directors’ compensation market practice in...

Directors’ Compensation

Market Practice in Luxembourg

ILA / KPMG Survey Results

March 2014

Directors’ Compensation Survey

Ladies and Gentlemen,

The Institut Luxembourgeois des Administrateurs (ILA) has initiated a process ofgathering relevant information on the remuneration of non-executive Directors inlarge financial, industrial and commercial Luxembourg-incorporated companies. Inthis context, ILA conducted a short survey that was submitted to a number ofLuxembourg-incorporated companies in the course of the second semester of2013.

In parallel, KPMG Luxembourg supported the ILA in this process by collectingsimilar information in the 2013 edition of the KPMG Remuneration Survey.

In this context, ILA and KPMG are today delighted to provide you with the results ofthis joint survey – a first on the Luxembourg market - and we hope that theinformation provided in this report will be of interest to you and your organisation.

We would like to thank all participating companies for their contribution andopenness and hope our analysis will be helpful to you and your organisation.

Kind regards,

Vincent KöllerThierry Schuman

The contacts persons

for this survey are:

Thierry Schuman

Institut Luxembourgeois des Administrateurs

Chairman of the Remuneration Committee

Tel: + 352 42 42 51 95 [email protected]

Vincent Köller

KPMG Luxembourg Sàrl

Partner

Tel: +352 22 51 51 79 22Fax: +352 22 51 [email protected]

1


Table of content

Table of contents

1. Profile of participants

Sector of activity

Size of organisation

2. Compensation of Non-Executive Directors

Principles

Main elements of fixed remuneration

Director’s fees – ordinary Board members

Director’s fees – Chairman & Vice-Chairman of the Board

Attendance fees

Board Committees

Directors’ & Officers’ Liability Insurance

3. Compensation of Executive Directors

Principles

Main elements of remuneration

4. Appendix

Questionnaire

2


39%

29%

14%

9%

9%

1 to 100 employees

101 to 300 employees


501 to 1 000 employees

More than 1 000 employees

63%14%

11%

9%3%

Banking & Investment Funds

Insurance

Financial Sector ‐Other

Industry

Media & Telecom

Profile of participants

66 Luxembourg-incorporated organisations took part in this survey.

As shown in the enclosed graphs, due to the specificity of the Luxembourg economic landscape, the vast majority of the participants are from the financial sector: 63% are either banking institutions or similar structures active in the field of asset management and investment funds, 14% are life and non life insurance companies and the 11% classified under “Financial Sector – Other” are either investment vehicles or financial service providers. Besides the financial sector, companies active in Industry or Media & Telecoms account for 12% of the sample.

When it comes to the size of the participating organisations, again, in line with the size of the Luxembourg economy, the majority of the organisations that took part in the Survey have fewer than 300 employees.

Finally, it is worth mentioning that most participants are Luxembourg-incorporated subsidiaries of larger groups based outside Luxembourg and only a very limited number are listed on the Luxembourg stock exchange.

Profile of participants – breakdown by size

Profile of participants – breakdown by sector

66 participants

3


40%

56%

0%4%

0%

20%

40%

60%

80%

100%

No remuneration Fixed remuneration only

Variable remuneration only

Both fixed and variable

remuneration

Compensation of Non-Executive DirectorsPrinciples

While 60% of the respondents compensate their non-executive directors for their contribution as Board members - be it through fixed or fixed and variable remuneration - it is interesting to note that 40% pay no compensation at all for their role as directors. Although this may come as a surprise, it should be noted that - as a substantial number of organisations of Luxembourg are subsidiaries of larger groups located in or outside the EU - many non-executive directors for Luxembourg-based organisations appear to hold executive roles at the mother company level in parallel. The oversight of their Luxembourg subsidiary is often included in their job description and is, consequently, already compensated in their executive remuneration packages.

When it comes to variable remuneration, the recent regulations imposed on organisations in the financial sector by the European Parliament and Council (Capital Requirements Directive – CRD III & CRD IV) – as well as the associated guidelines defined by a number of regulators including the European Banking Authority (EBA) and the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) - strongly recommend that no variable remuneration be paid to non-executive directors so as to ensure sound and effective risk management and prevent excessive risk-taking : “In order to properly address conflicts of interests, it is good practice for members of the supervisory function to be compensated only with fixed remuneration. Incentive-based mechanisms should generally be excluded.”1. Additionally, in the post-crisis context with increased scrutiny on non-executive directors and their roles and responsibilities, many companies outside the financial sector have today adopted similar approaches and limited or removed the variable elements of non-executive directors remuneration.

The Survey results confirm this situation: not one single participant reported compensating their non-executive directors with only variable remuneration and a very limited number (4%) provide both fixed and variable compensation.

Compensation of Non-Executive Directors for their position as Board Members

1 CEBS Guidelines, Dec 2010, art. 47

40% of

respondents pay no compensation to their non-executive directors

4


14%

86%

yes

no

58%

6%

36%Director's fees

Attendance fees ("jetons de présence")

Both Director's and Attendance fees

Fixed Remuneration of Non-Executive Directors for their position as Board members

Main elements of fixed remuneration

As far as fixed remuneration is concerned, the two main components are the director’s fees and attendance fees:

• Director’s fees: an annual allowance or lump sum paid on a yearly basis to non-executive directors for their participation in the Board or in a committee of the Board. This is paid regardless of the amount of work entailed in holding the position and regardless of the number of meetings per year. The director’s fees may, however, vary for Chairman of the Board or of a committee of the Board or Vice-Chairman, in comparison with the fees of an regular Board member.

• Attendance fees: fees paid for actual participation in a meeting of the Board or of a committee of the Board. As a rule, the attendance fees are the same for the Chairman of the Board or of a committee of the Board, the Vice-Chairman and regular Board members.

58% of the participants compensate their non-executive directors with director’s fees only (the assumption is probably that the director should attend all meetings) and 36% pay both director’s and attendance fees. The fact that only a very small number of participants pay attendance fees only indicates that, here again, companies acknowledge the essential role that non-executive directors play in their supervision function. Finally, it is worth mentioning that less than 14% of the participants that do pay attendance fees have introduced a cap on these fees.

Where your company offers attendance fees, are those fees capped?

58% of

respondents pay director’s fees only

5


13% 35% 39% 9% 4%

0% 20% 40% 60% 80% 100%

<= € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000]

17%

50%

42%

33%

100%

33%

67%

50%

50%

8%

25% 25%

0% 20% 40% 60% 80% 100%

1 to 100 employees





<= € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000]

Director’s fees - regular Board members

Director’s fees

Regular Board members

When it comes to the amounts allocated to regular Board members, it is interesting to note that 35% of the respondents pay annual director’s fees that range between € 10 000 and € 25 000 and 39 % between € 25 000 and € 50 000.

Looking more closely at the breakdown either by sector of activity or company size, we have not been able to establish a strict correlation between sector / size and director’s fees. For example - as shown in the enclosed graph - whereas a limited number of companies with over 1 000 employees pay higher fees, i.e. above € 50 000 or € 100 000, 50% of them pay between € 25 000 and € 50 000, just like 50% of companies with between 500 and 1 000 employees, 67% of companies of 100 to 300 employees and 33% of companies with fewer than 100 employees.

There are – in our opinion – two underlying reasons for an absence of correlation. On the one hand, it is only relatively recent that companies have taken a serious interest in reviewing and analyzing the way their non-executive directors are compensated and, at this stage, no or limited harmonization has taken place. On the other hand - due to the specific situation of Luxembourg as a crossroads for many companies from a large number of different countries - parent companies tend to apply the same remuneration policy in their subsidiaries as that in force at the parent-company level, with all the potential governance or cultural differences that may stand out among these entities.

Director’s fees - regular Board members: Breakdown by company size

74% of

respondents pay between € 10 000 and € 50 000 to regular Board members

Average: 33 150€

Median: 26 282€

Average: 68 750€ - Median: 50 000€

Average: 21 250€ - Median: 10 000€

Average: 17 500€ - Median: 17 500€

Average: 30 900€ - Median: 31 343€

Average: 26 575€ - Median: 21 786€

6


3% 22% 44% 25% 3% 3%

0% 20% 40% 60% 80% 100%

<= € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

Director’s fees

Chairman & Vice-Chairman of the Board2

With regards to director’s fees allocated to the Chairman of the Board, 44% of the participating companies pay between € 25 000 and € 50 000 and 25% pay between € 50 000 and € 100 000.

We have tried to establish a correlation between size and director’s fees but, here again, with limited success. On one side, companies with over 1 000 employees do indeed appear to provide the highest fees. But on the other hand, 33% of companies with between 300 and 500 employees pay more than all the companies with 500 to 1 000 employees and as much as 63% of companies with over 1 000 employees (between € 50 000 and € 100 000). Similarly, 50% of companies with fewer than than 100 employees pay as much as 50% of companies that have between 100 and 500 employees.

Interestingly, for a certain number of participants, the remuneration paid to the regular Board member and to the Chairman and the Vice-Chairman of the Board do not seem to differ significantly.

Director’s fees - Chairman and Vice-Chairman of the Board

Director’s fees - Chairman and Vice-Chairman of the Board : Breakdown by company size

44% of

respondents pay between € 25 000 and € 50 000 to the Chairman of the Board

7% 29%

33%

33%

50%

67%

33%

100%

13%

14%

33%

63% 13% 13%

0% 20% 40% 60% 80% 100%

1 to 100 employees





<= € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

2 For comparability reasons, and because they are very similar, the data related to the remuneration of the Chairman and the Vice-Chairman have been grouped

Average: 49 750€

Median: 39 204€

Average: 97 625€ - Median: 79 365€

Average: 37 500€ - Median: 37 500€

Average: 42 900€ - Median: 37 879€

Average: 30 900€ - Median: 31 343€

Average: 34 675€ - Median: 32 000€

7


54%

19%

12%

15%

[€ 501 to € 1 000] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500

Attendance fees for the Chairman of the Board, the Vice-Chairman and regular Board members

Attendance fees

Chairman, Vice-Chairman & regular Board members

As far as attendance fees are concerned, the majority of respondents offer between € 500 and € 1 000 per Board meeting and a limited number of respondents (15%) offer more than € 2 500.

As mentioned earlier, there is - as a general rule - no actual difference between the amount of attendance fees per meeting paid to the Chairman of the Board, the Vice-Chairman and regular Board members.

Interestingly, a very low number of the participating companies (7%) had set up specific practices regarding a reduction in the attendance fee in case where the director is not physically present (for example, the attendance fee may be halved in case of attendance via telephone or video conference).

54% of

respondents pay attendance fees between € 500 and €1 000

Average: 1 570€

Median: 963€

8


Compensation of Non-Executive Directors for their position in the Audit/Risk Committee

0%

0%

0%

5%

14%

81%

0%

46%

0%

18%

9%

27%

0% 20% 40% 60% 80% 100%

<= € 2 500

[€ 2 501 to € 5 000]

[€ 5 001 to € 7 500]

[€ 7 501 to € 10 000]

> € 10 000

No specific fees

<= € 500

[€ 501 to € 1 000]

[€ 1 001 to € 1 500]

[€ 1 501 to € 2 000]

[€ 2 001 to € 2 500]

> € 2 500

Specific Director’s fees

Attendance fees (Amount per

meeting)

Chairman of the Committee

Compensation of Non-Executive Directors for their position in the Audit/Risk Committee

Committees of the Board

Audit Committee

As shown in the enclosed graphs, a very limited number of organisations pay additional director’s fees to non-executive directors who are members of, or who chair, committees of the Board. This situation can undoubtedly be explained in part by the fact that, in many cases, the members of the committees of the Board are also members of the Board and already receive remuneration for that position.

Their participation in the committees is maybe considered as part of the job as Board members and is de facto remunerated with attendance fees only .

0%

0%

5%

5%

5%

85%

0%

46%

9%

18%

9%

18%

0% 20% 40% 60% 80% 100%

<= € 2 500

[€ 2 501 to € 5 000]

[€ 5 001 to € 7 500]

[€ 7 501 to € 10 000]

> € 10 000

No specific fees

<= € 500

[€ 501 to € 1 000]

[€ 1 001 to € 1 500]

[€ 1 501 to € 2 000]

[€ 2 001 to € 2 500]

> € 2 500



meeting)

Member of the Committee

Average: 1 875€

Median: 1 611€

Average: 1 650€

Median: 1 222€

9


Compensation of Non-Executive Directors for their position in the Nomination and Remuneration Committee

Compensation of Non-Executive Directors for their position in the Nomination and Remuneration Committee

Committees of the Board

Nomination & Remuneration Committee

0%

0%

0%

5%

10%

85%

0%

46%

0%

18%

9%

27%

0% 20% 40% 60% 80% 100%

<= € 2 500

[€ 2 501 to € 5 000]

[€ 5 001 to € 7 500]

[€ 7 501 to € 10 000]

> € 10 000

No specific fees

<= € 500

[€ 501 to € 1 000]

[€ 1 001 to € 1 500]

[€ 1 501 to € 2 000]

[€ 2 001 to € 2 500]

> € 2 500



meeting)

Chairman of the Committee

0%

5%

0%

5%

0%

90%

0%

46%

9%

18%

9%

18%

0% 20% 40% 60% 80% 100%

<= € 2 500

[€ 2 501 to € 5 000]

[€ 5 001 to € 7 500]

[€ 7 501 to € 10 000]

> € 10 000

No specific fees

<= € 500

[€ 501 to € 1 000]

[€ 1 001 to € 1 500]

[€ 1 501 to € 2 000]

[€ 2 001 to € 2 500]

> € 2 500



meeting)

Member of the Committee

Average: 1 875€

Median: 1 611€

Average: 1 650€

Median: 1 222€

10


71%

29%

Yes

No

Participants having a Directors’ and Officers’ liability insurance

Directors’ & Officers’ Liability Insurance

Over the past few years, the increased role played by non-executive directors in the effective supervision of companies has unsurprisingly led organisations to subscribe to so called “Directors’ & Officers’ Liability Insurance” policies, also known as D&O. It is, however, an astonishing fact that 29% of companies do not have such a D&O.

It should also be mentioned that, for all of the participating organisations that have a D&O, this insurance coverage is paid by the companies on behalf of the non-executive directors.

Directors’ & Officers’ Liability Insurance (D&O)

Business is inherently risky and claims against directors and officers have been increasing over time. D&O insurance has been created to protect directors from liability arising from actions connected to their corporate positions.

Each D&O shares a similar outline: there are three insuring clauses providing coverage of individual directors and officers depending on the indemnification or not by the corporation, and for the corporation itself, in case of claims brought against it.

It has, however, today expanded beyond its original and basic coverage and there is no standard D&O form.

29% of

companies do not have a D&O insurance

11


75%

19%

3% 3%

0%

20%

40%

60%

80%

100%

No remuneration Fixed remuneration only

Variable remuneration only

Both fixed and variable

remuneration

Compensation of Executive Directors for their position as Board Members

76% of

respondents pay no compensation to their executive directors for their position as Board members

Compensation of Executive DirectorsPrinciples & elements of remuneration

Three quarters of respondents pay no compensation to their executive directors for their position as Board members.

This situation is mainly due to the fact that executive directors receive a global compensation package for their executive positions in the organisation. As a result, their role as Board member is probably perceived as part of their position and is, consequently, de facto compensated in their executive remuneration packages.

Among the 19% of respondents providing additional fixed remuneration to executive directors for their position as Board members, 25% pay attendance fees and 75% pay director’s fees. These director’s fees are generally limited to € 25 000 as a maximum.

Furthermore, in a similar way to non-executive directors, almost no participants provide their executive directors with variable remuneration for their role as Board member.

Finally, when it comes to “Directors’ & Officers’ Liability Insurance”, in the same way as with non-executive directors, more than two-thirds of the participating organisations provide this benefit to their executive directors.

12


Table of content

Appendix - Questionnaire

13


Name of your organization

Please specify if your organisation is:

A listed limited company

A non-listed limited company

A family-owned company

An investment vehicle

Other (please specify):

Please indicate the total number of employees (headcount as of June 1, 2013)

14


Non Executive Directors

1. Are the Non Executive Directors of your company compensated for their position as Board Members?

1.1. Fixed Remuneration:

Director’s fees (annual allowances) Attendance fees (« jetons de présence ») No fixed remuneration

In case your company offers attendance fees, is the total amount of attendance fees capped?

Yes No

If Yes, please specify the cap (annual gross amount in €):

1.2. Variable Remuneration (other than Long Term Incentive Programme):

Yes No variable remuneration

If Yes, under which form is the variable remuneration paid?

Cash Company equity Mix of cash and company equity

2. On average, what is the individual gross amount of compensation offered by your company to Non Executive Directors (fixed and variable remuneration on an annual basis)?

Director’s fees (annual allowances)

Variable Remuneration (other than LTIPs)

Attendance fees Amount per meeting

2.1. Chairman of the Board

≤ € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

≤ € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500

2.2. Vice Chairman of the Board

≤ € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

≤ € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500

2.3. Other Board Members

≤ € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

≤ € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500

3. Does your company offer Long Term Incentive Programmes to Non Executive Directors?

Yes No

If yes, please describe the main characteristics (e.g. decision-making process, granting conditions, types of LTIs, etc.):

If yes, what is the average level of LTIs? % of the annual Director’s fees

4. Do you offer other benefits to Non Executive Directors?

Yes No If yes, please specify:

15


7. Do you have a Directors and Officers liability insurance (“D&O” insurance)?

Yes No

If Yes, this D&O is paid by:

The company The Director Both the company and the Director

6. Are there any specific practices regarding attendance fees (e.g. reduced fees in the case the director is non physically present). If yes, please specify.

5. On average, what is the individual gross amount of compensation offered by your company to Non Executive Directors for their participation in the Committees of the Board (on an annual basis)?

Specific Director’s fees Attendance fees

Amount per meeting

5.1. Audit / Risk Committee

5.1.1. Chairman of the Committee

≤ € 2 500 [€ 2 501 to € 5 000] [€ 5 001 to € 7 500] [€ 7 501 to € 10 000] > € 10 000 No specific fees

≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500

5.1.2. Member of the Committee


≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500

5.2. Nomination & Remuneration Committee



≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500



≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500

5.3. Other Committee (please specify)

……………….....

…………………..

…………………...



≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500



≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500

Non Executive Directors

16


8. Are the Executive Directors of your company compensated for their position as Board Members (in addition to their remuneration as executives)?

8.1. Fixed Remuneration in addition to their remuneration as Executives:

Director’s fees (annual allowances) Attendance fees (« jetons de présence ») No fixed remuneration

In case your company offers attendance fees, is the total amount of attendance fees capped?

Yes No

If Yes, please precise the cap (annual gross amount in €):

8.2. Variable Remuneration in addition to their remuneration as Executives (other than Long Term Incentives Programme):

Yes No variable remuneration

If Yes, under which form is the variable remuneration paid?

Cash only Company equity only Mix of cash and company equity

9. On average, what is the individual gross amount of compensation offered by your company to Executive Directors for their position as Board Members (fixed and variable remuneration on an annual basis)?

Director’s fees (annual allowances)

Variable Remuneration (other than LTIs)

Attendance fees Amount per meeting

≤ € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

≤ € 10 000 [€ 10 001 to € 25 000] [€ 25 001 to € 50 000] [€ 50 001 to € 100 000] [€ 100 001 to € 150 000] > € 150 000

≤ € 500 [€ 501 to € 1000] [€ 1 001 to € 1 500] [€ 1 501 to € 2 000] [€ 2 001 to € 2 500] > € 2 500

10. Do you have a Directors and Officers liability insurance (“D&O” insurance) for Executive Directors?

Yes No

If Yes, this D&O is paid by:

The company The Director Both the company and the Director

Executive Directors

17


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