’s dividend was maintained as normal, but the main shareholders committed to dedicating 30% of it to the solidarity fund.
In Germany, board members and executives in some companies have foregone bonus payments and occasionally, salary cuts have also been accepted. These have occurred primarily in companies that have introduced short-time work for employees and the employees are in receipt of pay under that scheme.
In Turkey, a short-time working scheme is available for employers and the Employment Agency announced that during the COVID-19 pandemic, all employers can benefit from this upon application and without the need for any checks or investigation prior to receiving it. Executives who are subject to short-time working are paid lower salaries during the time they are subject to this scheme.
In Sweden, companies have been eligible for state support for short-time working. In essence, the Swedish government pays up to 50% of the employees’ salary during the short-time working period. Several conditions must be met to receive this. The company must be facing serious financial problems, for example. Thus, it is not recommended for companies that receive state support to pay out discretionary bonuses to executives during this period. However, if a company is forced to pay a bonus to honour a contract, this is still allowed, without affecting the elegibility to state support.
In Ireland, pre-COVID there had been an increase in executive pay, with senior executives in the top 22 largest Irish publicly quoted companies seeing their pay increase by up to 18%. However, since COVID, there has seen a temporary drop in executive pay, with longer term impacts expected. Many senior executives have taken pay cuts and had bonuses paused during the crisis and these may not be reinstated if the longer term economic outlook remains poor. Shareholders are also likely to expect remuneration committees to recommend continued pauses to executive pay increases to take account of the economic impact of the pandemic. This is particularly the case where companies have availed themselves of government wage support during the crisis and/or are restructuring and cutting jobs.
In Austria, many companies are affected by COVID-19 and face serious economic losses, that may result in mass dismissals or other severe measures. However, we are not seeing a generalised impact on executive pay at this point. Bonuses paid out in 2020 would not fully reflect actual losses because those payments result from the figures from the year before the crisis. In general, Austrian law does not stipulate the automatic unilateral reduction of payments in certain circumstances (such as the current crisis). Most executive contracts do not include a clawback clause or something similar to allow a company to unilaterally cut bonuses based on the previous year’s work purely as a result of recent economic developments and losses in the year of payment. Further, there is no general company practice providing for reductions to fixed pay in the employment contract. Therefore, we assume that the full effect of the crisis on executive pay will only be seen next year and will principally result from a reduction to bonus payments.
It is also the case that some executives would be agreeable to a reduction to their payments – or indeed, have already taken a cut to this year’s bonus, possibly because of media pressure after taking severe measures affecting their employees. This is especially likely if the company has applied for short time work or other governmental aid.
In Russia salary cuts were introduced in industries that were unable to function as normal during the self-isolation regime and restrictions on business due to COVID-19. This includes hospitality, transport, entertainment and the beauty industry. The reductions particularly applied to variable pay for executives. In addition, some companies decided to reduce board member and executive pay. For example, the Russian airline, Aeroflot, has announced a plan to cut board member salaries by 40% and the Russian airport, Sheremetyevo, has reduced executive pay by more than 60%. Some top executives in the Russian bank, Sberbank, donated their pay to support anti-coronavirus measures.
In the US, companies that have received aid pursuant to the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES) may not exceed the 2019 total compensation for any executive from the date of the loan or guarantee agreement until one year after the loan is repaid (the ‘restriction period’). These restrictions apply to officers and employees whose total compensation exceeded USD 425,000.00 in the 2019 calendar year. Similarly, an officer or employee whose 2019 total compensation exceeded USD 425,000.00 is restricted from receiving severance pay or other benefits upon termination of employment that exceeds twice the employee’s total 2019 compensation. If an executive received more than USD 3 million in the 2019 calendar year, then they are prohibited from reciving total compensation each year during the restriction period in excess of USD 3 million plus 50% of the amount by which the employee’s 2019 total compensation exceeded USD 3 million. These restrictions will affect many US businesses due to the sheer number of businesses that received financial aid under the CARES Act.
ARGENTINA: Verónica Puerta, AUSTRIA: Sophie Pfitzner, Sarah Lurf, BELGIUM: Jan Van Gysegem , Thomas Douillet, BRAZIL: José Carlos Wahle, GERMANY: Jeremy Bister, Markus Bohnau, IRELAND: Catherine Hayes, Linda Hynes, ITALY: Ornella Patanè, Lorenzo Gelmi, LUXEMBOURG: Guy Castegnaro, Ariane Claverie, NETHERLANDS: Benjamin Vaandrager, RUSSIA: Irina Anyukhina, Anastasia Petrova, SPAIN: Gisella Alvarado, SWEDEN: Petter Wenehult, TURKEY: Batuhan Sahmay, Özlem Özdemir Yılmaz, UK: Jonathan Carr, US: Tiffany Downs, Brian Spring.