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Article | Executive Pay Memo – Western Europe

Seize SRD as a business opportunity…

A unique opportunity to realign, review and communicate on executive pay

Total Rewards|Executive Compensation|Future of Work
Preparing for the EU Shareholders’ Rights Directive

By Manuel Montecelos and Piia Pilv | September 29, 2020

We offer a few simple and useful tips to help listed companies ensure that they are fully equipped for the changes ahead.

In recent years, the European Union has sought to implement many improvements in corporate governance matters and in the transparency of directors’ remuneration packages. The European legislator, in the wake of the last financial crisis, has been working towards improving a culture of good governance as a means to avoid a repeat of the situations and practices that previously compromised the “health” of so many listed companies and had such a negative impact on the economy.

To this end, on 20 May 2017, the Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC (also known as the Shareholder’ Rights Directive) was published in the Official Journal of the European Union.

This EU regulation sought to promote a more active and long-term involvement of shareholders in European listed companies.

In order to improve remuneration systems and governance, one of the measures the Directive introduced was the "say on pay" reforms. These new rules encourage more transparency and accountability around directors’ pay by giving shareholders the right to know, and to influence, how much a company’s directors are paid. This is aimed at ensuring a stronger link between pay and performance, and thereby eliminating excessive risk-taking and contributing to the long-term sustainability of businesses.

A Harvard Business School study from April 2019 on Russell 3,000 predicted that “say on pay” vote support will continue to decline. While the sample and market are different, the underlying reasons are valid: increased transparency allowed for more and better information, and there are better grounds to disagree… which puts an extra layer of demand to do, and then report, better.

The Harvard Business School study concluded that the Russell 3000 “say on pay” failure rate was set to jump to 3 per cent in 2019 for the first time. This upward trend has been seen in Europe as well, and looks set to continue in the coming years.

Seize this as a unique opportunity to realign, review and communicate on executive pay and to try to stand out in terms of good governance and transparency.

Just in the last few weeks, some European companies have suffered the consequences of the lack of support of proxy advisors and institutional investors on remuneration matters. The annual variable remuneration of Ryanair’s CEO, Michael O’Leary, for example, came under fire recently (4 September 2020), as ISS urged shareholders to oppose the package in a non-binding vote on 17 September 2020. ISS said the pay award “raises concerns” and was hard to justify amid the unprecedented aviation crisis sparked by COVID-19. Criticism of O'Leary's package follows an ISS recommendation against the bonus payout for Willie Walsh, the retiring CEO of IAG, parent company of British Airways.

It is clear that as a result of the new rules, listed companies will be significantly impacted in the way they design and report on executive pay. The default approach would be for companies to implement changes based on a check-the-box exercise, but Willis Towers Watson’s recommendation is for companies to seize this as a unique opportunity to realign, review and communicate on executive pay and to try to stand out in terms of good governance and transparency.

Turn the SRD into a business opportunity

The EU Shareholders Rights Directive aims at improving transparency and long-term shareholder engagement. This will impact the way you'll design, report and communicate on executive compensation.

Based on Willis Towers Watson’s experience as a trusted Executive Compensation advisor, here are a few simple and useful tips to help listed companies ensure that they are fully equipped for the changes ahead:

  • Companies should take the time to assess, once again, their remuneration policy: is it still aligned with the long-term business strategy? Does it ensure line-of-sight from the executives’ perspective? Is there a need to reconsider the present pay-for-performance strategy, and KPIs in particular?
  • Competitiveness and positioning vis-à-vis the external market should be thoroughly reviewed. 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 will become increasingly important, as will a clear rationale regarding the choice of pay structure, performance measures and justification of payouts.
  • Companies should genuinely engage/consult with all relevant stakeholders (e.g. shareholders and proxy advisors) in a timely manner, to ensure that they are aware of their expectations.
  • Communication is key: companies need to clearly define the story their remuneration policy/report is telling within the broader picture of the business and HR strategy, with a focus on mission and purpose. That is why the implementation of SRD should be a truly combined effort between many different areas with a company -HR, legal, investor relations, etc.

How this could translate into listed companies’ agenda (in countries with implementation as of reporting year 2020):

In summary, we advise companies to seize this opportunity to demonstrate how they are doing, to respond to challengers, to raise awareness of their brand and to enhance their reputation. If you haven’t started to align your executive remuneration strategy yet, it’s time to get going! Don´t miss the opportunity to make your company stand out.


Senior Director, Executive Compensation Practice Leader, Western Europe

Executive Compensation Leader, Northern Europe

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