Executive Remuneration. A Comparative Overview

ECGI Law Working Paper N° 268/2014. In   this   chapter,   we   analyse   current   trends   in   the   regulation   and   practice   of   executive   remuneration.  No  doubt,  the  role  of  regulation  in  this  area  is  on  the  rise,  particularly  after the recent financial crisis, and the standards as to pay governance and structures are spreading from the financial sector to the non-financial one. As a consequence, today's remuneration practices   are   shaped   not   only   by   the   need   to   reduce   managerial   agency   costs   at   listed   companies   through   appropriate   incentives,   but   also   by   the   hard   and   soft   laws   tackling   corporate   governance   and   remuneration   structures.   Moreover, regulation also responds to social issues and political pressures, reflecting concerns about either inequality in the distribution of wealth or incentives to undertake "excessive" risks in the financial sector. We examine, in particular, the main policy questions concerning incentive pay, including   the   optimal   design   of   stock   options   and   the   importance   of   longterm   pay. Amongst the governance mechanisms, we consider both the role of boards and independent directors,   and   that   of   shareholders   under   say   on   pay   rules,   taking   into   account   the   rise of shareholder engagement in listed companies across the Atlantic. We also analyse regulatory  developments  in  Europe  over  the  last  decade  and  current  postcrisis  proposals   by  the  Commission,  comparing  the  same  with  developments  at  member  state  level  and  in   the  US.  In  particular,  we  highlight  the  impact  of  say  on  pay  rules  on  shareholder  activism,   expanding  on  the  role  of  proxy  advisors  and  the  behaviour  of  large  institutional  investors. We lastly focus on the regulation of pay structures, showing that long-term incentives are clearly favoured for both financial and non-financial companies by either regulators or institutional investors. However, financial institutions are the main target of post-crisis reforms, firstly at international level and secondly in the US and the EU, where the FSB principles  have  been  implemented  along  partially diverging  routes.  CRD  IV,  in  particular, has marked a new trend in the regulation of bankers' pay, by imposing a bonus cap that we  criticize  from  an  economic  perspective  and  which  clearly  goes  beyond  the international principles.