Say on pay around the world.

Author:Thomas, Randall S.
Position:I. Description of the Say on Pay Regimes: Legal Rules and Voting Outcomes F. Germany 2. Assessment of Shareholder Voting Power on Executive Remuneration Agreements in Germany b. Results of Shareholder Voting on Executive Remuneration through III. Predictions About the Future of Say on Pay, with footnotes, p. 692-731
  1. Results of Shareholder Voting on Executive Remuneration (227)

    While not mandatory, (228) all DAX companies have had their management board remuneration system approved at least once by their general meeting of shareholders since 2010. The general shareholders meetings at three firms, BMW, Beiersdorf and Munich Re approved the system every year between 2010 and 2012, even though the pay system of these companies was not changed in each of those years. Cite. Smaller companies are less keen to provide in a shareholder vote: in 2009 and 2010, 78% of the general meetings of M-DAX companies approved the remuneration system, only 42% of the meetings of S-DAX companies and 63% of the TecDAX companies did so. (229)

    Over this time period, fewer companies have put their executives' pay practices up for a shareholder vote each year. Thus, while 90% of the DAX general meetings voted on the remuneration system in 2010, this dropped to 47% in 2011, and fell even further to 33% in 2012. (230)

    At the same time, at DAX companies, the average shareholder approval rate for the compensation systems decreased between 2010 and 2012 from 91.6% to 89.9%. In the same vein, in 2010 and 2011, over 75% of compensation systems were approved by over 95% of company shareholders. However, by 2012, only 40% of companies' compensation systems were approved by more than 95% of the shareholder votes. (231)

    In one important example, in 2010, the shareholders at Heidelberger Cement rejected the remuneration system of the company. Several other companies have experienced strong opposition to their proposed remuneration system, including Deutsche Bank in 2010 (42% opposed), (232) Deutsche Borse (47% opposed) in 2010, Merck (30% opposed) in 2011 and SAP (35% opposed) in 2012.

    As a result, Deutsche Bank, Heidelberg Cement and Merck resubmitted their remuneration systems for shareholder approval at subsequent general shareholder meetings. In response to Deutsche Bank's efforts to make its remuneration system more transparent (but only modestly changing the system itself) (233), its shareholders cast 94% of their votes in favor of the plan in 2012. Similarly, Heidelberg Cement developed a new remuneration system, (234) and over 96% of its shareholders approved the revised system in 2011. Ironically, Merck added a long-term variable compensation component (235) that actually increased the size of its executives' compensation, but its shareholders' support for the remuneration system went from 70% in 2011 to 87% in 2012.

    Overall, the visible influence of German shareholders' votes on management remuneration systems is modest. Say on Pay is optional, though widely employed. When given the chance, shareholders generally approve of the remuneration systems and companies that experienced significant shareholder opposition against their remuneration system did not necessarily change their systems. There were more medium- and long-term incentive schemes, (236) resulting in more generous remuneration packages, (237) which are less transparent. (238) Whether the low levels of shareholder opposition are the result of companies having private consultations with major institutional investors, as reported in the financial press, (239) is not clear.

    In February 2013, in its latest proposed amendments to the corporate governance code, the German Corporate Governance Commission proposed that the supervisory board set a cap on the amount of total compensation awarded to individual management board members as well as a cap on the components of this remuneration. (240) Some commentators have suggested tying management pay growth to the level of increases in the employees' salaries. (241) The German government has also prepared a new proposal that will make Say on Pay binding for listed companies, but the German elections of September 2013 stopped the pending legislative procedure. (242)

    1. Sweden

      1. Regulatory Framework for Shareholder Approval of Executive Remuneration Agreements

        Swedish public limited liability companies must have both a board of directors and a managing director. The board of directors must be comprised of three members or more. (243) More than half of the members of the board of directors must be elected by the general meeting of shareholders. The articles of association can provide for other bodies to elect the remaining directors, but this power cannot be delegated to the board of directors or one of its members. (244) Large listed Swedish companies commonly have all members of their board of directors elected by the shareholders. (245) In addition to the members elected by the general meeting of shareholders, the trade unions representing the firm's workers get to elect two or three directors to the board. (246)

        The board of directors of public limited liability companies elects a managing director, (247) who is responsible for the day-to-day management of the firm under the guidance of the board of directors. (248) The managing director may also take extraordinary actions if they must be done so quickly that she cannot wait for a decision of the board of directors. (249)

        The general meeting of shareholders determines the remuneration of the board of directors. Since 2006, unlike in France and Belgium, the general meeting of shareholders for Swedish companies sets individual director's fees separately, (250) although individual directors are generally paid about the same. Like in France and Belgium, the directors receive a fixed director's fee with an additional fee for committee work and a flat fee if they serve as chairman of the board.

        In addition, since 2006, the general meeting of shareholders of Swedish listed companies casts a binding vote, a "Say on Pay" vote, for or against the board of directors' proposed remuneration guidelines for determining the remuneration of the managing director and the company's senior management. (251) The general meeting of shareholders must vote annually on the guidelines to be applied in the current accounting period.

        The Swedish Companies Act provides a number of rules regulating the content of the remuneration guidelines. First, the guidelines must be forward looking but limited to the period until the next general shareholders' meeting. (252) Salary and all other types of compensation must be addressed, including the granting and vesting of options and any future payment in securities. When the exact amount of the remuneration cannot be predetermined, the guidelines must contain information on the nature of the compensation as well as the estimated total cost to the company. (253) Further, the company has to disclose information on the remuneration that has been approved by the board but is not yet payable. Also, the guidelines can provide that the board of directors has the right to deviate from these guidelines in individual and specific circumstances. (254)

        Conversely, the Companies Act indicates that when the compensation package requires the company to issue shares, convertibles or warrants for the members of the board, or the managing director, no further guidelines must be provided. (255) The Companies Act itself provides the shareholders the right to approve this type of issuance by a supermajority of 90% of the represented votes and shares. (256) The report of the board of directors must also provide information about the issuance, including the allotment of the shares. (257)

        The Swedish Companies Act states that three weeks before the general shareholders meeting, the company's auditors must provide a report certifying that the company complied with the guidelines approved by the AGM at the prior general meeting. (258) If the auditors opine that the company did not comply, their report must provide the reasons thereof.

        The Act provides little guidance about the appropriate level of detail that must be disclosed in the guidelines submitted to shareholders. However, some things can be inferred from the Swedish Corporate Governance Code. For example, the Code defines executive pay as: "(i) fixed salary or fee, (ii) variable remuneration, including share- and share-price-related incentive programs, (iii) pension schemes, and (iv) other financial benefits." (259) The Corporate Governance Code requires the general meeting to approve every kind of allotment of shares to executives, executive share-price related incentive schemes, and urges the company to provide detailed information on these schemes. (260)

        At public companies, the shareholders also have the right to vote on the issuance of shares, warrants or convertible instruments to the board of directors, the managing director or employees that involve the suspension of the preemption rights of the incumbent shareholders. Such plans require the approval of 90% of the votes at a shareholders' meeting where at least 90% of the shareholders are present. (261) This rule makes it difficult to use most share-based incentive schemes, although many companies make use of alternative mechanisms, like phantom stock.

        There have been some efforts to reduce the level of shareholder input on executive remuneration. In 2009, a governmental inquiry recommended changing the mandatory "Say on Pay" requirements into a less intrusive regulatory comply-or-explain regime, but no action has been taken to implement this recommendation thus far. (262)

      2. Assessment of "Say on Pay" in Sweden

        CEO pay is considered moderate in Sweden. In 2005, the average CEO's pay was below $1 million, less than half of their American counterpart. The pay package was skewed towards salary, bonus and social security contributions, with long-term incentives providing less than 10% of the total remuneration package. (263) Since then, pay has increased, but a recent survey estimated the average pay of the CEO's at the twenty-three largest companies at around 13.5 million Swedish krona (SEK), or less than $2 million, of which only one-third consisted of a variable short- and long-term...

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