Golden Parachutes Face Clampdown in EU Law on Executive Pay

Golden parachute pay packages to departing company executives may face greater scrutiny from shareholders as part of European Union proposals to stem excessive awards.

Michel Barnier, the European Union’s financial services chief, said he’ll seek to give shareholders more power to veto compensation packages, including payouts to exiting managers, in a draft law later this year.

“Lucrative severance packages for managers who have underperformed are the subject of increasing criticism,” Barnier said in prepared remarks for a speech in Dublin today. “Shareholders now care about the relationship between executive compensation and the performance of the company,” he said.

The European Commission’s push for more shareholder power over pay adds to binding curbs on banker bonuses that were agreed on by the EU this year. Barnier said that his plans were inspired in part by a referendum in Switzerland on limiting bonuses.

“First of all, we need more transparency on remuneration, and secondly, shareholders should be given a binding ‘say on pay,’” Barnier said. “Our revision of the Shareholder Rights Directive will address these issues. I intend to present the legislative proposal after the summer,” he said, adding that the proposals would apply to listed companies.

Increased Scrutiny

Payments to top managers in the EU are under increased scrutiny amid the bloc’s recession and austerity measures from Ireland and Spain to Cyprus. The commission sees the EU economy shrinking 0.1 percent this year, a second annual contraction, before returning to growth in 2014.

A U.K. pension group recommended last month that members vote against London-based AstraZeneca Plc’s remuneration policy at the company’s annual general meeting on April 25 to protest a so-called golden hello payment and planned incentives for Chief Executive Officer Pascal Soriot.

Novartis AG met similar pressure earlier this year over plans to pay outgoing Chairman Daniel Vasella $77 million as part of a non-compete agreement. Vasella’s golden parachute came to light after details were leaked to the press, leading to a public outcry in Switzerland and prompting him to give up the money.

Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester last year waived his 963,000-pound ($1.5 million) bonus after the U.K.’s opposition Labour Party said it would ask the national parliament to vote on the award at the bailed-out lender -- part of a series of pay revolts by bank investors that Barnier described as a “shareholders’ spring.”

“The financial crisis has shown that excessive bonuses can lead to excessive risk-taking,” he said in today’s speech. “Big bonuses also raise issues of social justice.”

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