Over the past few years, partly due to the financial crisis, executive remuneration at listed companies has become a critical issue in the dialogue between issuers and shareholders, who have often contested the gap between top managers’ compensation and the value created. The Frontispiece Governance’the report analyses All remuneration components in the most minute detail of the CEOs and Board members of 98 Italian listed companies. The purpose of the study is not to define whether overall compensation is too high, but, as the title states, to evaluate its actual alignment to the company’s goals: are remunerations effectively structured to pay for performance?
Since the first year of implementation, the shareholders’ vote on remuneration reports has shown its full strength: in 2012, the level of dissent was so high as to define that proxy season as “the shareholders’ spring”. Nonetheless, one of the main and clearest effects of the introduction of say-on-pay in Italy is a Greater transparency on executives’ remuneration structure. The analysis of 2012 remunerations is therefore highly relevant for at least two reasons: for the first time it is possible to observe the changes of each component over time, also allowing an initial evaluation of the closer dialogue between issuers and minority shareholders.
Methodology and contents
The Frontispiece Governance’s study, Pay for Performance? Analysis of 2012 Remuneration in Italian Listed Companies, scrutinises the compensation structure of 98 largest Italian issuers. All remuneration components are analysed by their nature (cash, shares or stock options) and relevant Vesting period (base salary, annual bonus and long-term incentives), in order to compare each amount through appropriate parameters: company's size, operating results and stock market performances, achieved the previous year and in the long term.
The second part of the study focuses on the remuneration vested in 38 FTSE MIB index components, widening the analysis to the entire Board of Directorsthe CEOs, the Chairpersons and all other members, differentiating the executives from the non-executive ones.
Finally, thanks to the partnership with the international network of proxy advisors ECGS (“Expert Corporate Governance Service”), it has been possible to compare the remuneration structure at Italian large-caps with a sample of European peers, operating in the same sectors represented in the FTSE MIB index.
Highlights
Remuneration of Italian CEOs increased by 27.5% in 2012 (+31.3% across 38 FTSE MIB companies), but the in-depth analysis led to much more nuanced conclusions, which in some way answered the initial question:
- The amount of base salaries seems to be completely independent of the company’s size, both in Italian companies and in comparison with their European peers: the average fixed component of Italian CEOs ranked second in Europe, even with a lower market capitalisation.
- Annual bonuses seem not to be correlated with Any performances achieved in the short term, both in terms of operating criteria and total shareholders’ return.
- The alignment between the Motivations à long terme and the value created is not clear, but it is possible to verify a higher correlation of vested incentives with Operating performances (in terms of EBITDA, Tier 1 Ratio or Solvency Ratio, according to relevant industry standards).
- The introduction of say-on-pay has already had clear positive effects: the The quality of disclosure has improved. with regards to long-term incentive plans (while annual bonuses still represent a critical issue) and several companies changed some remuneration clauses (better defining the severance provisions or eliminating discretionary variable components), often urged by shareholders.
- The results of last proxy season confirm the positive effects of closer dialogue between companies and their financial stakeholders. dissenting votes, coming from strictly independent shareholders, fell by 17.3% in 2013, to 30.2% from 36.5% in 2012.
Download the full report here: Analysis of 2012 Remuneration in Italian Listed Companies