Realize a check-up of your Say on Pay resolution
Your company prepares the Say on Pay resolutions that it will submit to the next general shareholder meeting : ex-post vote and ex-ante vote on remuneration policy, according to the AFEP-MEDEF Code and the Sapin 2 law.
If the introduction of the Say on Pay in France in 2014 has been satisfactory, observers have since noticed increased requirement of investors, year after year, on compensation topics. They issued signals to the Boards of Directors for several reasons :
- Transparency in progress, but clarifications to be provided on the link between the company's strategy and compensation practices ;
- Insuffisance de transparence et manque d’explications convaincantes sur les pratiques de rémunération ;
- Difficulty to assess the link between performance and level of remuneration paid ; in particular concerning ILT plans (long-term incentive schemes) - shareholders want to ensure that it is indeed the creation of long-term value that is remunerated and that criteria are sufficiently demanding ;
- Mistrust concerning deferred benefits (severance pay, non-competition indemnity, supplementary pension scheme) : too flexible triggers, insufficient performance conditions, cumulative benefits ...
Investors expect :
- A convincing explanation of the link with strategy and values ;
- Accessibility to modalities (quantum, mechanisms) ;
- A Board and Remuneration Committee at the helm (independence, skills, commitment, resources) ;
- A dialogue with investors (opportunity to highlight the role of the Board and Remuneration Committee in the decision-making process, and its independence from management).
Say on Pay is a dynamic : the degree of expectation of investors, often global players, is increasing every year, driven by the constantly evolving practices in Anglo-Saxon countries and by the strengthening of Community regulation.
As leader in France on governance of executive compensation, and as partner of the international group GECN, our approach Say on Pay goes beyond compliance to integrate the DNA of your company and to highlight it through explain.
Today, we offer to carry out a quick and efficient check-up of your draft resolution Say on Pay.
The objective of this check-up is to identify strengths, weaknesses and risks.
It takes place in three stages :
- The company provides the draft resolution and, if possible, the draft annual report ;
- Analysis of the project by ESSERE ASSOCIES experts for a balanced and complementary added value ;
- Restitution, during a meeting (three hours) of the check-up and corresponding recommendations.
We communicate our reflexions (to Remuneration Committee, HR / Legal / Investor Relations ...) on the form and, if necessary, on the substance of your resolution, and make suggestions for improving its structure, content, presentation and tone.
We draw inspiration from the best practices of British and American companies in remuneration policy and governance.
Sapin 2 law institutes binding vote
On Tuesday, 08 November 2016, Parliament finally adopted the introduction of stricter rules on transparency, fighting against corruption and economic modernization, known as Sapin 2 law.
Under this omnibus law, Amendment 161 establishes two separate binding votes on remuneration : a forward-looking vote on executive compensation policy, and a backward-looking vote on variable and exceptional remuneration amounts.
By introducing binding Say on Pay votes, France is following in the footsteps of the United Kingdom and Switzerland, which have already, respectively, imposed binding votes on remuneration policy and maximum payouts.
Regarding timing, the forward-looking vote will enter into force in 2017, while the backward-looking vote will not take place before 2018. More specifically :
- In 2017, the first binding vote is a forward looking, annual and mandatory vote of the shareholders on the « principles and criteria for determining, distributing and allocating the fixed, variable and exceptional components of total compensation and benefits of any kind », attributable to company officers. In case of failure of this forward-looking vote, the previous principles and criteria will continue to apply or, if there was no previous policy, compensation will be determined « in accordance with the compensation awarded the previous year ».
- In 2018, the second binding vote will come into force : for any payment, shareholders will have to approve the payment of variable and exceptional remuneration amounts to company officers. In case of failure of this backward-looking vote, the amendment does not specify the recourse modalities.
Implementation to be clarified
Amendment 161 remains in many respects imprecise and confusing for coming general shareholder meetings.
Issuers expect AFEP-MEDEF (principal employer’s federations in France) to update its Say on Pay recommendation, clarifying the terms of implementation for this new regulation.
SAY ON PAY IN FRANCE : HOW TO GET READY ?
If the Say on Pay in France has been smoothly introduced in 2014, it has to be pointed out that there has been increased requirement from investors, year after year, on compensation topics.
In practice, they are many consequences of the Say on Pay :
- Issuers should include in their annual report a detailed presentation of their remuneration policy for corporate officers (including all the required information), prepared with the support of the Remuneration Committee ;
- According to the regulation, companies still need to vote on specific resolutions (« conventions réglementées », severance pay, stock-option and performance share plans) ;
- The « Sapin 2 » law institutes two separate binding votes on remuneration : a forward-looking vote on the executive compensation policy, and a backward-looking vote on variable and exceptional remuneration amounts.
Investors' attention focuses on three following targets :
- Clarify the link between the company's strategy and its compensation policy ;
- Build dialogue with investors ;
- Optimize the role of the Remuneration Committee, in relation with the Board and the management.
Clarify the link between the company's strategy and its compensation policy
International institutional investors are used to make decisions on a report which links the company’s strategy, its remuneration policy and its effective executive’s remuneration packages. Indeed how could the shareholders approve the payment of a bonus, when they ignore or could disagree with the rules set for the bonus (ie performance criteria, objectives and targets to achieve), all presented in the remuneration report ?
Establish the link between the company’s strategy and its remuneration is capital in order to align executives’ commitment with the objectives of the company, and to legitimize remuneration practices for shareholders.
Multiple illustrations show the links that exist between the specificities of a company and its remuneration practices : weight of incentive components in the total remuneration, weight of the remuneration in capital ... It is a challenge for each company to conduct a thorough reflection on its DNA and culture, in order to determine its remuneration policy.
Build dialogue with investors
It’s necessary to initiate this dialogue before the general shareholder meeting.
This dialogue is also an opportunity to highlight the role of the Board and the Remuneration Committee in the decision-making process, and their independence from the management.
Some people in France are reluctant to establish a direct dialogue between Board members and investors, objecting legal reasons and the risk of multiplying communication channels. Yet for investors, the multiplicity of communication channels is already a reality ; a dialogue which would be limited to experts designated by the management - regardless of their competence - is ambiguous in the sense that it can give the impression that the Board is simply a registration room on remuneration.
Optimize the role of the Remuneration Committee, in relation with the Board and the management
Current discussions on the relationship between the Remuneration Committee and the Board highlight the crucial role of the Remuneration Committee, in relation to the Board of Directors and the management (HR, Company Secretary, Investor Relations).
The Remuneration Committees are becoming more professional, in particular through enhanced resources : tools, direct access to external consulting, training, remuneration of its members due to a growing workload. It is up to the company to promote this professionalization among its investors.
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