How has SRD II changed say on pay in Europe?

Oct 12, 2020
Q&A with Aniel Mahabier of CGLytics

The Shareholder Rights Directive II (SRD II) handed European investors greater say over executive compensation.

Under the rules, investors have a vote on both the remuneration policy and the remuneration report, which for some European markets represents a wholesale shift in corporate accountability over pay. 

Below, Aniel Mahabier, CEO at CGLytics, a data and research firm focused on corporate governance, discusses how the directive has altered remuneration votes across Europe, and what changes are still to come.

How is SRD II changing the landscape of say on pay across European markets?

I break them into a few buckets. You have markets in Europe where there were no pre-existing legal requirements before SRD II on shareholder votes related to executive remuneration. A couple of examples are Austria, Luxembourg, Poland and Finland. Then you have another bucket where we’ll see some material changes on top of the existing say-on-pay regulation. Those markets [include] Denmark, Germany, the Netherlands and Sweden. 

What are some specific examples of the way SRD II is being implemented?

One market where the rules have become stricter is France. One of the material changes is that the remuneration report will be a binding vote. Also, in the past you could isolate and vote against a [specific] director’s pay. Now you are essentially voting against the whole slate of directors. 

In the Dutch market, they put a requirement in the corporate governance code that at least 75 percent of the vote [for the remuneration policy] has to be approved by shareholders. And companies also have to explain how the board accounts for ‘social acceptance’ and the advice of the workers’ council when putting together the policy. So additional layers are being put on SRD II for that market.

What future changes can we expect to executive remuneration stemming from SRD II?

The big one would be in how pay is structured: what the components are, particularly focusing on long-term incentives. With SRD II, there’s also a focus on ESG, making sure that it is more present in company disclosure, in terms of what companies are doing but also in the non-financial metrics of a remuneration plan. We’ve already seen a shift in the market where companies have started to look much more into ESG metrics linked to remuneration practices of directors and executives. Going forward, we’ll see more pressure coming from investors to see ESG metrics in executives’ KPIs. 

How has the Covid-19 pandemic affected this debate?

ESG was something that in the past was a nice-to-have for corporates. What the recent pandemic highlighted is the urgency of having a sound ESG practice in companies and holding executives accountable for the execution of that. We see from our engagements with corporates… that they want to understand what’s best practice from an ESG KPI perspective. What are companies doing in their sector? Should they consider, in the upcoming season, incorporating similar types of KPIs?

What other impacts will SRD II have on how companies approach executive compensation?

With SRD II, it’s becoming much more important that companies show their executive pay practices are very much aligned with their company performance and long-term value creation. They need to disclose that in their reports, looking back five years at how the company performed and how the pay of executives evolved. Investors have always been focused on this topic. But in the upcoming season, with companies disclosing that, we’ll see more scrutiny. 

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