Executive remuneration Navigating the complex global landscape and the growing regulatory environment 26–29 October 2014
Executive remuneration
Navigating the complex global landscape and the growing regulatory environment
26–29 October 2014
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Disclaimer
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Introduction
► In today’s session, we will cover:► The global evolution of “say on pay”► Learn about leading practices for achieving and driving business
performance► Practical examples of AXA’s ability to navigate this complex global
landscape
People and remuneration
strategy
Business challenges and
opportunity
Financial services and general regulation
Investor focus
Reputation, public perception and media scrutiny
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The recent decade demonstrates a global trend toward stronger say on pay in executive remuneration
► U.S. Securities and Exchange Commission (SEC)
► Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)
► Sarbanes-Oxley Act (SOX)
► Minder Initiative
► Swiss Code of Obligations
► Swiss Code of Best Practice
► Directive on Corporate Governance
► Corporations Legislation Amendments Bill 2012
► FAS123R revised
► Department for Business, Innovation & Skills (BIS) regulation
► VorstAG
► German Corporate Governance Code (GCGC)
► InstitutesVergV
► 9 April 2014
► EU proposes a revision of the Shareholder Rights Directive (2007)
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Banking regulation has also continued to expand globally
Founded in the G20FSB principles, banking regulation globally has evolved to focus on sustainable risk and economic systems CRD III and CRD IV
Asset management
Banking andcapital marketsInsurance
AIFMDUCITS V
FSB principles
CRD III
CRD IVAIFMD & UCITS
FSB principles set global banking standard on approaches to remuneration including deferrals and clawbacks
Initial EU regulations
Solvency regulations have not evolved as quickly as expected; shifting insurance frameworks have resulted in a “wait-and-see” approach AIFMD: Alternative Investment Fund Managers Directive
UCITS: undertakings for the collective investment in transferable securities
FSB: Financial Stability Board CRD: Capital Requirements Directive
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Impact of conflicting stakeholder perspectives
• Organizational strategy has evolved with improving economy• Focus on compliance in 2013 may have resulted in less alignment
with business needsBusiness strategy
• Increased use of longer term incentives in balance of pay• Longer vesting/holding periods have increased time horizon• Consideration of post-employment holding requirements
Shareholder alignment
• Continued restraint on pay due to increased disclosure• Increased adoption of clawback/malus clauses• Broader focus on pay alignment with risk tolerance and appetite
Regulatory pressures
• Continued high level of focus on quantum/level of pay• Continued misinterpretation of salary vs. total pay, opportunity
and deliveryMedia and public perception
• Wider workforce needs alignment with executives• Disclosures have increased focus on broader employee base• Need for enhanced opportunity for true “value creators”
Talent market
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This is highlighted in EU’s proposed say on pay proposal
The updated Shareholder Rights Directive proposal states that shareholders of companies listed in the European Union are to be given:
i) A binding vote on executive remuneration policy every three yearsii) An annual nonbinding vote on how the policy has been implemented
► There is, however, varying impact from country to country
i) Key requirements for the executive remunerationreport
ii) Key requirements for the disclosed policy statement
Total remuneration received by each executive
How the policy links to the long-term interests of the company
Maximum amounts that can be awarded and the mix of fixed and variable pay
The relative change in over three years in remuneration Details on each remuneration element, including performance criteria for variable pay
Main contract terms, including notice periods and termination payments
Information on any reclaim of variable pay (e.g., clawback)
The ratio between the remuneration for the average executive and that for the average full-time employee below the executive level
Information about the pay decision–making process, including significant policy changes
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Legal perspective on compensation challenges – recent challenges in Europe
► Clawbacks vs. illicit financial sanction of employees► Clawbacks set up in the United Kingdom, permitting to take back bonuses to bank
employees who were negligent, can be illicit in other countries.► For example, in France, bonuses, and more generally remuneration of employees,
cannot be conditioned to the employee’s good behavior. Negligence, wrong behavior and misconduct can only be sanctioned by disciplinary measures.
► Equal pay for equal work vs. differentiated reward for high talents► Principle established at the European Union level and is transposed in most
countries.► The challenge is to differentiate high performance with average performance, and
to comply with this principle. Objective criteria must be established and transparent. ► Principles of free movement of workers vs. social dumping.► There is still a problem against which the European Union seeks solutions. ► Difference of salaries and social security costs between European countries cause
social dumping. ► European Union tries to better monitor and regulate posting employees, to avoid
social dumping and to promote fair and efficient free movement of workers.
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Legal perspective on compensation challenges – works councils in Europe
► European countries: ► Staff representative bodies may be involved and disclosure of
compensation may be imposed in some countries (e.g., unions, Works Council, European Works Council, etc.).
► Examples of European countries with rules on transparency toward the staff representative bodies:► France: annual report to be delivered by the employer to the Works
Council related to the economic situation of the company that contains information related to the evolution of compensation.
► Germany: the Works Council is informed of all employees remuneration. ► Belgium: works councils and trade unions: right to information and
consultation on remuneration of executives in listed companies and autonomous public enterprises and supplementary pension schemes.
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Legal perspective on compensation challenges and mobility – key issues to consider
► Key issues to consider when moving employees across Europe:► Anticipate remuneration challenges by being well advised, considering
remuneration policies globally► Use variable pay and new flexibility opportunities to control HR costs► Use benchmarking with a peer group of companies when determining
compensation levels and structure► Consider local laws and the tax treatment of compensation► Consider pension benefits, and the timing of compensation which may
have an impact on social security charges► Remember works council and trade union requirements► Be legally sensitive to unexpected local rules► Be culturally sensitive to local cultural expectations
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Longer-term implications
Focus Unintended consequences
Greater transparency in executivecompensation ► Visibility often results in increased pay
Demonstration of link between pay and performance
► Public and media perceptions often misinterpret information ► Challenge in balancing perspectives
Investor rights and engagement ► Investors are not always homogenous in their decision making► Fatigue in investors to manage the conflicting opinions
Performance focus ► Competitive disclosure of sensitive information
Average compensation ► Definition of average can be subjective ► Is a lower ratio better?
Corporate responsibility agenda ► Growing agenda resulting in difficulty keeping up to speed
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Key trends impacting remuneration policy
► Bespoke performance metrics► Increased usage of business unit
and geographic long-term incentive (LTI)
► Quantification and measurement of non-financial metrics
• s
► Demonstrate the alignment between business strategy and shareholder value
► Growing application of LTI vehicles► Quantifying metrics to connect
more with brand and customer
► Simplification in remuneration design
► Executive base salary increases being limited to those received by the wider workforce
► Continued communications to ensure alignment of reward
► Increases in pay will be linked to incentives — not fixed pay
► Clearer distinction between clawback and malus
► Increase in the number of vested long-term incentive plan (LTIP) awards
► Consideration of holding periods post termination
•
• s
► Growing application will likely reduce perceived value of awards, and will require further communication
► Increase of vesting and holding periods
Business alignment
► Improving levels of mobility and increased competition for talent
► Need to ensure that there is a globally consistent reward framework which is also market competitive
Investor focus
Regulatory requirements
Talent and workforce
Stakeholder perspectives Key trends Implications for talent and reward