The increasing spotlight on executive compensation shows no sign of abating, with the topic remaining a hot-button issue for shareholders and the general public alike, leading to critical headlines and political exhortations across the globe. Indeed, boardroom pay remains high on the political agenda for the post-Brexit British government, is being addressed by impending legislation in France, and even became the focus of criticism from US President-elect Donald Trump, who has referred to current pay levels as “disgraceful”.
In light of this intense scrutiny, it is interesting to observe how pay practices have developed over the past year among blue-chip companies in certain European markets, namely France, Switzerland, Belgium, Spain, Italy, Germany, Denmark, Sweden, Norway and the Netherlands; and whether or not the spotlight being placed on incentive structures across Europe has resulted in major changes to incentive arrangements and pay levels.
When viewed as a whole, certain common trends emerge across the continent– salary levels have remained relatively stable across the board, while the increasing prevalence of long-term incentive plans is leading to higher overall compensation. Certainly, long-termism and risk mitigation has been the order of the year, with most markets seeing increases in the number of issuers requiring executives to defer a portion of their annual bonus, or to invest a certain portion of pay into company shares.
Another outcome of the shareholder focus on risk mitigating provisions can be observed by the increased prevalence of recoupment provisions for variable elements of pay; each of Switzerland, Spain, Denmark and the Netherlands saw double-digit increases in the presence of recoupment provisions. It is interesting to note, however, that average bonus limits in those markets also increased, by 4-9%, while average limits in every other continental European market remained the same, or even fell. Perhaps one explanation for the correlation of increasing bonus limits and the rising prevalence of recovery provisions is the argument made in some quarters that more stringent pay plans are a factor in the growth of total compensation paid to executives, whereby executives essentially seek to increase potential compensation in the event that companies place any additional ‘conditionality’ on final payments.
Indeed, a look further north appears to add some weight to these ideas. While the rest of Europe has converged on a best practice standard of three-year performance periods, Scandinavian companies have opted for shorter periods; the average LTI performance period in Sweden remains just two years. Generally, short performance periods under LTIPs may be cause for investor discontent; however, levels of equity-based compensation in the Nordics pale in comparison to their southern neighbours, likely assuaging any potential fears of incentivising short-termism. Similarly, Nordic companies have lived up to their reputations of modesty by keeping average bonus limits below 100% of annual salary, despite average caps in the rest of Europe running at approximately twice that amount.
At the other end of the spectrum, there seems to be a certain level of overlap amongst German, French and Swiss issuers in how executives are being compensated; average bonus levels in these markets have continued to pull away from the pack – 210% of base salary in Germany immediately jumps out – even while recoupment provisions have largely been shunned (except in Switzerland, where half of companies use such provisions). In addition, German issuers have also been slow to move on implementing shareholding guidelines, a feature that has become market practice across most of Europe.
Related Stats
Belgium: 24% of companies have no long-term incentive plan (“LTIP”), a higher percentage than any of the other nine countries.
Denmark: With the exception of Jyske Bank, where management solely receive fixed salary, all companies now have an LTIP.
France: Of the ten countries, shareholding guidelines are at their most popular here, with 83% of companies including ownership goals for executives.
Germany: The highest average bonuses (210% of salary) and longest average performance periods (3.5 years) were found here.
Italy: 77% of LTIPs contain recoupment provisions, a higher percentage than any other market.
Netherlands: Dutch LTIPs contain the lengthiest time-horizon for the full release of awards, with performance periods of three years supplemented by an average additional holding period of 2.9 years in 67% of plans.
Norway: LTIP target disclosure is at its most robust here, with 57% of companies prospectively disclosing performance targets in 2016.
Spain: Spanish compensation policies have seen the biggest additions in terms of structural features – recoupment provisions, bonus deferral and shareholding guidelines have all increased significantly.
Sweden: The average limit on annual bonuses has come down to 79% of executives’ base salary; only neighbouring Denmark has a lower cap (77%).
Switzerland: The highest average salary, at €1,777,947 per annum.