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Benedicte Hautefort’s Column

On January 26th, we invite you to our online-event with opinion leaders to identify 223 AGM hot topics. Executive remuneration will, not surprisingly, be in the spotlight.

2022 has been another booming year for business, with luxury goods, transport and tourism taking off again. But the difficulties in China, the war in Ukraine, its impact on energy costs, and above all the soaring inflation were not foreseen. For the first time, Remuneration Committees face the issue of social acceptability in a concrete way. In all European countries, populist parties point at executives compensations to make them the scapegoats for all daily difficulties.

Every day there is a lay-off announcement in the US, employees are on strike to demand wage increases in the name of inflation in France, Norway and the UK, factories are closing because they cannot pay their energy bills. Is it fair to grant managers bonuses of several million euros, in the name of the smooth running of the mechanics of the criteria set in advance? Conversely, is it fair to reduce them, changing the rules of the game ? This is an extremely difficult equation for boards of directors.

Their toolbox this year is more limited than usual. Companies have made extensive efforts to formalise and explain their compensation policies. They have detailed on several pages the choice of their criteria, from turnover growth to cash flow, from gender diversification to carbon neutrality strategy. Bonuses are now relying on measurable criteria, whether short-term or long-term, financial (80% on average) or non-financial (20% on average). It is difficult to deviate from this mechanical pattern, expected by investors. And yet, since executive income is affected by inflation like all other income, boards of directors are looking for solutions.

When variable criteria are now all set, Remuneration Committees have two other area for action: fixed salary increases and exceptional remuneration. Problem: because of a few historical cases, both have become unpopular, with public opinion and with investors.

A further increase in fixed remuneration will be very difficult, after the very important increases of 2021 (19% on average). The Afep Medef Code recommends increases only every three years.

This leaves “exceptional remuneration” as last chance to upgrade executives packages. The voting recommendation agencies, led by ISS and Proxinvest, have warned that there will be no “exceptional remuneration” this year in any way.

In their view, there were too many abuses in 2021.

Historically, a long time ago, when Say-on-Pay did not exist yet, it was a way for the Board of Directors to reward a successful acquisition, for example. But investors considered this to be a lack of transparency, and companies gradually gave it up. The instrument was rediscovered in 2020 by TF1, which paid its CEO Gilles Pélisson an “exceptional bonus” of 230,000 euros so that he would keep the same total remuneration as in 2019 – the calculation of his 2020 variable otherwise resulting in a lower calculation. The explanation was clear. This new use of the ‘exceptional bonus’ was the envy of many … and by spring 2021, this new instrument was everywhere in remuneration policies. The maximum “exceptional bonuses” are part of the bonus of Nicolas de Tavernost at M6 (3.5 million euros), Carlos Tavares at Stellantis (1.7 million euros out of a total of 66 million euros), or Paul Hudson at Sanofi (“exceptional bonus” of 2 million euros per year since 2019), Ilham Kadri at Solvay, or even Stéphane Pallez at Française des Jeux.  Exceptional bonuses’ are not a substitute for variable pay, they come on top.

The season in Europe will start just after our January 26th debate, in a fortnight’ time, with Thyssen and Siemens, two companies whose performance will be heavily impacted downwards in 2022. Scalens teams will be there.


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