A new statement on management remuneration in state-owned companies; remuneration to be based on openness, moderation and performance
On 13 August 2012, the Cabinet Committee on Economic Policy adopted a statement on remuneration of management in state-owned companies. The previous statement dates from autumn 2009. Openness and moderation are the statement's fundamental premises. Remuneration must be predictable and transparent so that everyone involved can assess its efficiency. In all companies total remuneration is to be reined in. According to the statement, the threshold for remuneration must be sufficiently challenging to reach and it is particularly important to ensure that remuneration does not lead to excesses jeopardising the targets set for remuneration schemes.
In contrast to the earlier statement, the current document gives due consideration to the fact that the State owns a whole range of different kinds of companies with a varying amount of shares in them. In state-owned companies with special assignment the level of remuneration is lower than in commercially operating non-listed companies and in listed international companies operating on the open market, or in companies similar to them. The statement calls for boards of directors to adopt a stronger role in the companies' target setting and associated management remuneration processes.
Remuneration is required to provide state-owned companies with opportunities to compete for competent executives and other key employees on the labour market. A fair share of the companys good results must be guaranteed to its staff by performance-based remuneration and personnel funds.
With the issued guidelines, the State aims to affect remuneration practices and the openness of such practices in other companies, too. Public acceptability is an important value for all companies regardless of their ownership structure.
Board of directors responsible for application
The board of directors is responsible for decisions concerning management remuneration. Remuneration is to be based on total remuneration, the level of which will be determined by the company's international operating and competitive environment. Targets set by the State as an owner, concerning moderation and benefits to the whole of society, are also to be taken into account.
The state owner requires that the basic levels of remuneration must be sufficiently challenging to reach and that the maximum levels of remuneration are reserved for exceptionally good performance. Performance-based bonuses must be based on factors that the corporate management can affect with its own actions.
Any remuneration on top of the fixed salary must be based on such performance that brings profit to the company and its owners. The company's board of directors needs to set measurable criteria for performance that promotes the companys success in the long run.
State calls for transparency in remuneration criteria
All bonus schemes must have such payment terms that allow cancellation of bonuses or their reduction to a reasonable level as necessary. When a company's targets are attained and the annual overall performance-based bonus level is exceeded on the basis of the set targets, the circumstances that have led to such a situation must be made public so that the company's owners and stakeholders may assess the payment criteria.
The state as an owner takes the view that additional pensions should not be used as remuneration. In companies that have other owners besides the State, decisions on management remuneration are made by the company's board of directors in the interest of the company.
Other than performance-based remunerations may be justified in exceptional changes or crisis situations. Even then there must be weighty reasons for such remuneration and they must not result in maximum bonus levels to be exceeded.
Binding effect in companies with different ownership arrangements
In companies wholly owned by the State, no deviations are accepted without prior approval by the owner. Unlisted state majority-owned companies must follow the guidelines unless otherwise required by the common interest of shareholders.
In listed state majority-owned companies, the board of directors is expected to recognise the guidelines in respect to the Companies Act and Securities Markets Act, and the Corporate Governance Code of listed companies issued by the Securities Markets Association and included in the regulations of the Helsinki Stock Exchange.
As far as companies in which the state is a minority owner or companies transferred under the ownership of Solidium are concerned, the guidelines provide an opinion of one major shareholder on good and acceptable remuneration principles. As such, the boards of directors are to take these guidelines into account in their decision-making.
Pekka Timonen, Director General, Government Ownership Steering Department, tel. +358 9 1602 3000 and Lauri Korkeaoja, Special Adviser, +358 440 788 282