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EU SRD update: European Commission draft guidelines on standardised presentation of remuneration reports

Compensation Strategy & Design|Executive Compensation|Talent
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March 19, 2019

The SRD is not always fully explicit, providing member states with choices in a number of areas. In some instances, a consistent approach would be beneficial and standardised presentations of remuneration reports would provide an easier read acros between companies across countries.

To accomplish this, the Shareholders’ Rights Directive tasked the European Commission with drafting guidelines to specify a standardised presentation of remuneration reports. The European commission has published draft guidelines subject to consultation until 21 March 2019.

The guidelines recommend a standard structure, summarised below:

  1. Introduction

    General overview (key events, changes in directors, changes in policy or its application) followed with more details on the performance and business environment and major decisions on remuneration and how the vote or views of shareholders on the previous report were taken into account.

  2. For each individual director, the report should include all remuneration including all benefits in whatever form, awarded or due, split by component for directors who served during the year (including former directors) and split between fixed and variable pay.
    • Base salary/fee
    • Benefits: e.g. travel, medical, company car, education, residence, security
    • Pension : Amount and footnote explaining type(s) of pension arrangement
    • Exceptional elements: e.g. sign-on, retention, buy-out, relocation, termination payments
    One year variable pay Multi-year variable pay
    Total value awarded or due in respect of the year Total value awarded or due during the year as a result of the fulfilment of performance criteria over more than one year (unclear which value to be shown)
    Components and respective values (e.g. cash and shares elements) in footnote Type of award(s), weights in footnote
  3. Performance metrics and outcomes for each director and each variable pay plan.

    For each financial and non-financial performance metric:

    • Description and respective weighting
    • Targets including minimum and maximum and corresponding awards
    • Actual performance and outcome
    • How discretion was applied where applicable

  4. Share-based remuneration awarded and vested.

    Share based remuneration tables (shares, options and other share related instruments such as phantom stock, SAR, warrants):

    • For each plan and each director:
      • Performance period, award and vesting dates
      • End of holding period where applicable
      • Opening balance: number held at the start of the year
      • During the year: number awarded & vested; market value at award & vesting date (companies may also show IFRS value)
      • Closing balance: number subject to performance conditions - unvested; vested but subject to holding
    • In addition for options: exercise period and strike price

  5. Malus and clawback provisions

    Include information on malus and clawback provisions and where applicable details of the use of such provisions including amount and relevant year.

  6. Derogations from the policy

    The Directive provides that Member States may allow companies, in exceptional circumstances to temporarily derogate from the remuneration policy. Where this is possible and derogation has been used, the report should explain the exceptional circumstances that led to the derogation and element(s) of remuneration concerned and the procedure followed.

  7. Comparison of annual change in each director's remuneration with company performance and average employee remuneration over five years.

    Annual change in each director's remuneration, performance and average employee remuneration over five years

    • Average remuneration of employees of the company, excluding directors, on a FTE basis. Consider using all employees of the group.
    • Director: total remuneration as disclosed in table, annualised for directors who served part of year. Employee remuneration not defined.
    • Change in percentage and absolute numbers.
    • Consider showing changes of the fixed and variable remuneration of each director and/or the average remuneration of all directors (distinguishing between executive and non-executive directors).
    • Company performance: net profit or loss + additional criteria the company may find appropriate.
    • No requirement to calculate average employee remuneration for past years.
  8. Response to AGM voting: How the vote at the previous general meeting was taken into account.

Willis Towers Watson's view

We welcome more standardised presentation of remuneration reports.

The guidelines encourage companies to place remuneration into business context and companies to disclose performance measures and targets retrospectively, which will enable the assessment of pay for performance alignment, in line with investors' expectations.

It is important that the guidelines are explicit on what is expected to be reported in the total remuneration table. It is not clear whether share based remuneration should be shown at grant value or vested. In our view, the value of awards vested would be preferable as it would enable to show the link between remuneration and performance achieved.

Although we support the view that pay and conditions of the broader employee population be considered when making decisions on executive pay, collating data and calculating pay on a full time equivalent basis for all employees of the group may prove challenging for companies and companies may prefer to select an employee group that will be most relevant for this purpose.

Contact

Anne-Sophie Blouin
Senior Director, Executive Compensation

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