Assumptions of good practices in the field of remunerating persons holding managerial positions in the companies of strategic importance

Transcription

1 Assumptions of good practices in the field of remunerating persons holding managerial positions in the companies of strategic importance Introduction Remuneration schemes for persons holding managerial positions in the companies of strategic importance need a public debate as the above-mentioned companies, irrespective of the requirement to generate value for shareholders, should additionally pursue a general social mission associated with the sustainable and long-term development of the country. This applies in particular to the problem of ensuring energy and financial security by such companies. However, a general social mission may also include other areas considered as strategic ones (for instance, the Warsaw Stock Exchange's mission is to develop the capital market and not just to maximize returns for shareholders). List of companies of strategic importance can vary depending on emerging risks to the economic growth and on changes in macroeconomic conditions, social issues and challenges resulting from the globalization. A good practice would be if such a list was established. The companies of strategic importance should not be confused with the companies in which the State Treasury holds shares. Methods of control over the companies of strategic importance: regulatory control (for instance supervision of the Polish Financial Supervision Authority over banks), ownership control (for instance, shares of the State Treasury in certain companies), debt control (for instance state or BGK guarantees), it should be coordinated. Incentive systems and management contracts concluded with persons holding managerial positions are an important part of improving supervision over the companies of strategic importance. The purpose of this recommendation is to formulate principles and rules governing good practices that could be helpful in improving systems of remuneration of persons holding managerial positions in the companies of strategic importance.

2 Principle 1 The supervisory board should be consulted and should approve general principles of the remuneration policy and incentive schemes for persons holding managerial positions, which: do not encourage an excessive risk-taking in the hope to improve short-term performance, support achievement of the company mission and strategy and reduce conflicts of interest. Persons holding managerial positions, apart from to members of the company management board, should in particular include: persons reporting directly to the members of the board, chief accountant persons responsible for the control and supervision, especially the head of internal audit, every person receiving total remuneration close to the remuneration of the persons mentioned above. Incentive schemes for persons holding managerial positions should be synchronised with the company's strategy and managerial contracts concluded with the members of the management board. Principles and level of the remuneration in the case of persons holding managerial positions is determined by the supervisory board after examining opinion by the remuneration and succession committee made up of the supervisory board members. The board periodically reviews the company policy regarding remuneration of persons holding managerial positions, with the proviso that the remuneration policy with respect to the head of internal audit services should be reviewed by the audit committee of the supervisory board. The board develops rules governing policy of succession at the company s managerial position at least three years in advance. Principle 2 The fixed remuneration of the members of management boards in companies of strategic importance should be a function of the level of market remuneration in other companies of similar size in Poland, or - if there are no such companies in the country - abroad. The purpose of this rule is that a strategic company should be able to attract from the market talented managers who gained their professional experience in international companies. It is worthwhile trying to make a broader comparison of the managerial salaries outside the industry, for instance in consulting or investment firms, careers in which are an attractive alternative for managers in Poland. This means that in the case of companies that are leaders in their industries, fixed remuneration may be lower or higher than the average one but as a rule should not (with the exception of individual cases) differ from the median for a given sector by more than one standard deviation. The final decision as to the specific sum should each time be subject to negotiations that would, on one hand, take into account the needs of the candidate, and on the other hand - the quality of alternative applications. Fixed remuneration in strategic companies should be competitive as compared to other private companies, also in order to avoid rewarding excessive risk undertaken by management boards,

3 which is identical to systems in which the fixed part of the remuneration is low and managers are motivated mostly by high bonuses. Many countries in the European Union put more and more emphasis on these issues. It is recommended to link salaries of the management boards in the strategic companies to the market level rather than the level of average wages in a given company or in the whole economy. All such solutions are eventually withdrawn as they are deemed rather destructive than generating value of the companies in the long term. Given the nature of the work performed by the management board, the supervisory board should first consider conclusion of an employment contract for a definite period of time in the form of a managerial contract. Conclusion of a contract for an indefinite period of time should be duly justified 1. The fixed part of the remuneration should include benefits in kind and social services, such as use of a company car for private purposes, medical care, individual insurance, etc. Principle 3 One should consider division of the variable part of the remuneration into three separate components: 1. Annual cash bonus paid in cash. Normally, the bonus should be based on the bonus plan approved by the supervisory board and conforming to the methodology of management by objectives. Typical targets for management boards should be both measurable and qualitative, and include: 1) achievement of the financial results for a given financial year, 2) measurement of the return to shareholders relative to other comparable companies, 3) measurement of the company's cost of risk, 4) strategic objectives (presented in the form of balanced scorecard), including efficient and effective completion of investment projects. 2. Bonus deferred in the medium term, paid partially in cash and partially in instruments related to the company stock price. An employee may not sell these instruments earlier than according to the principles laid down by the company. The most popular period of postponement is three years. 3. One should also consider a possibility of postponing the part of variable remuneration for a period longer than three years. Examples of the Scandinavian countries and Finland, but also some international companies (including companies present in Poland) show it is appropriate to allocate part of the remuneration to e retirement scheme, paid whole (or in a large part) by the employer. The latter solution would require, which is worth emphasizing, specific legal solutions for pension funds. In the guidelines of authorities supervising financial sector it has been recently pointed out that the pension policy should encourage care about the long-term value of the institutions, as well as constitute part of long-term incentive plans. 1 According to the ordinance no. 3 of the Minister of State Treasury of 28 January 2013 on the principles of the corporate governance over the State Treasury Companies.

4 It seems reasonable that the ratio of annual bonus to the medium-term and long-term deferred premium was in proportions determined by the managerial services market 2. It would be a good practice to define these relationships in accordance with the trends on the European market, taking into account industry specifics and size of companies. Experience learnt from the recent crisis has shown that incentive schemes which are too "aggressive" and contain a high variable part, led to an excessive focus on short-term results of the companies and increased the risk of bankruptcy. Deferral of bonuses over time and introduction of the bonus pool recommended below may significantly increase share of the variable part and overcome negative consequences while maintaining strong incentives aimed at increasing the company's value. In many businesses which are characterized by a sustainable growth of their value, remunerating persons holding managerial positions in the form of shares or share options constitutes an important part of LTI programme 3. It is also widely believed that it reduces negative consequences of the separation of management functions from the ownership ones as extensively described in the theory of agency. Principle 4 It is recommended for managerial contracts concluded with executives, especially in the case of two deferred bonuses as described above, to use a bonus-malus system, which rewards for completing tasks but punishes in the case of failures to complete these tasks. The system consists in the payment of the part of bonus as a deposit rather than it in full. In most cases it is a part of the bonus exceeding the planned amount. The value of the deposit may be correlated with the value of the company (for instance stock price). In the case of destruction of the shareholder value or a significant failure in the achievement of the planned objectives, a part or all of the deposit is liquidated. The positive value of the deposit is successively paid within 3 to 5 years. This allows to avoid significant fluctuations of the bonuses, as well as protects against "buying over" managerial staff by competitors. In Poland, such a system is currently used by the Warsaw Stock Exchange Company. Putting it simply, from the formal point of view the bonus-malus system, often called a bonus pool (this is a proposal made by the consulting company Stern Stewart) is a conditional obligation to pay the management board a bonus in a specified amount if the board does not destroy the company value in the coming years. In view of the fact that bonus pool system poses a risk of its loss by the managerial staff, it would be a good practice to offer in such cases bonuses that are higher than bonuses provided for in contracts in which there is no such risk. 2 The Ministry of State Treasury recommends that the variable part should account for 40% of the total remuneration of managers in state-owned companies. Currently, the Ministry provides no possibility for the remuneration in the form of capital instruments. Best Practices in shaping the amount and components of the remuneration in the case of managerial contracts concluded with the members of selected state-owned companies. Ministry of State Treasury, 3 April It is worth considering certain changes in this area, building on the experience in the field of prudential regulations of the banking supervisors in response to the crisis, including Resolution of the Polish Financial Supervision Authority no. 258/ One of the safest Polish banks has for many years been using share options with a deferred by several years date for the exercise of the right to acquire a specified number of shares at the average rate for the month prior to the conclusion of the managerial contract as a form of remunerating persons holding managerial positions.

5 Principle 5 Automation rather than discretion should be a good practice allowing an objective assessment of the management board work. The aim should be to ensure that the largest possible portion of the variable remuneration be a result of automation rather than discretion and negotiations. The discretionary should part should not exceed 30% of the total variable remuneration. Too frequent changes of the system and a too big discretionary part diminish the power of motivation. The ratio between the fixed and variable parts should be set for a given company in a cycle not shorter than three years, preferably five or six years, with a possibility to review it every three years, which in the Polish realities translates into a single term of office of the supervisory board and the management board.