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Global overview

Marc Trevino

Sullivan & Cromwell LLP

Monday 06 August 2018

As the geographical reach of companies expands, executive talent is more than ever spread across borders and both global executives and companies are coming to expect consistent compensation practices in both ‘business-as-usual’ and strategic situations. The political, cultural and legal considerations that drive the provision of executive incentives and benefits, however, are more constrained by jurisdictional boundaries. As a result, companies are more often finding – sometimes the hard way – that local requirements or expectations act as barriers to achieving global business and organisational goals.

This overview discusses these trends, and highlights how they apply in the more detailed summaries that follow.

The ‘Americanisation’ of compensation structures

There is continuing evidence that the strategies for delivering pay are becoming more uniform from one country to the next. American pay-for-performance systems are being deployed in many parts of the world, with a structure of limited salary, significant annual incentive and long-term incentive that increases with seniority (often equity-based and with increasing frequency employing multiple delivery systems) becoming pervasive. Relative to other jurisdictions, the percentage representing salary is lowest in the United States and the percentage representing long-term incentive is the highest. In Europe, the allocation is more balanced, and in Asia, salary continues to represent a larger percentage of compensation. Although stock option plans continue to be prevalent outside the United States, the global movement toward other equity-based long-term compensation schemes continues.

These structures were originally designed to take advantage of a combination of lax labour laws (particularly on incentives and termination), tax limits on public company salaries, well-developed securities laws and favourable accounting. Although at least one of these factors is missing from almost every other jurisdiction, there have been a number of – evolutionary but not revolutionary – changes in the rules and practices around the world to accommodate a consistent structure and to avoid placing local businesses and executives at a competitive disadvantage.

In many jurisdictions, for example, the most senior company executives are now exempted from some or all of the protections that extend to other members of the labour force, facilitating implementation of a cohesive global compensation system. There are still many jurisdictions, however, where an Americanised structure is sub-optimal. In particular, the discretion that American plans often contemplate in operation, amendment or cessation is not consistent with many stricter labour regimes, such as those in Latin America. In other jurisdictions, a global structure leaves tax advantages (for both employers and employees) on the table.

Notably, some of the tax limits that have driven American compensation structures for 30 years no longer apply. As a result, leading American companies will likely revise their compensation programmes to relieve the constraints of those limits. The nature and extent of these revisions is uncertain, and it likely will take 48 months before the effect of the tax changes makes it through the American market. It is also uncertain whether and when compensation structures in other jurisdictions will follow.

The struggle against perceived excess and inequality

Although the political and popular focus on compensation is not as intense as it was in the shadow of the financial crisis, national executive compensation agendas are dominated by attempts to address perceived excesses and inequality in public company executive compensation. It is clear that, in the current global economic environment, the continued growth of senior executive compensation stands in stark contrast to the stagnation in real wages in many parts of the world, and continues to drive legal and regulatory changes designed to address the perceived lack of fairness.

In Switzerland, for example, we have seen voters approve strict limits on signing bonuses and golden parachutes, and implement binding say-on-pay votes. (A subsequent measure that would have limited executive salaries to 12 times that of the lowest-paid employee, however, was not adopted.) In France, tax change rules have been adopted to promote broad-based profit-sharing schemes and to limit top-hat pension schemes for executives. In the United Kingdom, emphasis had been on long-term incentive programmes, which some view as having increased executive pay without delivering a corresponding increase in company performance. In Belgium, rules require shareholder approval of specified aspects of management committee compensation (such as severance longer than specified terms or share-based scheme with less than minimum vesting). Globally, we continue to see heightened transparency regarding executive compensation, even in jurisdictions that have long resisted such disclosure.

In 2018, for the first time rules in the United States requiring the disclosure of the ratio of chief executive compensation relative to that of the median employee have become effective. The resulting ratios and comparisons across companies and industries have already generated considerable public attention. Rules to require disclosure of the relationship between executive compensation and company stock performance continue to be expected. In the United Kingdom, for the first time all companies and public bodies with more than 250 employees are obligated to publish their gender pay gap, their bonus pay gap and the proportion of men and women in each quartile of their business.

A developing area is the compensation of non-executive directors. In many countries, non-executive director compensation is unlimited, while in others it requires the annual approval of shareholders or is subject to strict statutory or regulatory limits. As the focus on perceived excesses in public company executive compensation continues, there has been increasing attention on the compensation of those that set executive compensation. In the United States, that attention has come through judicial action. In other areas, legislative activity has grown.


The newest trend in compensation structures since the shift from options to other equity-based long-term incentives is the introduction of provisions that require the return of compensation in certain circumstances (clawbacks). Clawbacks aim to deter misconduct that may be identified (or occur) after the normal vesting cycle of awards. Common bases for clawbacks include discovery of misconduct, future competition, financial restatements and incentives based on incorrect metrics. We also have seen a migration of provisions that require clawbacks in the case of negative risk outcomes from the financial sector to other sectors that have ‘long-tail risks’, such as is the case for drug companies. In some cases we have seen the adoption of clawbacks in an attempt to respond to concerns about large bonus levels.

In many cases, clawbacks are untested. Although often favoured by both investors and government officials, labour laws in many countries limit the ability of companies to recover compensation that has previously been paid to employees. In some cases, criminal liability can attach. However, the exercise of clawbacks has become increasingly prevalent.

Deferral and vesting of compensation presented similar concerns when they were introduced into many jurisdictions (including some states in the United States). Now, however, the legal regimes in most jurisdictions easily accommodate them. We expect that the law regarding clawbacks will expand similarly, and expect to see the continuing, but cautious, global expansion of their use.

In light of the Carillion collapse early this year and the continuing public criticism toward levels of executive pay, the United Kingdom expects a fresh review of its corporate governance regime, in particular around when executive bonuses and share awards can be clawed back in the event of corporate failures.

Change-in-control protection

Providing enhanced separation protection in a context of the change-in-control or strategic transactions affecting a company, as well as protecting annual and long-term incentive awards, has been common for decades in the United States. The ongoing prevalence of these protections, even in an increasingly hostile governance environment, demonstrates their value, and research continues to support the fact that appropriate protection is associated with higher sales prices.

A variety of factors supports the continued implementation of change-in-control protections. For example, long-term incentive plans are particularly vulnerable to strategic transactions, and their sustained expansion (especially expansion to lower levels of management) requires that companies consider an appropriate balance. The acceleration of global mergers and acquisitions activity also suggests that companies should be rapidly evaluating their suite of change-in-control protections.

Outside the United States, however, the use of change-in-control arrangements continues to be mixed. For example, they are reported to be somewhat prevalent in the United Kingdom and less so in Belgium. In some jurisdictions, such as Switzerland, change-in-control protections have fallen victim to political agendas. We expect that competitive and equitable considerations will, however, place increasing pressure on change-in-control arrangements in jurisdictions in which they are not currently customary.

The continuing influence of large passive investors and proxy advisory firms

In 2018, we continue to observe the continuing influence of large passive investors and proxy advisory firms on the outcome of say-on-pay and other compensation-related shareholder proposals. In addition to the direct influence these institutions tend to hold over the outcome of votes, they also hold influence over the creation of ‘best practices’ in various regions, indirectly affecting voting outcomes. While much of this best practice is uncontroversial, it often lacks empirical backing and does not have the process checks and balances that apply to formal codes. As such, there is a danger of prejudice and assumptions influencing best practice, voting and – ultimately – how companies are run. In the United States, legislation has been proposed to regulate proxy advisory firms. If such legislation is adopted, we expect other countries will follow.


At the same time as we see a desire among global corporations for a convergence of executive compensation philosophies, we are witnessing a desire among global sovereigns to address perceived excesses and shortcomings. The structure, governance and disclosure of executive compensation remain hot topics worldwide, with regulation continuing to expand rapidly – but in different directions in different regions. Creating and executing effective global compensation strategies has always been a complex process, but is more so now than ever.

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