The European Commission says remuneration policies for directors of listed companies should ensure pay for performance ensure the medium and long term sustainability of companies.
The EC says firms should set a two-year limit on directors’ severance pay and ban severance pay in the case of failure.
The recommendations also say share options should not make up part of non-executive directors’ remuneration to avoid conflicts of interest.
The EC also focuses recommendations on all risk-taking staff and is calling for the adoption of new measures relating to structure of pay, governance, disclosure and supervision.
It says financial institutions should strike a balance between the level of core pay and bonuses and the bulk of staff bonuses should be deferred in order to take into account risks linked to underlying performance.
It adds that financial institutions should also be able to claim back already paid bonuses where data has been proven to be manifestly misstated.
The EC says firms’ remuneration policies should be disclosed to stakeholders and supervisors should ensure that financial institutions apply the principles on sound remuneration policies to the largest possible extent.
Internal market and services commissioner Charlie McCreevy says incentive systems for executive directors in listed companies have led to “excessively short-term management actions” and “pay for failure”.
He says: “The existing EU rules need to be supplemented by additional guidance on certain key aspects of the structure of directors’ remuneration. Our message is very clear: directors’ remuneration must be clearly linked to performance and should not reward failure.”