On March 7, the European Commission announced its plans to hand over the responsibility for executive pay to shareholders, addressing the staggering ratio of worker-executive pay at big banks, often exceeding a ratio of 100 to 1.
The announcement comes as the Royal Bank of Scotland will pay out £576 in bonuses although it reported massive losses, as well as the Lloyds Banking Group, which unveiled a share bonanza for top executives worth £ 35 million.
Under the draft proposal published, Brussels intends to force Europe’s corporate chiefs not only to justify the pay gap between executives and the average full-time worker but also to justify why this ratio is considered appropriate.
Following the so-called 2012’s shareholders spring, during which investors battled with the boards of Barclays, Citi and Aviva, it is foreseen that the draft proposal will also require shareholders to approve a remuneration policy for directors, which will set a maximum pay and bonus level.
Though at least 10 EU member states already have rules on executive pay, investors and business groups consider this proposal as “weird” and “counterproductive” since the European Commission proposal goes further than the US or UK by requiring a binding vote on a wider range of sensitive remuneration benchmarks. A frosty response from the UK, Germany and other member states is now expected when the European Commission will table the proposal next month once domestic debates over corporate governance reform had no impact on such ratios.
The rules are however unlikely to be agreed before late 2015.
Cartoon by Khalil Bendib