The remuneration of top executives has been in the French Government’s crosshairs since François Hollande and the Socialist Party came into power in 2012, and now the French National Assembly has adopted a draft law aimed at giving shareholders a binding vote on executive pay. In passing through the upper chamber of the Senate, however, the strongest provisions of the Assembly’s bill were removed and transformed into a more flexible, less constraining instrument. Last Wednesday a joint Parliamentary commission, comprising members of both legislative bodies, began their work on finding a compromise text between the two versions.

The coming of pay legislation has been foreshadowed for a number of years in France; in 2013, it was in response to the government’s threat to legislate for say-on-pay that the AFEP-MEDEF (a coalition of employer’s federations) introduced a recommendation to hold individual advisory votes on the pay of top executives to its French Corporate Governance Code (the “Code”). More recently, in August 2015, legislation was passed (Act no.2015-990 of August 6, 2015) which saw a tightening of the rules on “top up” pensions, an additional pension entitlement sometimes granted to a company’s highest earners. Matters came to a head earlier this year, after the French government introduced the Law on Transparency, the Fight Against Corruption and Economic Modernisation, also known as the Sapin 2 law (“Sapin 2”) after its author, Finance Minister Michel Sapin. Originally wholly unrelated to the subject, the bill became a vehicle for increasing shareholders’ power over pay after several controversies during the year (the Renault debacle chief amongst them) stoked the fires of public opinion, prompting amendments to include a provision giving shareholders a binding vote on executive remuneration.

While this amendment to Sapin 2 was passed by both the National Assembly and the Senate, each chamber approved a vastly different version of it. Both envision a forward looking and a backward looking vote on executive remuneration, but the texts differ on the timing of the votes and on whether the backward looking votes would be binding or advisory, as well as other areas, with the joint commission tasked with finding a compromise.

The National Assembly’s Tight Leash

It was evident from the debate in the lower chamber in the days prior to the vote that a majority of members believed that self-regulatory “soft law” had proven a failure, and that the captains of French industry couldn’t be trusted to police themselves. This scepticism was so strong that the chamber nearly took the unprecedented and somewhat extreme step of setting an upper quantum limit to executive remuneration, with the proposal rejected by a single vote.

Under the Assembly’s text, executive remuneration at listed companies would be subject to two separate annual binding shareholder votes: an “ex-ante” vote on the fixed pay and remuneration structure of corporate officers would be introduced, and the existing “ex-post” vote on the actual amounts due to the corporate officers in respect of the prior year would be made binding and extended to all companies listed on Euronext.

The “ex-ante” vote would set out all components of remuneration, including the limits and structure of variable incentives, similar to the UK’s binding policy vote. The “ex-post” vote on the implementation of the variable remuneration elements would give shareholders a binding say on the variable payouts, similar to how many Swiss companies have implemented pay votes under Minder. According to the Assembly’s text, variable and exceptional remuneration would not be payable until after approval of the “ex-post” vote, giving shareholders the power to block the payment of variable or exceptional remuneration they believe inappropriate, even though the policy giving rise to these payments had been approved in principle in the previous year.

The Senate’s Flexible Instrument

The Senate took a very different approach, leaving little of the original amendment unchanged. Under the text that they adopted, the “ex-ante” vote would only be required to take place at least every four years rather than annually, with shareholders voting on a special board report setting out the principles and criteria of determination, distribution and allocation of pay components. If rejected by shareholders, a new, revised draft of this document would be submitted for shareholder approval at the next general meeting. Once adopted, the remuneration of executive directors would have to be determined in accordance with the principles and criteria outlined in the policy, and any significant changes would have to be submitted to a new shareholder vote.

The Senate also proposed an annual “ex-post” vote similar to the existing say-on-pay mechanism under the AFEP-MEDEF Code; however, while this vote would not be binding, it would have more teeth than the existing structure. Whereas the current Code merely calls for a statement to be published on the company’s website in response to shareholder concerns when a say-on-pay fails to receive majority support, the Senate’s amendment would require companies to prepare and present a report at the next general meeting detailing how it took the shareholder vote into consideration. This change likely reflects outrage at the cursory response provided by Renault’s board after a majority of shareholders opposed CEO Carlos Ghosn’s pay at the company’s 2016 AGM.

The Art of Compromise

One result of Sapin 2 is certain: say-on-pay votes will become a legal requirement for companies listed on French stock exchange (in addition, we note that the provisions regarding termination agreements and pensions that are already included in the French Commercial Code will remain unchanged). However, at what point compromise will be reached between the National Assembly and the opposition-dominated Senate remains to be seen. The significant differences between the two versions of the amendment mean that there is still considerable uncertainty about what powers (and responsibilities) the final version will give shareholders. While each of the proposed amendments will undoubtedly give shareholders greater power to curtail what they deem as inappropriate executive pay, both also present some potential drawbacks.

The Assembly’s proposal can be seen as combining the UK’s “ex post” policy structure with an “ex ante” vote that gives shareholders the final say what gets paid out, in line with the Swiss approach. The desire to beef up the UK structure may reflect concerns that despite the introduction of binding policy votes, controversies and questionable pay practices have continued to abound across the channel. On several occasions shareholders have rejected the advisory “ex-post” pay proposal even when the binding policy proposal had been overwhelmingly approved. While such signals from shareholders may result in changes being made to the policy, they seldom result in changes to the payouts that have already been made.

This may, somewhat counterintuitively, result in greater support for executive pay proposals; by only allowing for binding votes, it denies shareholders a means to make their discontent heard without facing the risks that a failed “ex-post” vote might entail, such as alienating executives by retrospectively taking away what they thought had been earned; or requiring sudden changes to an incentive structure, which in turn may disrupt the results of long negotiations and create management uncertainty. A binding vote on quantum amounts is a blunt instrument, and shareholders may be reticent to employ it as freely as they would if the vote were advisory. Indeed, since the introduction of the Minder initiative in Switzerland, companies have regularly been recording higher approval rates for their binding “ex-post” proposals than for the advisory approval of the remuneration report. Moreover, many have questioned the efficacy of the binding vote to curb excessive pay, since blue chip CEOs were paid more in Switzerland than in any other European country in 2016. By contrast, advisory votes have historically been utilised as a means of registering discontent and sparking engagement between stakeholders, which often leads to a change in remuneration practices without the dramatic potential consequences of a binding vote.

With regard to the Senate’s proposed approach to “ex ante” votes, a significant amount of work remains to clearly define just what the principles and criteria for determination, distribution and allocation of pay would look like in practice, and without more specific guidance there is a risk that shareholders would be asked to vote on reports largely comprising boilerplate language. These issues raise the question of how a remuneration policy can maintain the flexibility required to deal with the reality of how executives are paid, and still be firm enough to ensure pay outcomes in line with investor expectations. Given the increasing interest in executive remuneration, both by the French public and its legislators, it seems unlikely that whatever emerges from Sapin 2 will be the last word on the subject.