The third Frontis Governance's report aims to identify factors influencing executive remuneration at Italian listed companies, as well as to verify eventual alignment with corporate strategies and shareholders’ long-term interests.
The analysis covers the remuneration policies of 100 Italian listed companies approved in 2014, as well as all remuneration components vested in the three-year period 2011-2013. Each component has been analysed in comparison with relevant key parameters:
- The base salary has been compared with size parameters (such as market capitalisation, total revenues and average workforce), average wages and share ownership structure;
- The variable components have been compared with sector-specific performance indicators (EBITDA, Tier 1 Capital Ratio, and Solvency Margin), and common criteria (EBIT and Total Shareholder Return), both in the short and long term (3 and 5 years).
Together with the remuneration of the Chief Executive Officers, the study analyses at the same level of detail the compensation of all other members of the Board, differentiating between Chairpersons and other members, executives and non-executives.
Remunerations 2011-2013: the alignment of interests
The average remuneration of Italian CEOs stood at €1,746,747 in 2013, down by 13.1% following the increase recorded in 2012 (+5.8% on 2011). A large proportion of the remuneration consists of the basic salary (56%), which is not subject to any performance conditions, whilst the annual bonus accounts for the majority of the variable components (23% of total remuneration, compared with 19% for long-term incentives).
It is not possible to identify any direct correlation of each remuneration component with the main indicators used in the analysis.
- Base salaries are largely independent of company size, in terms of market capitalisation, total revenue and number of employees. However, fixed components appear to be strongly influenced by the ownership structure: companies with a controlling shareholder (holding more than 50% of the share capital) tend to pay their CEOs average salaries that are 29% lower.
- The annual bonus is the only component that increased in 2013 (+18.5% compared with 2012 and +9.4% compared with 2011). Bonuses vested during the three-year period 2011–2013 were generally not aligned with the performance achieved in previous years. The three-year trend in the bonus is in line with the annual changes in EBIT in 10 companies, whilst in only 3 companies has it been possible to verify a clear alignment with the main performance indicators disclosed in the Remuneration Report (Gtech, Interpump and Saipem). Only one company (Astaldi) paid a bonus that was consistently in line with Total Shareholder Return (the bonus increased in tandem with the rise in TSR in the previous year).
- The general independence of variable compensation from performance indicators can still be observed even with regards to the aggregate long-term incentives vested in the three-year period 2011-2013. However, the level of correlation slightly increases when considering the incentives vested only in FY 2013, at least with regards to EBITDA, EBIT and the Tier 1 Capital Ratio. Incentives are still a long way off from clearly aligning with performances, but the higher correlation verified in 2013 may be considered as a result of the closer dialogue between issuers and investors brought about by the introduction of “say on pay” in Italy (in 2012).
- On the other hand, the correlation between incentives and Total Shareholder Return is close to zero, regardless of the reference periods, which still highlights a lack of alignment of interests between CEOs and shareholders in the long term. Taking into account the companies that permitted the payment of long-term incentives, between 2011 and 2013, CEOs received average rewards equivalent to 43.2% of their base salaries, whilst shareholders of the same companies suffered an average loss of 16.9% between 2007 and 2012, which corresponded to the vesting period for the incentives.
The impact of remuneration policies on performance
The study also attempts to verify whether different remuneration structures may affect a company’s performance and the sustainability of its results. The sample of 100 Italian listed companies has been divided into three groups, depending on the CEO’s remuneration structure: (a) including variable components in the short and long term (annual bonuses and long-term incentive plans), (b) companies that reward the CEO in the short term only (no incentive plans), and (c) companies where the CEO does not receive any remuneration components depending on performance (only the base salary).
Through the analysis of long-term results, it has been possible to verify that the remuneration structure not only affects the amount of the compensation, which tends to strongly increase in companies providing for both annual and long-term incentives (on average €6,732,470 in three years, versus €2,715,095 in other companies), but also the quality and volatility of results.
- Companies with a combination of short-term and long-term incentives reported better and more stable EBIT during the five-year performance period of 2007-2012. Over the same period, companies that only offered short-term rewards for the CEO reported average negative and far more volatile results.
- A similar result was observed when taking the TSR into account: companies without performance-related remuneration components reported average negative and more volatile shareholder returns from 2007 to 2012, compared to the better and more stable results achieved by companies that reward the CEO in some way.
Download the abstract (English) here
“Pay on Performance 2014 – Alignment of Interests in the Long Term” is available here (Italian only)