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«Recent European Compensation Developments: Financial Institutions and Beyond April 23, 2013 Almost half a decade after the onset of the financial ...»

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 Scenario charts indicating what directors would get paid for performance that is above, on or below target (maximum, on-target and minimum scenarios).

 Principles on which loss of office payments would be made, including how they would be calculated, how the company would take into account the circumstances under which a director leaves and how performance would be taken into account.

 How employee pay and how, if at all, shareholder views have been taken into account when setting compensation policy.

Implementation report A continued advisory shareholder vote would be held each year on a company’s compensation implementation report, which is retrospective in that it sets out how the company’s compensation policy was implemented in the past fiscal year, including actual payments to directors and details on the link between company performance and pay.

The implementation report would cover the following elements:

 A single total figure of remuneration for each director, presented in a specific tabular format disclosing salary, benefits, pension, bonus, long-term incentives and the total remuneration amount.

 Performance against metrics for long-term incentives.

Davis Polk & Wardwell LLP 6  Total pension entitlements (for defined benefit plans).

 Variable pay awarded in the past fiscal year.

 Payments made in the relevant fiscal year to past directors.

 Loss of office payments made in the past fiscal year.

 Total shareholding of directors.

 A performance graph indicating the company’s total shareholder return compared with that of a broad equity market index (the period covered is initially the five most recent fiscal years inclusive of the year in which the report is first produced; this period increases yearly to reach a maximum of the nine most recent fiscal years).

 Percentage increases from the past fiscal year of the CEO’s pay and of the total aggregate pay of all the employees of the company, or a different group of employees chosen by the company with a statement indicating why that group was chosen.

 Percentage details and amounts of retained and distributed profits, tax paid and overall expenditure on pay, identifying within that amount the overall spend on pay for directors.

 Information about who has advised the remuneration committee.

 Percentage details of the votes for and against each of the policy report and the implementation report at the last general meeting at which such votes were proposed, as well as any reasons for significant dissent, where known, and actions taken by the directors in response.

Effective date As noted above, the new regime is expected to come into force on October 1, 2013. Assuming that it does, for any annual shareholders meetings held in the first fiscal year beginning on or after October 1, 2013, companies will be required to produce a director remuneration report in the new format, with a separate policy part and implementation part. At these shareholders meetings, many of which will occur in the spring of 2014, both parts will be put to shareholders for approval.

All companies will be required to successfully seek approval for their remuneration policies by no later than the start of the second fiscal year to begin after October 1, 2013; thus, for calendar year-end companies, this will mean January 1, 2015. After this date, all remuneration and loss of office payments to directors will be required to comply with the company’s approved remuneration policy, or else be separately approved by shareholders. Before this date, any such payments that do not comply with the approved remuneration policy will not be unlawful.

The forward-looking and binding remuneration policy will be required to be put to shareholders at least once every three years, and the backward-looking and advisory implementation report will be voted on once a year. The binding remuneration policy vote will need to be held more frequently than every three

years if:

 The company wishes to change its remuneration policy, in which case the company would be required to obtain shareholder approval; or  If the advisory vote on the implementation report is not passed in a fiscal year where there was no vote on the policy report, in which case the company would be required to hold a binding vote on the policy report in the following fiscal year.

If a company were to fail its binding remuneration policy vote, it would need to continue using its existing policy until a revised policy were approved by shareholders and/or seek shareholder approval for any specific remuneration or loss of office payments inconsistent with the policy. The company would have the choice of convening an extraordinary general meeting to put forward a revised policy or waiting until Davis Polk & Wardwell LLP 7 the next annual general meeting to do so. If a company were to fail its very first binding vote, it would be required to call a general meeting and put a remuneration policy (which could, but need not, be an amended version of the last policy) to shareholders for approval.

The restrictions on loss of office payments will apply from the start of the second fiscal year to begin on or after October 1, 2013 (i.e., January 1, 2015 for calendar year-end companies). There are limited exceptions for judicially compelled payments and payments mandated by other legal requirements.

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Germany On March 12, 2013, the German government announced proposals to regulate executive compensation by shareholder vote and increase transparency regarding executive compensation. Details of the proposals are currently unclear, as no draft legislation has been published, although most commentators expect that the proposals will involve a binding shareholder vote that applies only to German companies.

According to German lawmakers, the proposals could be enacted as early as the summer of 2013.

Spain Also on March 12, 2013, the Spanish government announced proposals to introduce a binding shareholder vote on executive remuneration in the financial services sector and to allow shareholders of financial institutions to impose limits on total remuneration. 10 Although details of the proposals are currently unclear, it is expected that the proposals would apply only to Spanish financial institutions.

Switzerland On March 3, 2013, Swiss voters approved a constitutional amendment known as the “Minder Initiative”, which introduced a series of measures relating to binding say-on-pay and executive compensation, notwithstanding efforts by the Swiss parliament to propose an alternative legislative approach that would have adopted many of the Minder Initiative’s key aspects, but without its punitive rigor. The Minder Initiative measures will come into force no later than March 3, 2014, once implementing provisions have been enacted either by the Swiss Parliament or by the Swiss Federal Council. These measures will apply to Swiss companies, whether listed on a Swiss or overseas stock exchange, and will not apply to nonSwiss companies, even if they are listed in Switzerland.

Say-on-pay Under the measures, shareholders will have a binding annual vote on the total compensation paid to the board of directors, members of management and any advisory board (together, “senior management”).

Other restrictions and requirements In broad terms, companies will be prohibited from making payments of sign-on bonuses, severance payments (and other forms of exit payments) and success fees for M&A transactions to senior management. Companies will also be required, in their articles of association, to set out certain Spain had earlier limited the salaries of senior executives to €500,000 at any bank that received governmental assistance.

Davis Polk & Wardwell LLP 9 restrictions affecting senior management regarding credit facilities, loans, pension benefits, bonus schemes and other compensation plans.

In addition, pension funds will be required to cast their votes in the interest of beneficiaries and to disclose how they voted.

These Swiss measures provide for significant criminal sanctions for violations, including fines of up to six times annual compensation and imprisonment for up to three years.

If you have any questions regarding the matters covered in this publication, please contact any of the lawyers listed below or your regular Davis Polk contact.


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