19 January 2021

Marco Visani
Better transparency on remuneration: are Italian companies ready?

The recent changes to the Consob Issuers’ Regulation (December 11, 2020) have significantly strengthened the transparency requirements for remuneration policies and salaries paid by Italian listed companies, in force from the coming stockholder meetings (spring 2021).

These changes have greater impacts on section 2 of the remuneration report, which illustrates the salaries paid to the Top Management.

In particular, companies are required to be more transparent regarding the results achieved compared to the set targets, and to represent, over a period of 5 years, the comparison between management remuneration trends, business performance and the average salaries paid to employees. In brief, companies are required to provide more useful information to understand whether the Pay For Performance principle, so dear to institutional investors, is in fact complied with.

On the other hand this should not come as a surprise, as despite the increasing market pressure, many Italian listed companies have still not complied with this “rule”: from the analyses carried out by The European House – Ambrosetti Observatory on Corporate Governance, it emerges that around 30% of Issuers in our country show an apparent inconsistency between the trends on corporate performance and those on the bonuses paid to the Top Management.

Are Italian listed companies ready for the significant changes introduced by Consob? Analyzing the stockholder meeting votes of spring 2020 on section two of the remuneration report, on a sample of the top 140 Italian companies in terms of capitalization, the results are “plebiscitary”: votes in favor, on average, count for more than 85% of the capital for FTSE MIB companies and over 90% for companies with small/medium capitalization. But if we consider only the vote of the minorities representing institutional investors (thus excluding the companies’ reference shareholder) the report would have been rejected in 35 cases out of 140 (around 25% of the considered sample).

In addition to this, the next remuneration reports will be strongly affected by the COVID pandemic: the market will pay close attention to the contents of section 2, to assess whether payments were made against satisfactory performances. Many investors expect one-off payments and derogations from the remuneration policy: it is fundamental for companies to clearly explain the reflections behind these decisions.

2021 will be the year of the Remuneration Committees, which will have to manage some complicated situations, including: i) managing the trade-off between payment against results and maintaining the motivation of the company population; ii) increasing the loyalty of precious resources; iii) setting up a new long-term system in a period of extreme uncertainty; iv) integrating “sustainable success” into remuneration policies; v) communicating effectively.

All these evaluations require close attention by the BofD and the corporate structures. With a single imperative: to be transparent, while thinking about the most useful level of disclosure for the company.