Survey of the remuneration reporting for 2021

The rules were changed in 2021 with enhanced requirements, both for the remuneration policy and the remuneration report. The purpose of these changes was to increase transparency regarding the remuneration of leading personnel as well as increase the understanding of its relation to the company’s financial performance. As a result, the shareholders influence on remuneration to leading personnel should increase to encourage a remuneration culture that contributes to company's long-term interests and economic sustainability.

We have reviewed the 2021 remuneration reports and related remuneration policies of twenty-one Norwegian companies included in the OBX index.[1] Through this article we present our observations and takeaways from this review and provide recommendations for the upcoming remuneration reports for 2022.

[1] Companies included in the OBX index as of 28th September 2022.

The remuneration report must be available on the company’s website immediately after the General Meeting and remain available, free of charge, for at least ten years. The remuneration policy must also be available immediately after approval from the General Meeting, including the date of approval and the voting results.

Through our review, we noted that two companies did not publish the remuneration report separately, but as a part of the annual report. Another report was not easily available since the company published the remuneration report named with the case number in the General Meeting.

Some companies did not publish the remuneration policy separately, but rather as an attachment to the notice of the General Meeting or included it in the annual report. At the time of our review four companies did not have the remuneration policy for 2021 available on their website.

The requirement is to keep the most recently approved policy available. Ten companies in our review approved a new remuneration policy for 2022. One of these companies did not publish the policy for 2022 separately. For the eleven companies whose policy for 2021 is the most recent, two policies were not available separately. Consequently, three companies in total did not have the most recent remuneration policy available separately on their website.

In our opinion the remuneration documents must be easily available, and to achieve this we recommend that they are published as separate documents on the company’s website. In addition they should be located on a section of the website where investors and others would intuitively expect to find them, e.g., Corporate Governance, Governance, or similar. In our opinion, the remuneration policy for 2021 should be available at least until the remuneration report for 2022 is published.

“Leading personnel” is not clearly defined by law or regulations. A specific assessment is required to determine who in fact is a leading person in the company. The CEO is always regarded as a leading person.

In addition, other management personnel are included and should include the same persons as in scope of the Accounting Act § 7-31b.

It is stated in the preparatory work that persons who cover one or more of the following criteria are included:

• member of the company’s management team
  
• affect the company’s operational decisions
  
• leading key business area

As an example, the executive management team/group management will normally be regarded as leading personnel. Based on our review, we advise that leading personnel should be clearly defined in the remuneration policy and described in the remuneration report. It is also important to ensure that the definition and information regarding leading personnel is consistent with the annual report and other reporting provided by the company. We advise to also revisit the remuneration policy if necessary to clearly define the Company’s leading personnel.

Board members and members of the corporate assembly that are employed by the Company are also regarded as "leading personnel”. Eighteen out of the twenty-one companies did however include all board members in the remuneration report, which in our opinion is best practice. 

All companies in our review presented total remuneration specified by each leading person, including specifications of both fixed and variable salary. In only nine out of the twenty-one remuneration reports was it clarified whether the presented remuneration was paid out or earned in 2021. Out of these nine companies, three presented only paid salary, three presented only earned salary, one company presented both, and two companies presented the fixed component of salary as paid and the variable component of salary as earned.

We recommend that both variable and fixed salaries are presented by earned amounts. Remuneration earned in the respective financial year (and paid the following year or later) should then be included. This creates a higher degree of comparability between the remuneration policy and the remuneration report, as earned salary reflects the applicable policy in the respective year and the recognized amounts in the financial statements. Furthermore, it should be clearly described in the remuneration report which presentation principles are chosen for both fixed and variable salary.

It is required to disclose an explanation of how the total remuneration complies with the adopted remuneration policy. Thirteen of the twenty-one companies provided an explanation in the remuneration report about how total remuneration is in line with their remuneration policy.

Seven companies included a reference to the remuneration policy in the remuneration report and stated that the remuneration report is in accordance with the policy but provided no explanation on how. One remuneration report did not provide any reference to the policy.

In our opinion eight of the companies reviewed did not comply with the reporting requirement to describing how the remuneration report is in line with the remuneration policy, and so must improve their reporting for the financial year 2022.

An important reporting requirement is to describe how the performance criteria were applied. Three companies in our sample does not reward variable salaries. The remaining eighteen companies in our review stated that they awarded short-term variable salary based on various predefined performance criteria.

We found that three companies described in detail how the performance criteria were applied to determine variable salary. These companies were the only ones to specifically address and display how actual performance compared to a target performance, and how the variable remuneration resulted from this. 

Another eleven companies explained how performance criteria were applied but with a lower level of detail. Two companies provided some information regarding their performance criteria but no information about how these criteria were applied, while the remaining two companies provided no information about their performance criteria.

Our opinion is that descriptions of how performance criteria are applied in general have room for improvement. We recommend looking at the EU-template section 6.5 for guidance and inspiration.

Out of the sixteen companies that presented their performance criteria for variable salary, three companies based short-term variable salary exclusively on financial criteria, while thirteen companies based it on both financial and non-financial criteria. For eight companies, the non-financial criteria included sustainability and/or ESG related criteria.

ESG is a hot topic, and it is important to include ESG-related matters in the Company’s business strategy and business plans to ensure long-term and sustainable performance with consequent effects on remuneration. We therefore advise management to revisit the remuneration policy to ensure that the policy contributes to, and is in line with the company’s ESG strategy. 

It is required to disclose information on the annual changes of total remuneration for each leading person, of the performance of the company, and of the average remuneration of employees of the company other than leading persons over at least the five most recent financial years.

In accordance with the draft EU commission’s “Guidelines on the standardised presentation of the remuneration report” the annual change should be presented as percentage and in absolute numbers. Five companies in our review presented annual change as only percentages, two companies presented annual change as only absolute numbers, while fourteen companies presented both.

All companies in our review included a table displaying comparative information, as required. However, one company did not include information on the average remuneration of employees of the company other than leading persons or required information on the annual change of company performance, while one company only included four years of comparative information instead of five.

Additionally, only nine companies included all leading personnel employed in this five-year period, while the remaining twelve companies only included leading personnel employed during 2021.  

The minimum requirement is to provide comparable information for all leading persons who performed in that role during the reported financial year. It is required to tell the ‘full story’ in order to make it possible to understand changes in the remuneration of leading personnel and other employees, and to compare this to the financial performance of the company.  In our view, if there are changes in the leading personnel during this five-year period then the previous leading personnel in the same position should be included for sufficient comparability for the entire five-year period.

Thirteen out of the twenty-one remuneration reports were signed. Of these, eleven were signed by the entire board of directors.

Having the remuneration report signed by the entire board of directors is not a requirement but is, in our opinion, best practice.

The remuneration report is the board of director's responsibility and their report to the shareholders on how the leading persons are remunerated within the approved remuneration policy. It is therefore natural that the board demonstrates its responsibility by signing the report. 

The Accounting Act has an option to include information following from § 7-31 b and § 7-32 (1) in the remuneration report, instead of in the notes to the financial statements. Since the deadline for the remuneration report differs from the deadline for the annual report, we have looked at the timing of the approval.

For fifteen companies in our review, the board approved the remuneration report the same day as the financial statements. For five companies the board approved the remuneration report at a later date, and one company did not provide information regarding when the report was approved by the board.

Eight companies included information required by the Accounting Act in the remuneration report instead of in the notes to the financial statements. The remaining thirteen companies included this information in both the remuneration report and in the financial statements. For two companies that only included this information in the remuneration report, the board approved the remuneration report at a later date than the financial statements. The approval date was excluded in one of those reports.

In a letter to the Norwegian Association of Public Accountants, the Norwegian Ministry of Trade, Industry and Fisheries has stated that if the option is applied, and the if information required by the Accounting Act is not provided in the remuneration report, the financial statement has an error. This statement also applies if the financial statements is approved by the board prior to the remuneration report.

If information required by the Accounting Act is excluded from the financial statements to be included in the remuneration report, we therefore recommend that the financial statement and the remuneration report is approved by the board at the same date. The alternative is to include the required information in both the remuneration report and the financial statements.

If a company uses the option to include information only in the remuneration report, we believe that management should provide information about this in the notes to the financial statements. Four out of the eight companies in our review that applied the option communicated this in the notes. 

The remuneration policy is binding but can be temporarily deviated in exceptional circumstances provided that the policy includes the procedural conditions under which the derogation can be applied and specifies the elements of the policy from which a derogation is possible. It is required to provide information in the remuneration report regarding any deviations from the remuneration policy. In our review six companies provided such information.

Five of these companies stated in their remuneration policies that deviations might occur during special circumstances or similar but did not specify which elements may deviate. The one remaining company that deviated from the remuneration policy described specific deviations in the policy but presented additional deviations in the remuneration report. It is not permitted to deviate in other circumstances than those mentioned in the remuneration policy.

Based on our review we recommend that this is taken more into consideration for future remuneration policies.