current trends in europe, the us and asia - hay group may 2013_ current trends in... · current...

The changing world of executive rewardCurrent trends in Europe, the US and Asia

APRIL 2013 WILLIAM EGGERS

2© 2013 Hay Group. All rights reserved

A note from the author

What‟s inside

Trends in executive reward:

an overview

Trends in Europe

France

Germany

Italy

The Netherlands

Spain

UK

Trends in the US

Trends in Asia

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Hi, I‟m William Eggers and

I‟m an executive reward

consultant for Hay Group

Germany.

I thought IMPACT readers might be interested to see

this report I‟ve put together on trends in executive

reward around the world.

What I find particularly interesting about the findings

is how much of an impact one industry – financial

services – has had on corporate governance since

the 2008 crash.

I‟d be interested to hear what you think. Send your

thoughts and feedback to:

[email protected]

Thanks and happy reading!

01Trends in executive reward: an overview


The situation in a nutshell

Ongoing economic uncertainty is putting executive pay under scrutiny

We‟re seeing a lot of activity in these areas…

Tax

Pay for

performance

Shareholder

activismDeferred bonus

Risk mitigationSay on pay

ClawbacksKey performance

indicators (KPIs)

Political and

public discussions

02Trends in Europe


Trends in Europe as a whole

Executive reward in the spotlight

• Governments, regulators and shareholders are still showing an appetite for increased control of executive reward.

• In many countries, this has led to new regulation.

Public and media opinion still harsh

• General, persistent perception that top executives are overpaid.

• To deal with this, many countries are proposing a ceiling on CEO pay as a multiple of average employee pay.

Shareholders getting tougher

• Shareholder activism is on the up, and they‟re beginning to take a firmer stance on executive reward.

• Although a mandatory and binding shareholder vote on executive reward exists in only a minority of countries, growing numbers of governments are considering the measure.

Growing tax burden

• Tax liabilities of top executives and high earners are on the rise, particularly in countries more severely affected by the European debt crisis.

• A number of governments have introduced measures aimed at taxing high earners.

Deferred bonus

• Growing regulation of the financial industry is putting pressure on the sector to institute deferral periods on all variable pay.

• This is now spreading to executive reward as a whole.

• As a result, companies are deferring short-term incentives for so long, they‟re becoming indistinguishable from traditional long-term ones.


Trends in France

A curb on executive pay

In mid-2012, the French government decided to cap executive reward

within public companies to 450,000 EUR.

More tax on higher pay

Tax has gone up in the last six months. There‟s a new income tax

bracket of 45%, and the government has brought the tax on stock options

and performance-based / restricted stock awards in line with the tax on salary.

The government also hoped to introduce a special 75% tax on incomes of

more than 1,000,000 EUR, but the French Constitutional Council rejected

the plan in December 2012.

As a result of tax rises, some of the executives in big French-based companies are apparently asking for

transfers to foreign countries – or, if they‟re already abroad, asking not to return to France. But it‟s difficult to

measure how widespread this effect has been because companies prefer not to talk it.

New approaches to variable pay

Tax rises on regulated long-term incentives are driving companies to consider using different pay vehicles

for long-term variable pay (eg removing stock options, implementing a medium-term cash bonus). But it‟s too

soon to spot any particular trends.

Corporate governance under discussion

Discussions are taking place about bringing in rules for good corporate governance (such as say on pay

guidelines) in big French firms. So expect to see these come in over the next few months.


Trends in Germany

How appropriate is executive pay?

Seen as divorced from the reality of most people‟s lives, executive reward

has become a popular target for public scorn.

Companies can tackle this by comparing executive reward with reward for

other employees in the company: the law “VorstAG – Act on the Appropriateness

of Management Board Compensation” recommends that executive packages

be tested for “internal appropriateness” .

The impact of the upcoming election 2013

Germany is moving towards tighter regulation of executive pay after Angela

Merkel (Chancellor of Germany) signaled her backing for plans to give company

shareholders the final say over top managers‟ salaries.

Executive pay has been a hot topic in Germany since the 2008/09 financial crisis led to taxpayer bail-outs of

banks and governments. It could be a key issue in the election, where Merkel is seeking a third term; she‟s

fighting off accusations from the opposition Social Democrats (SPD) that she‟s been too lenient on bankers.

Changes to the Corporate Governance Code

The Commission of the German Corporate Governance published amendments to the German Corporate

Governance Code for listed companies in February 2013. The main changes proposed were:

a cap on both the total amount of individual compensation and its separate components

the supervisory board should consider the relationship between how it pays the management board,

senior management and total staff – and monitor how it develops over time.


Trends in Italy

More proxy advisors and institutional investors

All listed companies, non-listed banks and insurance companies have to

present a remuneration report at the general shareholders‟ meeting.

The report is subject to a non-binding vote.

In the 2012 meetings, companies noticed an increase in the numbers of institutional

investors and proxy advisors, who often voted against the remuneration report.

Despite that, there was only one case of the assembly rejecting the report –

because there‟s usually a dominant shareholder.

Remuneration policy is the issue – not pay

Long-term cash plans that don‟t include any stock price or total shareholder

return (TSR) component; lack of long-term incentives; and compensation that‟s

excessively weighted towards annual incentives or base salary – remuneration

policy in Italy tends not to reflect the interests of institutional investors.

Deferred bonuses and clawbacks are used, but not everywhere

Bonus deferrals are mandatory in banks and insurance companies, but less common in listed companies. Of

the 40 companies in the Italian FTSE Milano Italia Borsa (apart from banks), only 15% have a deferral scheme.

Clawback clauses have always been used for misconduct (eg legal action for damages), but they‟re harder to

implement for poor managerial or company performance.

Few firm trends in the KPIs for variable pay

In long-term incentive plans there‟s a tendency to use more relative performance measures (how performance

compares to that of other companies). But because these measures are more suitable for LTIs, the majority of

listed companies still stick to internal targets such as EBITDA or cash flow.


Trends in the Netherlands

Say on pay well established

Say on pay has been part of Dutch corporate governance since 2004.

The season is always interesting; in this one (May 2013), some companies

have already presented new incentive plans, and others are about to.

Cap and clawbacks already in place

There‟s no real spillover from the financial market to the general market

(yet). But clawbacks are already part of the regular corporate governance

code. The Dutch Banking Code includes a cap on bankers‟ bonuses

of 100% of fixed pay (self-regulation), and it‟s expected that the government

will intervene to cap bankers‟ bonuses at 20%.

So far, only one AEX company outside of the financial services sector (and

with a significant Dutch license to operate) has followed the bankers‟ lead

by implementing a 100% cap: mail company PostNL. In its recently adopted

remuneration policy, the company reduced the cap further, to 75% of fixed compensation.

Different KPIs for short- and long-term incentives

KPIs for short-term incentives are specific to each company. In large listed companies, KPIs for long-term

incentives used to be total shareholder return (TSR) only. Now, they‟re a combination of TSR and other KPIs,

such as sustainability, and/or return on capital employed (ROCE) or earnings per share (EPS).

Guidelines for owning shares

Share ownership guidelines are becoming commonplace in the Netherlands. Typically, board members need to

invest 1-2 times their base salary in the company (it‟s 2-4 times base salary for CEOs).


Trends in Spain

Steep rises in tax on executive reward

Tax has gone up significantly since early 2012, especially on global salaries

of more than 120,000 EUR. This means that some Spanish regions have

tax rates of 56% – among the highest in Europe.

Shareholders not rocking the boat

Although some big Spanish companies have put a very transparent policy in

place for how they pay their senior people (and say-on-pay has been the norm

since 2011/12), shareholders aren‟t particularly challenging about reward matters

at general shareholders‟ meetings.

Deferred bonus and clawback: little appetite beyond the financial sector

Current practices stem from the European and international regulatory framework for banking. No sustainable

practices are in place yet outside the financial sector – nor is there any appetite to introduce them.

KPIs for variable pay based on international peer groups

Big international listed groups usually use relative performance compared to an international peer group.

Some of these KPIs are internal, others are based on the value added for shareholders.

Government yet to respond to Swiss and other pay curbs, but limits were already in place

Recent regulations in Switzerland and Europe haven‟t had much impact in Spain. But pay limits have been in

place for executives in banks with public support, and those owned 100% by Central Bank as a result of public

support, since early 2012. In the first scenario, the limit is 500,000 EUR; in the second, it‟s 300.000 EUR, with

no variable payment or pensions contributions at Executive Board level during the public ownership period.

Non-executive director salaries in these organizations are subject to caps, too: 100,000 EUR in public aid banks,

and 50,000 EUR in mostly publicly owned banks.


Trends in the UK

Shareholders clamoring for greater control

In 2012 the UK experienced one of the most significant surges in shareholder activism.

A number of major listed companies saw shareholders vote against their remuneration

report, while many others experienced a notable level of dissent.

The British government plans to grant shareholders an annual, binding vote on executive

compensation policy from late 2013, although companies that leave their remuneration

policy unchanged will only need to hold a vote once every three years. The annual advisory

vote (on how companies have implemented policy) will continue.

Deferred bonuses on the up, clawback on many agendas

The financial service regulations are spilling over, though not always with immediate effect.

There‟s been a sharp increase in deferred bonuses across all sectors, for example, since

they became mandatory for many financial services firms; and the majority of companies

now operate deferral. Similarly, clawback provisions and risk management are now very

much on remuneration committees‟ agendas and regularly form part of discussions around incentive design.

Public outrage hasn‟t gone away

The media, politicians and public are still outraged by high bonuses, with banking the prime target.

Communicating with investors is key

No institutional investor has the resources to question every issue for every company, especially in the busy

season; and some (especially from outside the UK) have very little in-house expertise.

In reality, then, big companies – and those that plan their approach to investor communication well – will

get positive attention; others are in danger of suffering from a tick-box approach, or the vagaries of proxy

voting agency reports.

03Trends in the USA


Trends in the US

Say on pay takes hold as companies move cautiously forward

Say on pay is one of the main issues US public companies are

focusing on.

A look back at 2012 suggests that say on pay had the desired impact,

as companies took a cautious approach towards both pay levels and

pay design. Compensation committees were conservative with their pay

decisions in the hope of avoiding a „no‟ vote at the shareholders‟ meeting.

Long-term performance plans becoming the single biggest piece of the pie

Long-term performance plans are becoming the most heavily-weighted piece of the entire pay puzzle, edging

out even annual bonuses. And companies continue to diversify, with an even wider portfolio of long-term

incentives than last year.

Short-term incentives are a mixed bag

For short-term incentives, the metrics used generally relate to the company‟s particular business and objectives.

The common metrics here are earnings-related and return-related. Companies rarely use total shareholder returns

(TSR) in short-term plans, despite the fact that the dominant shareholder advisory groups use TSR as the primary

measure of performance.

Reducing the risks of reward

To date, most regulation on executive reward has been in the financial industry. This is also the sector that‟s done

the most to reduce risks, for example by limiting current cash bonuses and paying more in restricted stock units.

While the press often paints executives as overpaid, companies have made real efforts on the pay-for-performance

front, and so far not much regulation has spilled over from the financial industry.


Trends in the US

Clawback policies are common, but not enshrined in law – yet

Although most large public companies now have clawback policies,

they vary substantially in scope. Companies are waiting for the Securities

and Exchange Commission (SEC) to issue new rules on clawback

disclosures under the “Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010” (DFA), which experts predict won‟t happen

before 2014.

Once clawback rules are in place, there‟s likely to be a lot of litigation if

compensation committees don‟t take prompt action to enforce them.

We‟ve already seen two rounds of executive pay litigations. The first round, last year, focused on say on pay

litigation, where companies lost their votes. When those cases largely failed, a second round developed this

year, alleging inadequate proxy disclosure of various compensation arrangements and efforts to stop the

annual shareholder meetings. While the latter had some early success, they now appear to be dropping back.

Looking ahead: if they can‟t justify it, companies won‟t pay it

In the US, the top trends in the coming years will be: pay-for-performance; say on pay; CEO pay ratio, and

clawback requirements.

The focus will stay on pay for performance, as companies will concern themselves with: setting challenging

but appropriate targets; implementing performance-vested equity plans that take account of both relative and

absolute shareholder performance; and careful use of “extras” like perquisites, severance and change-in-control

protections.

In short, we expect to see fewer and fewer features in executive pay programs that companies can‟t easily justify

to their shareholders.

04Trends in Asia


Trends in Asia

Say on pay is no big deal, but pay for performance is tough

In a world where concentrated ownership is very common, say on pay

is seen as a Western creation with little value.

Pay for performance is hitting the low-performing Chinese banks

hard this year – they‟re paying little or no bonus without a high level

of performance. But as all the big banks are state-owned, they‟re also

obliged to calculate bonuses in line with the relevant regulations, so it‟ll

be interesting to see what happens when the time comes.

Choosing the right peer group is key

In fast-growing markets like Indonesia, it‟s important to benchmark against the right peer group. Many large

organizations are either family-owned or state-owned, so having too many of them in a database could seriously

skew the data – particularly for senior executives. Real understanding of how to manage pay, combined with

strong local market knowledge, can save precious time and money.

Long-term incentives are regaining stronger interest

The stock market‟s been on the up, especially in the last 12 months, which has ignited more discussions with

companies. But some incentive plans are still designed around the individual‟s interests, rather than the long-

term interests of shareholders.

When western multinationals use global/centralized long-term incentive plans, local companies will either decide

to mimic western design or venture towards creative long-term cash plans.

The war for talent wages on

The gap between the West and the East on reward is closing rapidly, and large local players are willing to pay

cash premiums for talent. And as skilled local talent is scarce, the trend may slow down, but it won‟t stop.

current trends in europe, the us and asia - hay group may 2013_ current trends in... · current...

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