- Approval ratings and shortcomings based on the say-on-pay results of Austria’s leading listed companies at their 2020 annual general meetings
- hkp/// group analysis – annual report evaluation and compensation policy ATX 2019/2020
Frankfurt am Main, November 4, 2020: Due to new legal and regulatory regulations, Austrian listed companies were forced to review the design of their Management Board compensation policies and put them to a ‘say-on-pay’ vote at their 2020 annual general meetings. After the majority of general meetings, the results are mixed. Despite some improvements not all of the companies lived up to their shareholder’s expectations.
The majority of the ATX companies managed to meet the expectations of investors, who already consider approval rates of less than 75% to be critical. Six companies came close to or even fell under this mark and are therefore expected to revise their policies. Of Austria’s second tier listed companies, five missed investor’s expectations and fell below 75% approval. Two companies are even missing the legally required simple majority. The main points of criticism relate to companies lacking a long-term variable incentive (LTI) or criticism of the LTI’s design, the absence of clawback regulations, the possibility of discretionary interventions by the Supervisory Board and inadequate disclosure of performance criteria for variable compensation.
This is the conclusion reached by the current analysis titled “Annual report evaluation and compensation policy ATX 2019/2020” conducted by the management consulting firm hkp/// group. 19 ATX companies (Erste Group will hold the annual general meeting in November) that had already held their annual general meetings at the time of the survey as well as 35 other companies listed on the Vienna Stock Exchange are considered in the analysis.
“The 2020 annual general meetings show that, from now on, listed companies in Austria have to deal with international capital market practices and investor’s requirements for the Management Board compensation,” explains Michael H. Kramarsch, Managing Partner at hkp/// group. He concludes that ATX companies are on the right track, even though past shortcomings have not been entirely eliminated yet and further improvements ought to be tackled quickly. “Institutional investors demand professional standards and respond sensitively to discretionary decisions and inadequate transparency, which have often been encountered in the past. This will be particularly painful for those companies that have not yet been in the public eye,” the corporate governance expert remarks.
Key quantitative results
- 15 of the ATX companies considered in the analysis achieve an approval rating of more than 75% for their compensation policy based on the new legal and regulatory requirements. Investors deem this mark to be the threshold below which subsequent improvement must be made to the company’s policy. To calculate the approval rate, many investors are not considering the vote of anchor shareholders.
- With 99.95%, Österreichische Post recorded the highest investor approval rates for the compensation system in the ATX. Uniqua, Verbund, Raiffeisen Bank, Telekom Austria, AT&S and OMV (all above 99%) are at similar levels.
- Andritz, DO&CO, Schoeller-Bleckmann and Wienerberger are so far the only four ATX companies with approval rates of less than 75%. Andritz is in last place, with 67.89%.
- Two companies, Addiko Bank and ams, have approval rates below 50%.
Shortcomings in compensation policies
- Compensation design: During the current annual general meeting season investors have mostly criticized the compensation designs for the lack of long-term variable compensation, or the fact that performance periods are too short or not clearly defined. The absence of Shareholder Ownership Guidelines for the Management Board Members, and the missing – or ineffective – implementation of malus and clawback regulations in the Management Board compensation are further main points of criticism.
- Discretionary interventions are essentially a red flag to many investors; others believe they are a sensible measure to a comprehensible extent if standards are clearly defined and followed. The criticism in the context of the current annual general meeting season is particularly directed at special bonuses that could granted in an incomprehensible manner, compensation components that are increased at reasonable discretion, and target figures being retroactively adjusted. Sign-on and retention bonuses are also viewed critically from investor’s.
- Transparency with respect to compensation disclosure is the third major issue that investors have been criticizing for some time in ATX companies. With the implementation of the second European Shareholders’ Rights Directive with the Austrian Stock Corporation Amendment Act (AktRÄG), they now have the power to effectively address this criticism. A lack of information about the weighting of KPIs, or at least their subsequent presentation, inadequate target criteria definitions, and an insufficient description of the compensation components are some of the relevant points.
“Investors’ points of criticism coincide with the shortcomings identified in our previous studies on Management Board compensation in ATX companies,” summarizes Jennifer S. Schulz, an hkp/// group study author. “The first-time obligation to vote on the compensation report during the 2021 annual general meeting season gives hope that there will be far greater transparency in the disclosure of short-term and long-term variable compensation. This which will make it possible to draw a differentiated picture of the relationship between company performance, Management Board compensation (i.e. the pay for performance) and international classification,” the compensation expert comments.
Shortcomings on the investor side
The approval ratings and main points of criticism with respect to Management Board compensation determined as part of the current hkp/// group study give clear evidence of the efforts that ATX companies are taking to bring the structure and disclosure of Management Board compensation in line with international capital market standards as per requirements set down in the European Shareholders Rights Directive.
However, there are as many institutional investors’ requirements as there are institutional investors, and they themselves are often insufficiently disclosed and therefore not a good guidebook to satisfy investors’ requirements. “Some investors assert their influence without transparent and action-guiding voting guidelines. They can attack companies at the annual general meeting at will – even legitimately based on the Austrian Stock Corporation Amendment Act,” warns corporate governance expert Michael H. Kramarsch. He advises companies to contact investors proactively and at an early stage if there are any outstanding points and unanswered questions: “Professional investment requires professional action in matters relating to Management Board compensation too. Companies should address investors in their fiduciary responsibility and demand clear guidelines!”