Executive summary
The remuneration of boards and executive management presents concrete challenges for the ownership of SOEs, and it straddles the spheres of corporate and public sector governance. While remuneration schemes falling below market levels may hamper the recruitment of qualified candidates, remuneration levels perceived as being too high can cause a public backlash. This issue also bears relevance in the midst of the COVID-19 crisis, which has increased scrutiny of executive pay packages and may be an opportunity to reconsider executive pay generally to “build back better”.
Recognising the importance of devising adequate remuneration schemes for the board and executive members of SOEs, this report takes stock of the policies and practices underpinning the remuneration of governing bodies of SOEs across 36 OECD member and partner countries. Its main findings can be summarised as follows.
While board remuneration levels are formally approved by the AGM in almost all countries, in practice different procedures exist across countries for setting the amounts of board fees. In countries with mainly commercial SOEs, remuneration seems to either be proposed by the remuneration committees of SOEs or set by the central ownership unit based on private sector benchmarks. By contrast, in countries with policy-oriented SOEs – including those operating under monopoly situations, or with a majority of SOEs of “strategic interest”, remuneration tends to either be set by law or based on public sector wage grids. Such measures were also introduced in countries severely impacted by the 2008 global financial crisis, and have remained in place for the past decade. Some countries also report different procedures according to the corporate form, share of state ownership and listing status of SOEs.
While remuneration levels can vary according to the size of SOEs and their sector of operation, on average, board members of commercially oriented SOEs tend to receive higher fees than those of public policy-oriented SOEs. Overall however, aggregate SOE board remuneration levels seem to stand significantly below those of private companies, which has reportedly hampered the recruitment of competent board members in several countries. Some countries do, however, perceive a vocational element of service to the public interest as a key lever for competent professionals to consider a board position within an SOE, as this may be associated either with prestige or with the fulfilment of a public duty.
There are considerable national differences to the basis by which board members are remunerated across countries. Board members may receive fixed fees, board meeting allowances, or a combination or both, which may be supplemented by additional fees for the membership of board committees. Allowances that cover actual costs related to the board duties, including travelling, are added in some cases. Other forms of remuneration such as short-term bonuses and performance-related compensation are generally not granted to supervisory board members, reportedly to avoid fears that it may compromise their independence by encouraging management to take excessive short-term risks.
Remunerated civil servants on boards can also give rise to potential conflicts of interest, as this may incentivise them to take an excessive number of directorships and to seek board membership in companies with the highest remuneration practices. As such, in many countries where civil servants are allowed to serve on boards and receive compensation, provisions have been introduced to limit the number of board seats that they may fill, as well as to cap their remuneration and to treat them like other independent members with regard to their selection, responsibilities and liabilities.
Practices regarding executive remuneration vary significantly across countries. In countries facing specific political or fiscal constraints, remuneration is generally prescribed by law or by separate government decision, with levels standing (sometimes significantly) below the average of SOEs in other countries and lower than market levels in the domestic economy. On the other hand, in countries where remuneration is set at the full discretion of the board, levels are generally higher – sometimes explicitly based on private sector benchmarks.
Average CEO remuneration in commercially oriented SOEs is double that of public policy-oriented SOEs, except in countries where levels are set by law. In many countries, the disparity between remuneration levels of CEOs of large SOEs and small SOEs is also significant. Some outliers exist by sector, such as the air transport sector, where caps may have been derogated to accommodate generally high sectoral pay levels. Unsurprisingly, the remuneration of the CEO is generally higher than the remuneration of other executive managers. In some cases, the differences actually seem to be smaller than may be expected in the private sector. Executive managers are mostly hired on fixed-term contracts rather than on continuous contracts with terms for termination found in the private sector in a number of countries.
Pay packages of executive managers usually include an annual fixed salary, allowances, fringe benefits and payments to the pension plan, and can also include severance payments. Stock options are generally not allowed. In almost all countries, executive managers’ pay packages also include a performance-based component. The latter, in turn, is capped by the government owner in more than half of surveyed countries, mostly at a percentage of the fixed remuneration component rather than at the absolute level. While limited information is available regarding how performance is benchmarked since these key performance indicators are mostly set at the full discretion of the board and not by government – and thus vary across companies, many countries mention that performance is benchmarked against profitability relative to other companies and compared to the previous year.
In almost all countries, SOEs are required to disclose information on the remuneration levels of executive managers to the general public, along with the remuneration policy including details of the bonus schemes in many countries. In some countries, disclosure requirements apply only to the remuneration of the CEO and/or only in the case of listed companies. Interestingly, some countries which have faced controversy over high executive remuneration have strengthened their disclosure requirements in recent years, in an effort to align them with those applicable to listed companies where information of higher granularity is required to be disclosed. By contrast, the state or ownership entity discloses information on executive remuneration in only around half of the surveyed countries, mainly through a central government portal, or the government or ownership entity’s annual report on SOEs.