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EU Shareholder Rights Directive: Change is coming to executive pay across Europe

Are you ready?

Governance Advisory Services |Executive Compensation
Preparing for the EU Shareholders’ Rights Directive

By Alex Little , Manuel Montecelos and Piia Pilv | July 30, 2019

Creating a Remuneration Policy that meets the requirements of the Shareholder Rights Directive needs careful consideration and takes times. If you haven’t started preparing your Policy yet, it’s time to get going!

EU regulations on governance, known as the Shareholder Rights Directive (‘SRD’), were approved by the European Parliament in 2017. Each member state was due to implement them into their local law by 10 June 2019, with the first annual reports under the regulations to be published in early 2020.

The SRD will give shareholders two annual general meeting (‘AGM’) votes in relation to Director pay arrangements:

  • Remuneration Policy (“Your licence to pay”): At least every four years, companies will be required to put a comprehensive policy on all elements of compensation for executives for shareholder approval. Once approved, pay arrangements must be operated in line with this policy, until a new one is approved.
  • Remuneration Report (“What happened in the year”): Every year shareholders will vote on the Remuneration Report, which will describe how executive pay arrangements were actually operated – for example, details of performance achieved and how short and long-term incentive outcomes were aligned with this.

Remuneration Policy

Binding or advisory vote at least every 4 years - "Your license to pay"
Policy Pay components
Explain how it contributes to the business strategy, log-term interests and sustainability of the company Describe the remuneration compononents (including benefits in whatever form) and their relative proportion
Variable pay
  • Describe financial and non-financial criteria, including corporate social responsibility measures where appropriate, how they support the strategy and long-term interests and sustainability of the company and methods to be applied to assess performance.
  • State vesting, and holding and deferral periods where applicable.
  • Indicate clawback provisions.
Service contracts Broader context
  • Main terms (duration, notice, termination payments, supplementary and early retirement schemes).
  • Explain how employees’ pay and employment conditions were taken into account.
Derogation may be allowed by Member State
  • In exceptional circumstances, where this is necessary to serve the long-term interests and sustainability of the company as a whole or to assure its viability.
  • Include procedural conditions and elements concerned.

Remuneration Report

Annual advisory vote - “What happened in the year”
Total remuneration Share awards
  • Total remuneration split by component
  • Fixed and variable proportion
  • Compliance with the Policy
Number and main conditions.
Variable pay Clawback
How performance criteria were applied. Any use of clawback
Derogation Broader context
Explanation of any use of discretion to derogate from the Policy.
  • Annual change ineach director’s remuneration;
    • average employee (other than directors) (FTE) remuneration;
    • company performance over the last 5 years.
  • How the vote at previous AGM was taken into account

The SRD provides some flexibility and the implementation will vary somewhat from country to country. For example, countries are able to choose whether the shareholder vote on Remuneration Policy is binding or advisory, or if companies can have any flexibility to operate outside of an approved policy in exceptional circumstances.

The content and formats of Remuneration Reports currently varies significantly across Europe so the European Commission has issued draft guidelines on standardised disclosure. Although these guidelines are not binding on the requirements in each country, over time, we expect there to be greater consistency across Europe in terms of disclosure style – driven by investor pressure for more detail on the alignment of pay and performance.

Willis Towers Watson’s view

Our experience is that reviewing and drafting a Remuneration Policy that gives sufficient flexibility to respond to unknown events that may occur during a four-year policy period, but also provides shareholders with their required level of detail needs careful consideration and takes time. So, if you haven’t started preparing your Policy yet, it’s time to get going! Bear in mind that it might be necessary to consult your key shareholders on the new Policy in advance of publication in the annual report so this needs to be built into your timeline as well.

Some countries already have detailed reporting and stringent voting regimes (e.g. the UK with a binding vote on remuneration policy at least every three years and an annual advisory vote on remuneration, France with annual binding votes on remuneration policy and on variable pay outcomes) but, where these are not already in place, the SRD is likely to prove a significant change in the nature of engagement with shareholders on executive pay issues and the required level of disclosure. We expect that investors holding shares in companies across multiple countries (as well as large proxy voting agencies) will likely push for increased disclosure in other countries. Consultation with shareholders and proxy voting agencies and clear rationale regarding the choice of pay structure, performance measures and justification of payouts will become increasingly important.

Continuing a trend of an increasing focus on the fair pay agenda, a noticeable new angle is that disclosure will be required comparing the change in pay of each Director with that of average employee pay. This requirement will encourage Remuneration Committees to take into account pay and conditions of the wider employee population when making decisions on executive pay, which may be a broader perspective for those Committees which have to date focused only on the senior team.

Finally, we believe this should be deemed to be an opportunity to review your policies and practices: “If there is something you can’t show off about, then perhaps it’s time to change it!”


What can you do to prepare?

Prepare and review policy:

  • Inform and engage all relevant stakeholders in good time (HR, reward, finance, audit, company secretary, legal, board)
  • Review all elements of pay, share ownership and holding requirements and clawback provisions against market and best practices
  • Review service contracts, share plan rules, board meeting minutes to ensure that any oddities or legacy items are picked up
  • Review variable pay performance measures
  • Assess potential outcomes under different performance scenarios
  • Review target setting approach
  • Understand views of shareholders and proxy advisors and assess appetite for change
  • Review EU remuneration disclosure guidance
  • Make any changes to directors' remuneration where appropriate – or build in grandfathering clauses, where required
  • Think ahead: What is the story you will tell in your Remuneration Report when you will want to explain what your “pay for performance” has been?

Draft disclosure and engage with external stakeholders:

  • Draft the remuneration policy in compliance with the new guidelines
  • Draft the remuneration report in accordance with the new guidelines
  • Consult with the key shareholders on the remuneration policy and remuneration report
  • Assess suitability of early disclosure
  • Preparation of the AGM documentation for the remuneration policy vote
  • Maintain engagement with shareholders and proxy advisors

Contact Us

Willis Towers Watson provides a depth of resources and expertise available from the world’s largest executive compensation consulting practice. We have consultants on the ground across Europe who can guide you through the impact of the SRD and how it has been implemented in each country. Our experts are well-connected to each other, and in particular, have deep expertise working with clients in similar projects in the UK and US. We can help you through all stages of the SRD, including preparation, implementation and ongoing support.

Contact a Willis Towers Watson expert to explore how we can help:

Please click on name to send an email
Europe Manuel Montecelos Piia Pilv
Belgium Noemie Tack
France Jerome Rambaldi Gerald Joliy
Germany Florian Frank Martin Emmerich
Italy Matteo Fiocchi Paolo Tanghetti
NetherlandsJoris Wonders Roel van der Weele
NordicsPiia Pilv
Olof Svensson
SpainCristina Martin Juan Guerrero
SwitzerlandSacha Cahn
UK & IrelandRichard Latham Alex Little
Contact Us