While companies in Europe, the Middle East and Africa (EMEA) show continuing progress in terms of their governance of executive pay and their efforts to engage with shareholders, it appears from our recent pulse survey that many companies in EMEA still have more work to do in the area of long-term alignment of pay and performance.
Notably, only about half of the companies in our survey have adopted share ownership guidelines, a key mechanism for achieving pay-for-performance alignment at the executive level, where equity incentives represent a significant portion of total remuneration. What’s more, an even smaller percentage of companies strictly enforce their share ownership guidelines.
Conducted this spring, the survey elicited responses from 58 companies across 10 countries (Belgium, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, the United Arab Emirates and the United Kingdom). The participating companies range widely in size and span a broad cross-section of industries, with financial services the most common. Almost three-quarters are listed parent companies.
Here are the highlights of our findings:
Just over half (52%) of the companies surveyed have share ownership guidelines in place for their chief executive, chief financial officer, chief operating officer or equivalent. Guidelines are less prevalent at lower levels of the organization. As Figure 1 shows, ownership guidelines are most often expressed as a percentage of base salary.
Figure 1. Prevalence of share ownership guidelines, by organizational level
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The survey also reveals that even fewer companies in EMEA — just over a third — actively enforce their ownership guidelines. And, as Figure 2 shows, where penalties for noncompliance exist, they are often discretionary and focused around future awards. In addition, a third of the companies with guidelines impose no stated timeframe for achieving target ownership levels. Where a timeframe is specified, a five-year deadline is most common.
Figure 2. Penalties for not meeting shareholding requirements
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GOVERNANCE AND SHAREHOLDER ENGAGEMENT
In terms of the internal governance of executive pay programs, almost all (93%) of the companies surveyed now have remuneration committees or the equivalent charged with making decisions about the structure and levels of pay for the organization’s most senior executives. For employees below the senior executive ranks, direct responsibility for pay decisions generally shifts to the CEO or line management. However, remuneration committees in almost half (47%) of the participating companies have additional responsibility over pay for other employee groups.
About two-thirds (65%) of the survey respondents already actively engage with shareholders with regard to executive pay. U.K. companies, in particular, have had longstanding traditions of shareholder engagement and consultation. This engagement takes a number of forms, including:
- Meeting with shareholders to discuss significant changes in the pay package in advance of shareholder votes, cited by almost half (48%) of companies
- Providing written explanations to inform shareholders in advance of pay changes, cited by 40%
- Regular (e.g., annual) meetings with shareholders.
The vast majority (85%) of companies in EMEA have enhanced their shareholder disclosures to demonstrate that executive pay is aligned with performance. For example, 70% report added focus on clarity and transparency in their remuneration report disclosures.
In setting pay, almost all of the companies surveyed give some consideration to realized pay over time, with most giving it a lot of consideration or viewing it as a very important factor in pay decision-making. On the other hand, relatively few companies consider pay levels in the rest of the organization when making decisions about executive pay. Only about a quarter of those in our sample give the relationship between CEO pay and compensation for other employees a lot of consideration or view it as an important factor. Remuneration committees’ focus will likely broaden following adoption of the European Commission’s proposed update of the Shareholder Rights Directive, which puts new emphasis on the consideration of executive pay in the context of pay for other employees. (For more on the proposed directive, see “European Commission Proposes Rules on Say on Pay and Disclosure for EU Companies,” Executive Pay Matters, April 14, 2014.)
Richard Belfield is a director in Towers Watson’s London office who leads the firm’s executive compensation consulting practice in the U.K. and Alex Little is a senior executive compensation consultant in London. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.