On 30 April 2009, the European Commission published further recommendations on the remuneration of directors of listed companies. Inevitably, a significant number of the points made by the Commission are driven by, and seek to address, the perceived excesses of the last few years which many believe have contributed to the current financial crisis. Key areas covered include the following:
- Variable pay structures – these should be subject to defined limits and should be conditional on the satisfaction of performance criteria (both financial and non-financial) that promote the long-term sustainability of the company. Also, a significant proportion of any variable pay that is earned should be deferred for a specified period and should be subject to a "claw back" in the event that the data used to determine the individual's entitlement proves to be mis-stated.
- Termination payments – these should not exceed stated limits (e.g. 2 x non-variable remuneration) and should not be paid if the termination is due to inadequate performance.
- Share-based remuneration (e.g. options and LTIP awards) – these should be subject to minimum vesting periods of at least three years and should be performance dependent. In addition, directors should be required to retain a proportion of vested shares until they leave the company.
- Statements disclosing policy on directors' remuneration – these should be clear and understandable.
- Remuneration committees – these should include appropriately qualified individuals and should receive advice from independent consultants.
Many of the Commission's recommendations are already dealt with in the UK, either through the Combined Code, generally accepted corporate governance practice or the requirements relating to the annual directors' remuneration report.
That said, it remains to be seen whether additional regulation in this area will be introduced in order to further address the points raised.