1. Setting the scene: rationale, scope and methodology
The governance of the remuneration of board members and key executives of listed companies has received considerable attention in the past decade.1 By contrast, the issue of executive and board remuneration of SOEs has to date apparently not been addressed in detail by other international organisations and standard-setting bodies. While this report fills an important gap, it is also aiming to assess the degree to which SOE practices coincide with, or depart from, the practices in listed companies.2
Overall, the remuneration of boards and executive management presents concrete challenges for the ownership of SOEs. While remuneration schemes for SOE board and executive members should reflect market conditions to the extent that this is necessary to attract and retain qualified directors and executives, in practice it seems that remuneration in many OECD countries falls below market levels. This reflects inter alia the fact that governments seek to avoid public controversy over excessive pay in the public sector. A further concern is that the excessive remuneration of underperforming SOEs provides the wrong incentives for executive and board members, and hence can lead to inefficiencies and a lack of accountability.
In particular, remuneration levels perceived as being too high – especially with regards to variable components of remuneration such as bonuses and/or redundancy payments – can cause a public backlash, especially when these do not seem to reflect the SOEs’ performance. For instance, in several OECD countries the remuneration of CEOs of SOEs in the aviation sector has received media attention a few years ago (e.g. in Finland and Latvia), in some cases leading to corrective measures by the state (Reuters, 2018[1]; Baltic Times, 2014[2]; Finnair, 2018[3]). More broad-based controversies have also arisen in some other countries, including in New Zealand, where SOE executives have been alleged to receive high performance bonuses “regardless of how the organisation is doing”, and in South Africa, where the media has repeatedly criticised in recent years the remuneration packages and annual bonuses of executive and board members of “loss-making” SOEs that “fail to deliver services” or are “frequently bailed out with public funds” (Stuff, 2018[4]; University of the Witwatersrand, 2020[5]).
As a result, many countries have introduced some limits and restrictions on the remuneration and employment conditions of SOE board and executive members (OECD, 2013[6]). However, such limits can also have adverse effects, as uncompetitive remuneration levels can impact SOEs’ ability to attract competent candidates from the private sector, therefore impacting the quality of boards and executive management. In Korea for instance, the remuneration of non-executive directors has risen considerably for the last 10 to 15 years in order to attract more professional candidates (OECD, 2018[7]). In Croatia, SOEs reportedly encounter similar difficulties in hiring members with sectoral experience in view of the poor remuneration of SOE boards as compared to competitors in the private sector (OECD, 2021[8]). Uncompetitive remuneration levels can also limit the pool of qualified candidates by detracting foreigners from considering board membership – a concern raised recently in the case of Ukraine (OECD, 2021[9]).
Recognising the importance of devising adequate remuneration schemes of board and executive members of SOEs, this issue also bears relevance in the midst of the COVID-19 crisis, which has brought executive remuneration (of listed companies in particular) into the spotlight with directors encouraged to “share the pain” of employees and investors by forgoing salary, bonus and share-based awards, particularly where shareholders have had dividend payments cut. While it may be argued that the crisis stands as an opportunity to reconsider executive pay generally in order to “build back better”, increasing scrutiny of executive pay packages is also expected in years to come.
The subject of board and managerial remuneration is to some extent covered by the OECD’s existent SOE-related instruments. While the OECD Guidelines on Corporate Governance of State-Owned Enterprises (“SOE Guidelines”) state that the remuneration of both SOE boards and executive management should be aligned with the long-term interest of the enterprise, and effectively identify some of the main issues underpinning board and executive remuneration, they offer little advice on how best to address them (Box 1).
Board of directors
With regard to the boards of directors, the SOE Guidelines posit that “[t]here is a strong case for aligning the remuneration of board members of SOEs with private sector practices. … However, care should also be taken to effectively manage any potential backlash against SOEs and the ownership entity due to negative public perception triggered by excessive board remuneration levels. This can pose a challenge for attracting top talent to SOE boards, although other factors such as reputational benefits, prestige and access to networking are sometimes considered to represent non-negligible aspects of board remuneration” (annotations to Chapter II point F).
Executive management
Concerning the executive management, the SOE Guidelines further offer that boards should “decide, subject to applicable rules established by the state, on the compensation of the CEO. They should ensure that the CEO’s remuneration is tied to performance and duly disclosed. Compensation packages for senior executives should be competitive, but care should be taken not to incentivise management in a way inconsistent with the long-term interest of the enterprise and its owners. The introduction of malus and claw-back provisions is considered a good practice…” (annotations to Chapter VII, point B). This effectively recommends the inclusion of a performance-related element in executive managers’ pay packages.
Transparency and disclosure
Finally, on the issue of transparency and disclosure, the SOE Guidelines observe that “[i]t is important that SOEs ensure high levels of transparency regarding the remuneration of board members and key executives. Failure to provide adequate information to the public could result in negative perceptions and fuel risks of a backlash against the ownership entity and individual SOEs. Information should relate to actual remuneration levels and the policies that underpin them” (annotations to Chapter VI, Point A). It indicates that it is considered in the interest of ownership entities to opt for maximum transparency, even at the risk of spurring public anger by disclosing pay levels that may be considered as excessive.
Source: OECD (2015[10]), OECD Guidelines on Corporate Governance of State-Owned Enterprises, https://www.oecd.org/corporate/guidelines-corporate-governance-soes.htm.
Against this background, this report provides a comprehensive mapping of the remuneration practices in OECD member and partner countries, along with a review of examples of recent and ongoing reform. As such, the report covers (i) direct action and rules implemented by the state as an enterprise owner, (ii) ownership policies, owner’s expectations and guidelines issued by the state, and (iii) general laws and regulations bearing on SOE remuneration. While detailed information on remuneration systems is provided for both board and executive members of SOEs, for executive managers in particular, consideration is given to the extent to which the state as an owner influences the board of directors’ autonomy to decide on managerial remuneration and incentives.
In terms of coverage, this report focuses on provisions applicable to supervisory board members (or non-executive directors, in the case of one-tier boards) and executive managers (or executive directors) of majority-owned SOEs with more than 50% state shareholding which are not listed on the stock exchange. Overall, the report highlights differences in remuneration practices according to the corporate context, including the size of the SOEs, their commercial and non-commercial orientations, and the sectors in which they operate.3
To prepare this report, information was collected through a questionnaire and supplemented by desk research. Overall, 31 OECD member and five partner countries provided responses to the questionnaire: Australia, Austria, Belgium, Brazil, Bulgaria, Chile, Colombia, Costa Rica, Croatia, the Czech Republic, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland,4 Israel, Japan, Korea, Latvia, Lithuania, Mexico, the Netherlands, New Zealand, Norway, Peru, Philippines, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey and the United Kingdom.
It should be noted that some caveats exist regarding the sample size and comprehensiveness of the information collected in some countries. In Australia, information was provided by the Department of Finance, which does not have a direct role in the management and determination of remuneration of SOEs. As such, comprehensive information was not available. In Belgium, information collected covered the four SOEs in the portfolio of the Ministry of Finance only (Skeyes, NMBS/SMCB, Proximus, and Bpost), hence excluding SOEs in the portfolio of the Federal Holding and Investment Company (SFPI-FPIM). In Japan, where a dispersed state ownership structure exists, information was collected on the practices in place in five SOEs (Japan Tabacco, Tokyo Metro Co. Ltd, Hokkaido Railway Company, Shikoky Railway Company, and Japan Freight Railway Company). In the United Kingdom, information provided covers the 13 SOEs in the UKGI portfolio.
Finally, while acknowledging that a given practice can be performed in different ways to a similar effect, the contents of the present report may also be influenced by the individual respondents’ choice of wording. Moreover, some of the questions in the questionnaire may not closely reflect all countries’ ownership and governance models, in which case the respondents will have picked the answers that they think most closely reflects their national practices.
References
[2] Baltic Times (2014), Air Baltic CEO salary increases 65 percent, https://www.baltictimes.com/news/articles/34980/.
[12] BIS (2011), Range of Methodologies for Risk and Performance Alignment of Remuneration, https://www.bis.org/publ/bcbs194.pdf.
[3] Finnair (2018), Remuneration Statement 2018, https://investors.finnair.com/~/media/Files/F/Finnair-IR/documents/en/governance/remuneration-statement-2018.pdf.
[11] FSB (2009), FSB Principles for Sound Compensation Practices, https://www.fsb.org/wp-content/uploads/r_0904b.pdf.
[8] OECD (2021), OECD Review of the Corporate Governance of State-Owned Enterprises in Croatia, https://www.oecd.org/corporate/soe-review-croatia.htm#:~: text=The%20OECD%20Review%20of%20Croatia,the%20%E2%80%9CSOE%20GuidelinespercentageE2%80%9D).
[9] OECD (2021), OECD Review of the Corporate Governance of State-Owned Enterprises: Ukraine, https://www.oecd.org/corporate/soe-review-ukraine.htm.
[7] OECD (2018), Professionalising Boards of Directors of State-Owned Enterprises: Stocktaking of National Practices, https://www.oecd.org/corporate/Professionalising-boards-of-directors-of-SOEs.pdf.
[10] OECD (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises, https://www.oecd.org/corporate/guidelines-corporate-governance-soes.htm.
[6] OECD (2013), Boards of Directors of State-Owned Enterprises: An Overview of National Practices, Corporate Governance, OECD Publishing, Paris, https://doi.org/10.1787/9789264200425-en.
[13] OECD (2011), Board Practices: Incentives and Governing Risks, Corporate Governance, OECD Publishing, Paris, https://doi.org/10.1787/9789264113534-en.
[1] Reuters (2018), Finnair board member quits after government lambasts CEO pension, https://www.reuters.com/article/uk-finnair-board-government-idUKKBN1FK19Z.
[4] Stuff (2018), Pay rises for SOE bosses as public service CEOs miss out, https://www.stuff.co.nz/business/farming/107758958/stateowned-enterprise-bosses-dodge-clamp-down-on-pay.
[5] University of the Witwatersrand (2020), Capping executive pay is the key to stop money-guzzling SOEs from ruining SA, https://www.wits.ac.za/news/latest-news/opinion/2020/2020-10/capping-executive-pay-is-the-key-to-stop-money-guzzling-soes-from-ruining-sa.html.
Notes
← 1. Executive remuneration schemes in listed companies and financial institutions in particular have been subjected to strengthened regulation since the 2008 global financial crisis, including in the European Union and the United States. In addition, in 2009, the Financial Stability Board issued Principles for Sound Compensation Practices for large financial institutions, in order to align compensation with prudent risk-taking (FSB, 2009[11]). In 2011, the Basel Committee issued a report on the Range of Methodologies for Risk and Performance Alignment of Remuneration analysing the methods used by banks for incorporating risk into bonus pools and individual compensation schemes (BIS, 2011[12]).
← 2. In 2011, the OECD Corporate Governance Committee issued a peer review of remuneration and incentives in listed companies, which subsequently served as a basis for revising the G20/OECD Principles of Corporate Governance in 2015, as well as for collecting information on how these policies and practices are implemented inter alia across all OECD, G20 and Financial Stability Board members in the OECD Corporate Governance Factbook, published every two years since 2015 (OECD, 2011[13]).
← 3. Detailed information on the criteria underpinning SOE orientation and size is provided in Annex A.
← 4. The questionnaire responses from Ireland do not consider financial institutions in respect of which the state retains a shareholding.