As another measure against the financial crisis, the Commission published on 29th April 2009 two proposals for remuneration systems in listed companies and in the financial industry. These proposals should make the “golden handshakes” for failed managers redundant and should counteract the short-term actions of the financial industry. Whether these proposals, which are legally not binding, will be implemented in the EU Member States, is more than questionable.
As the Commission concluded in its proposal, it had become increasingly clear in the light of the financial crisis that the current remuneration systems for senior executives had become more and more complex, that they partly resulted in “excessive” salaries without any performance-related justification and that they in particular steered the corporate focus onto short-term successes. The Commission also sees a clear connection between the remuneration practices of the financial industry and the excessive risks, which had been taken by banks and investment corporations respectively. Even if these remuneration systems cannot be blamed as the main cause for the financial crisis; they were responsible for the fact that long-term forecasts were ignored and at least co-responsible for causing global systemic problems.

The Proposal of the Commission for remunerating senior executives of publicly owned companies is a continuation of the Commission’s Proposals from 2004 and 2005. The current Proposal of the Commission heralds the message that remuneration systems for senior executives should orientate themselves on the long-term, sustainable success of the company. The performance criteria for the remuneration of managers should be clearly defined and controllable. In future, managers, who have caused their company losses by their own failure or due to non-achieved performances, should no longer be granted high severance indemnities, the so-called “golden handshakes”. The Commission proposes double the amount of an annual salary (the non-variable part of the income) as an upper limit for severance indemnities. Managers should also only be able to exercise their share options after three years; these too should be linked to concrete performance targets. Members of the supervisory board should not have the opportunity to take share options as part of their salary. Furthermore, the Commission comes out in favour of limiting the variable part of manager remunerations without specifically defining this limit.

The second Proposal by the Commission on the remuneration policy within the financial services sector is above all directed at a better risk awareness of employees working for credit institutes, investment companies, insurance companies and pensions funds etc. The remuneration systems in the financial services sector should not create any incentives for “excessive” risk behaviour; they should be consistent with the long-term interests of financial institutes as well as protect the interests of clients and investors. In order to avoid “excessive” risk behaviour, the Commission proposes special remuneration systems for all those employees, who, based on their activities, have a decisive impact on the risk profile of the financial institute. This Proposal too suggests a limit of the variable part of the remuneration. Annual and other bonuses should only be paid in staggered form so that any possible future risks can be taken into account. It should also be possible to request a claw back of bonus payments from managers if it turns out that their performance was not up to standard. In addition, the Commission comes out in favour of minimum standards concerning the disclosure of remuneration policies, such as the details of the composition and mandates in Committees on which the remuneration is based.

The Proposals of the Commission on regulating manager salaries appear - in particular based on experiences made with the Proposals from 2004 and 2005 - to be rather “toothless”. For example only recently the European Corporate Governance Forum, which was set up by the Commission itself to modernise company law and to enhance corporate governance, stated that the impact of the non-binding proposals from 2004 and 2005 was minimal. The Forum requested from the Commission to come forward with a Directive with binding character, according to which publicly owned companies would be forced to disclose their remuneration policy.

AK EUROPA and the European Office of the Austrian Trade Union Federation (ÖGB) use the publication of the Commission’s Proposals on management pay as an opportunity to discuss within the scope of their series of events “Regulate the Markets!” on 11th May in Brussels the reasonableness of non-binding rules for the remuneration of top executives with top experts.

Further Information

Proposal of the European Corporate Governance Forum

Press release on the remuneration of employees working for the financial services sector pay

Press release for Directors’ pay