Executive Remuneration in the EU: The Context for Reform
University of Genoa and ECGI
University of Nottingham and ECGI1
This paper shows how clear divergences arise across the EU in how executive remuneration is structured. Sharp differences also occur in the adoption of best practices in pay-setting and in the disclosure of executive pay. These divergences are broadly in line, as agency theory predicts, with blockholding and dispersed-ownership governance profiles. While the EU has recently adopted two important 2004 recommendations on executive pay, the paper argues that EU-led reforms should be undertaken with care. Harmonization should be limited and only address disclosure. Disclosure is central to the adoption of effective incentive contracts in that it can manage the particular agency costs of executive pay, across dispersed and blockholding systems, without intervening in governance choices and structures. Any other interventions in the pay process carry the risk of distorting competition and interfering with the dynamics of different ownership structures and economic contexts.
1 Section III of this paper is based on the answers to a questionnaire on the pre-enlargement EU member states' laws relating to executive remuneration, the full text of which is available on http://www.ecgi.org. The paper also draws on Ferrarini et al. (2003, 2004) and on previous presentations of this research at the University of Milan; Siracusa, Sicily (conference on a Modern Regulatory Framework for Company and Takeover Law in Europe—now published as Ferrarini and Moloney (2004)); London (annual meeting of the Federation of European Securities Exchanges); and Brussels (Centre for European Policy Studies conference on Corporate Governance Reform in the EU).