Executive Compensation - Panel Contribution by Christian Strenger*

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Executive Compensation -Panel Contributionby
Christian Strenger
IFC (World Bank Group) Global Corporate
Governance Forum
EU Corporate Governance Seminar
Session I Key Pillars of EU Corporate Governance

• Brussels, 20 February 2008

Deputy Chairman, Private Sector Advisory Group
of the Global Corporate Governance Forum
Member of the German Government Commission on
Corporate Governance Member of the Supervisory
Board, DWS Investment GmbH, Frankfurt
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Christian StrengerExecutive Compensation

• The executive compensation problem

• The practical significance for companies
• Excessive CEO compensation is in the US the
  single most important litigation risk for
  companies
• In Europe attention to excesses in compensation
  has grown sharply with social balance
  ramifications

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Christian StrengerExecutive Compensation
II. The EU Commission's approach to executive
compensation (1/2)
1. No common approach in the EU

• No EU-wide code of corporate governance
  instead 27 different
• codes
• Diversity of the EU leads to a problem for
  multi national companies
• Due to the specific market characteristics a
  one-size-fits-all approach would be
  counterproductive

2. The EU's approach to governance(-convergence)
(1/2)

• The EU's approach to governance is principle
  based seeking the implementation of
  basic governance aspects, leaving the detailed
• application to the member states

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Christian StrengerExecutive Compensation
II. The EU Commission's approach to executive
compensation (2/2)
2. The EU's approach to governance(-convergence)
(2/2)

• EU Commission adopted in 2004 a non-binding
  'Recommendation'
• on the remuneration of directors
• The key principles are

• Disclosure of the remuneration of individual
  executives (incl. termination payments)
• Disclosure of the remuneration policy (incl.
  contract terms
• for directors)
• Shareholders' vote on the remuneration policy
• (binding or advisory)
• Prior shareholder approval of share and share
  option schemes

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Christian StrengerExecutive Compensation
III. Main governance issues regarding the EU's
recommendation and other best practice principles
on executive compensation (1/6)

• EU Commissions recommendations on directors'
  compensation have not yet met with the desirable
  high level of acceptance
• Major deficits regarding executive compensation
  in the EU are

• Individual disclosure of executive remuneration

• Some European countries still only provide
  executive remuneration as an aggregated
  amount

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Christian StrengerExecutive Compensation
III. Main governance issues regarding the EU's
recommendation and other best practice principles
on executive compensation (2/6)
Recommendation for improvement

• Fixed and variable compensation details of the
  fixed and variable compensation
  components
• Variable compensation elements instruments to
  be linked to appropriate performance
  benchmarks
• Long term incentives link between a director's
  and company's performance to be disclosed
• Other benefits to be disclosed in sum
• Positive examples France and UK

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Christian StrengerExecutive Compensation
III. Main governance issues regarding the EU's
recommendation and other best practice principles
on executive compensation (3/6)
2. Disclosure of the remuneration policy

• Commission policy is followed only by about 60
  of the EU Member States

• Important aspects for the disclosure of the
  remuneration policy
• Setting and disclosure of relevant criteria
• Immediate execution of share options when
  executives leave a company
• Positive examples France and UK

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Christian StrengerExecutive Compensation
III. Main governance issues regarding the EU's
recommendation and other best practice principles
on executive compensation (4/6)
3. Shareholder vote on the remuneration policy
an uneven picture

• EU Commissions recommendation on a shareholder
  vote on the remuneration policy as a whole
  is hardly accepted

Positive examples Spain, Netherlands, Belgium
(not fully implemented)

• The British way- non binding shareholder vote

• The GM must include a resolution approving the
  Directors'
• remuneration report but not individual
  compensation

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Christian StrengerExecutive Compensation
III. Main governance issues regarding the EU's
recommendation and other best practice principles
on executive compensation (5/6)
4. Adequate compensation structures
Key aspects are

• Necessary link to long-term profitability and
  individual success
• Share based compensation must be a substantial
  part of the
• compensation package
• Supervisory boards must avoid excessive share
  based compensation
• Avoidance of 'pay for failure' by appropriate
  length of employment contracts
• Avoidance of excessive severance packages

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Christian StrengerExecutive Compensation
III. Main governance issues regarding the EU's
recommendation and other best practice principles
on executive compensation (6/6)
5. Compensation committees necessary to achieve
equitable solutions for executives and
investors

• Widely implemented key challenge improvement
  of
• committee quality
• European average 95 of companies have a
  compensation
• committee - however only 40 of the DAX
  companies
• Oversight of executive pay programs to be
  executed by
• directors with appropriate skills, knowledge
  and experience

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Executive Compensation -Panel Contributionby
Christian Strenger
IFC (World Bank Group) Global Corporate
Governance Forum
EU Corporate Governance Seminar
Session I Key Pillars of EU Corporate Governance

• Brussels, 20 February 2008

Deputy Chairman, Private Sector Advisory Group
of the Global Corporate Governance Forum
Member of the German Government Commission on
Corporate Governance Member of the Supervisory
Board, DWS Investment GmbH, Frankfurt