Executive Compensation in the European Union

In October 2004, the European Commission announced a non-binding Recommendation that encourages EU member states to adopt certain guidelines to halt excessive director compensation. The Recommendation asks member states to implement four measures (two involving disclosure and two involving shareholder rights). The disclosure guidelines require listed companies to (1) release a statement about their director compensation policy, including a breakdown of performance criteria; and (2) disclose how much individual directors earn and in what form. The shareholder rights guidelines seek to protect shareholders by allowing them to vote (1) on the company’s director compensation policy in a binding or advisory capacity; and (2) to approve company rules regarding stock option compensation.

Recently, Charlie McCreevy, the EU Single Market Commissioner,reiterated that the EU member states should move to adopt this Recommendation. According to McCreevy, less than half of the twenty-seven EU member states implemented the Commission’s Recommendation on director compensation. Allowing shareholders to vote on the payment of board members “would go a long way towards increasing or restoring shareholder confidence and it would force boards to do a whole lot more explaining than is done at present,” said McCreevy. In addition, McCreevy highlights that a vote permits shareholders to determine whether there is a link between executive pay and performance and to object to compensation packages.  

Currently, the EU Recommendation is not legally binding. Thus, unless the EU member states implement the Recommendation, shareholders likely are “unequipped” to constrain corporate excesses. We plan to follow whether additional EU member states voluntarily implement this Recommendation in the future.