This article first appeared in Dutch in Mgmt. Scope on 27th May 2019: https://managementscope.nl/online/data-zet-beloning-ceo-in-perspectief

Shareholders are making themselves heard more than ever about the strategy of the company. Certainly the remuneration of directors has gained much attention. Corporate governance analytics – the specialization of CGLytics – helps to separate the facts from the opinions in regards to remuneration policies. This is also not a superfluous luxury: data shows that shareholders are quite rightly concerned.

In recent years, shareholders have been expressing themselves more and more emphatically at General Meetings of Shareholders (AGMs). In 2018, the average number of votes cast at the AGMs of AEX companies reached a record level of 72.4 percent. Never before have shareholders voted so massively on the issues that concern them. The most important topic from a distance: the remuneration of directors. The figures for 2019 are not yet complete, but the same picture emerges.

Remuneration of directors

What does the data say? The remuneration policy, and certainly the alignment of the CEO’s remuneration, keeps the minds of shareholders busy. The average percentage of votes against the remuneration policy of all Dutch listed companies rose to 16.5 percent in 2018. That is more than double the average for the combined years of 2015, 2016 and 2017. The media is also paying more and more attention to the remuneration policy of companies. These are important reasons to take any adjustments to the remuneration policy very seriously. Paying attention to remuneration fits in with the development of corporate social responsibility (ESG practices). Companies must be able to indicate how the remuneration of the CEO contributes to long-term value creation. They must also be willing to discuss their performance in this area. For example, in the amended corporate governance code, the disclosure of the relationship between the remuneration of CEOs and the average employee is already mandatory. The legislation is expected to follow soon.

Pay for performance

An important indicator for value creation in the long term is pay for performance, or the ratio between remuneration and performance. There is still a lot for companies to do in this area. Data from CGLytics shows that the financial performance of companies and the rewards of their CEOs are poorly aligned. 44 percent of the 25 AEX companies – measured over the 2017 financial year – have an imbalance between remuneration and performance. Which means the CEO’s remuneration is higher than expected based on the company’s performance. Over a three-year period, 2015-2017, this is 38 percent. There is also good news. Over the past five years, AEX companies have found a better mix between fixed, short-term and long-term bonuses in their remuneration policy for directors. The average basic salary and the long-term bonuses increased, while the size of the short-term bonuses decreased. It is generally accepted that a fixed compensation and long-term bonuses do more for long-term value creation for stakeholders.

Data provides insight

Data therefore offers important insights; not just for shareholders. It is not for nothing that an increasing number of directors, supervisors, remuneration committees and investors use corporate governance data to test the remuneration policy. Data helps determine an adequate remuneration structure and makes it possible to distinguish the facts from the opinions.

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