(1)

On 14 December 2004, the Commission adopted Recommendation 2004/913/EC fostering an appropriate regime for the remuneration of directors of listed companies (1) and on 15 February 2005 the Commission adopted Recommendation 2005/162/EC on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board (2). The main objectives of those Recommendations are to ensure transparency of remuneration practices, shareholder control on the remuneration policy and individual remuneration through disclosure and the introduction of a mandatory or advisory vote on the remuneration statement and shareholder approval for share-based remuneration schemes, effective and independent non-executive supervision and at least an advisory role of the remuneration committee with regard to remuneration practices.

(2)

It follows from those Recommendations that the Commission should monitor the situation, including implementation and application of the principles included in those Recommendations, and assess the need for further measures. Moreover, experience over the last years, and more recently in relation to the financial crisis, has shown that remuneration structures have become increasingly complex, too focused on short-term achievements and in some cases led to excessive remuneration, which was not justified by performance.

(3)

Whilst the form, structure and level of directors’ remuneration continue to be matters primarily falling within the competence of companies, their shareholders and, where applicable, employee representatives, the Commission considers that there is a need for additional principles regarding the structure of directors’ remuneration, as set out in a company’s remuneration policy and the process of determining remuneration and control on that process.

(4)

This Recommendation is without prejudice to the rights, where applicable, of social partners in collective bargaining.

(5)

The existing regime for the remuneration of directors of listed companies should be strengthened by principles which are complementary to those contained in Recommendations 2004/913/EC and 2005/162/EC.

(6)

The structure of directors’ remuneration should promote the long-term sustainability of the company and ensure that remuneration is based on performance. Variable components of remuneration should therefore be linked to predetermined and measurable performance criteria, including criteria of a non-financial nature. Limits should be set on the variable components of remuneration. Significant variable components of remuneration should be deferred for a certain period, for example, three to five years, subject to performance conditions. Further, companies should be able to reclaim variable components of remuneration that were paid on the basis of data, which proved to be manifestly misstated.

(7)

It is necessary to ensure that termination payments, so-called ‘golden parachutes’, are not a reward for failure and that the primary purpose of termination payments as a safety net in case of early termination of the contract is respected. To that purpose, termination payments should be limited to a certain amount or duration beforehand, which, in general, should not be more than two years’ annual remuneration (on the basis of only the non-variable component of the annual remuneration) and not be paid if the termination is due to inadequate performance or if a director leaves on his own account. This does not preclude termination payments in situations of early termination of the contract, due to changes in the strategy of the company or in merger and/or takeover situations.

(8)

Schemes under which directors are remunerated in shares, share options or any other right to acquire shares or be remunerated on the basis of share price movements should be better linked to performance and long-term value creation of the company. Therefore, an appropriate vesting period should apply to shares, whereby vesting is made subject to performance conditions. Share options and rights to acquire shares or be remunerated on the basis of share price movements should be not be exercisable during an appropriate period and the right to exercise them should be made subject to performance conditions. In order to further prevent conflicts of interest of directors who hold shares in the company, these directors should be obliged to retain a part of their shares until the end of their mandate.

(9)

In order to facilitate the shareholders’ assessment of the company’s approach to remuneration and strengthen the company’s accountability towards its shareholders, the remuneration statement should be clear and easily understandable. Moreover, further disclosure of information relating to the structure of remuneration is necessary.

(10)

In order to increase accountability, shareholders should be encouraged to attend general meetings and make considered use of their voting rights. In particular, institutional shareholders should take a leading role in the context of ensuring increased accountability of boards with regard to remuneration issues.

(11)

Remuneration committees, as referred to in Recommendation 2005/162/EC, fulfil an important role in designing a company’s remuneration policy, preventing conflicts of interests and supervising the (managing) board’s behaviour in the context of remuneration. To strengthen the role of those committees, at least one member thereof should have expertise in the field of remuneration.

(12)

Remuneration consultants may have conflicting interests, for instance when they advise the remuneration committee on remuneration practices and arrangements, and at the same time advise the company or the executive or managing director(s). It is appropriate for remuneration committees to exercise caution when hiring remuneration consultants in order to ensure that the same consultants do not advise the human resources department of the company or executive or managing directors at the same time.

(13)

In view of the importance of the question of remuneration of directors and in order to enhance the effective application of the Community framework on directors’ remuneration, the Commission intends to make extended use of different monitoring mechanisms, such as annual scoreboards and mutual evaluation by Member States. Moreover, the Commission intends to explore the possibilities of standardising disclosure of directors’ remuneration policy.

(14)

The notification of measures by Member States in accordance with this Recommendation should include a clear time-frame for companies to adopt remuneration policies consistent with the principles set out in this Recommendation,