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Understanding Directors' Pay in Europe: A Comparative and Empirical Analysis

99 Pages Posted: 22 Jul 2009 Last revised: 14 Aug 2009

Guido Ferrarini

University of Genoa - Law Department and Centre for Law and Finance; European Corporate Governance Institute (ECGI)

Niamh Moloney

London School of Economics - Law Department; European Corporate Governance Institute (ECGI)

Maria Cristina Ungureanu

Sodali; Genoa Centre for Law and Finance, University of Genoa; European Corporate Governance Institute (ECGI)

Date Written: June 9, 2009

Abstract

This paper analyses the regulatory framework which applies to the determination of directors’ remuneration in Europe and the extent to which European firms follow best practices in corporate governance in this area, drawing on an empirical analysis of the governance systems which European firms adopt in setting remuneration and, in particular, on an empirical assessment of their diverging approaches to disclosure. These divergences persist despite recent reforms. After an examination of the link between optimal remuneration, corporate governance and regulation and an assessment of how regulatory reform has evolved in this area, the paper provides an overview of national laws and best practice corporate governance recommendations across the Member States following the adoption of the important EC Recommendations on directors’ remuneration and the role of non-executive directors in 2004 and 2005, respectively. This overview is largely based on the answers to questionnaires sent to legal experts from seventeen European Member States. The paper also provides an empirical analysis of governance practices and, in particular, firm disclosure of directors’ remuneration in Europe’s largest 300 listed firms by market capitalisation. The paper reveals that, notwithstanding a swathe of reforms across the Member States in recent years and harmonisation efforts, disclosure levels still vary from country to country and are strongly dependent on the existence of regulations and best practice guidelines in the firm’s home Member State. Convergence in disclosure practices is not strong; only a few basic standards are followed by the majority of the firms examined and there is strong divergence with respect to most of the criteria considered in the study. Consistent with previous research, our study reveals clear differences not only with respect to remuneration disclosure, but also with respect to shareholder engagement and the board’s role in the remuneration process and in setting remuneration guidelines. Ownership structures still ‘matter’; these divergences tend to follow different corporate governance systems and, in particular, the dispersed ownership/block-holding ownership divide. They do not appear to have been smoothed since the EC Company Law Action Plan was launched and notwithstanding the harmonisation that has been attempted in this field.

Keywords: Directors’ remuneration, corporate governance, disclosure, European regulation

JEL Classification: G30, G38, J33, K22, M52

Suggested Citation

Ferrarini, Guido and Moloney, Niamh and Ungureanu, Maria Cristina, Understanding Directors' Pay in Europe: A Comparative and Empirical Analysis (June 9, 2009). ECGI - Law Working Paper No. 126/2009. Available at SSRN: https://ssrn.com/abstract=1418463 or http://dx.doi.org/10.2139/ssrn.1418463

Guido Ferrarini (Contact Author)

University of Genoa - Law Department and Centre for Law and Finance ( email )

Via Balbi, 22
16126 Genova, 16100
Italy
+39 010 209 9894 (Phone)
+39 010 209 9890 (Fax)

HOME PAGE: http://www.clfge.org

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Niamh Moloney

London School of Economics - Law Department ( email )

Houghton Street
London WC2A 2AE, WC2A 2AE
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Maria Cristina Ungureanu

Sodali ( email )

9 West 57th Street
26th Floor
New York, NY 10019
United States

Genoa Centre for Law and Finance, University of Genoa ( email )

Genova
Italy

HOME PAGE: http://www.clfge.org

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
Brussels, B-1050
Belgium

HOME PAGE: http://www.ecgi.org

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