No EU Monopoly on Pay Restraint

Remuneration professionals around the world are watching European executive remuneration developments with the morbid fascination drivers reserve for a freeway pile up. It’s tempting to sit back and feel schadenfreude, glad not to be the company scrambling to rework incentive plans.

But the schadenfreude would be misplaced.

In the wake of the global financial crisis, the underlying narrative of every corporate governance decision has been about avoiding a second crisis. This has meant stepping back and reconsidering what were believed to be basic truths. For remuneration professionals this involves asking whether the structure and quantum of incentives for key management personnel were a factor in the risky behaviour endemic in the management and boardrooms of some global companies prior to the crisis.

In the years since, each nation has faced this question on its own terms. Europe has perhaps moved faster and further than elsewhere after being mercilessly squeezed by a lack of growth, but the tectonic plates of key management personnel remuneration are shifting everywhere, with no one certain where they will stop.

Below are some examples of the changes which have been happening across the globe:


EU-wide, member states have agreed on legislation to cap banking executive bonuses to one times fixed remuneration, unless shareholder approval is sought, when it can rise to twice fixed remuneration. This is to be in place by January 2014.


After the Swiss vote, an opinion poll in France showed that there was 83% support for the capping of executive pay. France is set to follow in Switzerland’s footsteps, foreshadowing legislation to increase shareholder power over remuneration and limit or ban pension deals and golden parachutes. The legislation may see worker representation on remuneration committees. Pay received by the heads of state-owned companies was capped in mid-2012.


A government commission has proposed changes to the German Corporate Governance Code to enhance the transparency and understanding of the remuneration of executive board members. The “comply or explain” amendments include: a cap on quantum and component ratios of executive board member remuneration and the maintenance of a reasonable pay ratio between senior management and staff in general. The government also intends to pass a new law after the federal election in September where shareholders have the power to determine the amount of executive remuneration in the future.


Following the financial crisis, banks receiving financial aid from the government were banned from paying executive bonuses. In 2010, the Dutch brought in a bonus cap for banking executives of 100% of fixed remuneration. Now the European Union as a whole is going down the same path, the Netherlands is debating lowering this amount to 20%.


A recent referendum led to the decision to legislate 24 initiatives including a binding annual shareholder vote on executive pay; a ban on severance, sign-on and merger payments; and the introduction of annual elections for Board Directors. Breaches will result in up to three years jail and fines. Legislation for the initiative has yet to be drafted; Implementation isn’t expected till 2015.


The UK is in the process of providing more power to shareholders to decide whether executive pay is appropriate by giving them a binding vote on new pay policies and facilitating understanding by mandating a “single figure” approach to disclosure in remuneration reports.



After concerns about the level of pay for members of parliament and MPs voting themselves bonuses, Kenya created a Salaries and Remuneration Commission to set pay for MPs, reducing the monthly pay package by half.

South Africa

In 2011, South Africa introduced laws that require remuneration policies to be approved by shareholders.


Australia has been increasing its regulation on executive remuneration disclosure and shareholder power over KMP pay. The 2011 AGM season was the first year that the two strikes rule was in effect, strengthening shareholders’ non-binding remuneration vote such that two consecutive votes of over 25% against the remuneration lead to a vote on whether to spill the board. Now, the government is proposing legislation to mandate “if not, why not” disclosure for executive clawback and the disclosure of crystallised, present and future pay.

North America


After the GFC, the US enhanced disclosure rules for KMP remuneration, set down guidelines for the independence of the remuneration committee and implemented a non binding vote on remuneration (say on pay) under its Dodd-Frank reforms. There are still parts of the reform that are yet to be implemented including rules on clawback, mandatory disclosure of the link between remuneration and financial performance and the disclosure of the ratio of CEO pay to other employees.


Many Canadian companies are voluntarily providing non-binding say on pay votes, including all five of its biggest banks. Canada has also been tightening its remuneration disclosure, requiring additional information on risks involved with executive incentives, the composition of the remuneration committee, fees paid to remuneration advisors, remuneration policy changes for the coming year and the grant processes for share plans.

South America


Financial institutions must reportedly pay half of executives’ bonuses in stock and defer 40% for three years.



Executive wages in China rose at 8% in 2012 according to a report by ECA International. Although Chinese executive pay is still low in comparison to the US, the gap between their pay and that of normal Chinese citizens is vast. Since the eighties, the state has imposed various caps on state owned enterprise executive pay, with the latest being a pay limit of 20 times the average state owned enterprise worker pay. Yet much of executives’ pay is reportedly not captured. The majority is said to be made up of hidden pay, including items such as travel, meals and housing.


Private sector and foreign banks operating in India need the Reserve Bank of India’s approval for grants of remuneration to top executives. Variable pay of senior management at banks has been restricted to 70% of fixed pay. In cases where the variable pay is in excess of 50% of fixed pay, 40% to 60% of variable pay must be deferred for at least three years. For non-banking listed companies, the provisions of Companies Act of 1956 caps total top management pay at 11% of net profits of a financial year. There are also limits on what proportion of net profits can be paid to a CEO or the directors as a whole.


Following US and UK Say on Pay moves, Israel implemented a say before pay system where shareholders must approve pay policy and CEO pay before its implementation.


Russian President Vladimir Putin has expressed the intention to regulate the size of golden parachutes for executives across the board.

Saudi Arabia

In 2010. Saudi Arabia created new disclosure rules for banks, setting requirements for the creation of a remuneration committee, remuneration policy and remuneration disclosure.

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