5.5.2 Remuneration of the CEO, management and employees

Remuneration policy

The Board is responsible for establishing the remuneration policy for the CEO, Management Board members, other managers and employees of the company and for ensuring its effectiveness. To assist the Board in this responsibility, a remuneration committee may be established; larger companies and public-interest entities usually establish one, to comply with the more stringent regulatory requirements that apply to them and with good corporate governance practice.

In relation to remuneration, the main functions of the Board are to:

1. adopt the remuneration policy and ensure its regular review;
2. oversee the implementation of the remuneration policy and practices, to make sure that the policy operates as intended and continues to comply with applicable laws;
3. ensure that the remuneration of the CEO and management, both the elements of the package and the actual amounts awarded, achieves the objectives of the remuneration policy;
4. provide sufficient information to shareholders and other stakeholders to ensure external transparency of the remuneration policy and of management remuneration packages.

For listed companies, the EU Shareholder Rights Directive II, as transposed in Estonia, Latvia and Lithuania, requires the remuneration policy to be submitted to the general meeting of shareholders for a vote and an annual remuneration report to be published and put to the general meeting. State-owned and municipally owned enterprises are subject to additional statutory rules and limits on management remuneration. The Board should know which of these requirements apply to the company.¹

The remuneration policy, and the practices used to determine remuneration, should be clear, documented and transparent. The remuneration policy should:

1. state its objectives, which should generally be to ensure that the company:
   1. provides strong incentives for management to perform in a way that is aligned with the company’s long-term goals and increases long-term value for its shareholders and other stakeholders, taking into account the company’s sustainability (ESG) goals;
   2. attracts and retains the talent necessary for its successful operation;
2. be aligned with the company’s purpose, vision, mission, strategy, long-term objectives and values;
3. be objective and fair, based on rewarding performance and results aligned with the long-term goals of the company;
4. be gender-neutral, non-discriminatory and inclusive;
5. provide an effective framework for performance measurement and a clear link between reward and performance aligned with the company’s long-term goals;
6. include the following:
   1. a description of the structure of the remuneration package, listing all components of fixed and variable remuneration, including all bonuses and other benefits in whatever form that may be awarded to management, and their relative proportions;
   2. a link between the variable part of remuneration and the financial and non-financial performance of the company and of the individual manager;
   3. where the company awards share-based remuneration, the vesting and delivery periods and, where applicable, the rules for retaining shares after delivery;
   4. the possibility of, and conditions for, adjusting variable remuneration before it is awarded (malus) and reclaiming it after payment (claw-back), in the event of failure to achieve the performance targets, payment based on misstated data or serious misconduct by the manager concerned;
   5. the deferral of part of the cash or share-based variable remuneration;
7. be reviewed regularly, preferably at least once a year and whenever the need arises (for example, changes in the company’s strategy or in labour market trends).

Management remuneration package

The management remuneration package is the total amount a manager earns for their performance and for achieving the objectives set by the Board. It may consist of various elements and usually includes:

• Fixed remuneration (fixed monthly salary) is non-discretionary: it cannot be unilaterally adjusted by the company or the Board and does not depend on the manager’s performance. Its amount may vary greatly according to the business sector, the manager’s experience and track record and other considerations.
• Performance-based variable remuneration depends on the performance of the company and of the manager, that is, on the achievement of company and individual goals. It is good practice to ensure that such remuneration is at all times aligned with the achievement of the company’s long-term goals and the shareholders’ interests.

It is common to provide variable remuneration as an annual cash bonus (short-term incentive, STI), which usually ranges from one to six months of the manager’s fixed salary. Good practice, however, is for the major part of variable remuneration to be tied to the achievement of long-term goals (long-term incentive, LTI). An LTI programme usually (a) runs for three to five years, (b) is larger than the STI, (c) preferably consists of shares as well as cash, (d) includes the deferral of part of the cash element, the delivery of awarded shares at the end of the programme and a requirement to retain part of the delivered shares for a certain period, and (e) allows the awarded cash or shares to be adjusted or reclaimed in the event of misconduct or a subsequent restatement of the company’s financial results. The Board may also award a one-off cash bonus for extraordinary performance, significantly above the goals set or in extraordinary situations that were not taken into account when the goals were set.

• Other cash and in-kind benefits provided by the company, such as health insurance, life insurance, a car or travel allowance, pension plans, sports and wellness programmes, family leave, compensation of relocation costs and discounts on company products or services.
• Severance pay is a payment for early termination of the contract (before the end of the term for fixed-term contracts, or before retirement for indefinite contracts), which may amount to 6 to 18 months of fixed monthly salary. Such conditions could be a subject to national law.

When defining and reviewing the management remuneration package, the Board should take into account the latest market data and trends in salaries, to ensure that its decision fits the market and motivates management.

Chapter