Good management is an important prerequisite for long-term value creation. Folketrygdfondet therefore believes that the companies in which the Government Pension Fund Norway is invested should offer competitive executive salaries, hereunder transparent and targeted incentive schemes. In addition, the total amount of remuneration must be neither unreasonable, nor determined by external circumstances outside the influence of executive personnel. This also applies to pension schemes, other supplementary benefits and severance agreements. Severance agreements shall not reward poor management.
Folketrygdfondet has adopted, as part of its management of the Government Pension Fund Norway, principles for responsible investment activities. An important aspect of such management is the exercise of ownership rights; see Item 8 of the principles for responsible investment activities. However, the design of remuneration schemes for executive personnel has turned out to raise specific issues. Folketrygdfondet has therefore deemed it appropriate to draft guidelines for executive remuneration schemes to outline the factors to which weight will be attached in the assessment of the various executive remuneration schemes of the companies in which the Government Pension Fund Norway is invested.
The background to the guidelines is that it is important to follow up on the executive remueneration policy of companies to safeguard shareholder value. This involves an assessment as to whether such schemes are designed in such a way as to actually contribute to more effective and performance-oriented management. Furthermore, an assessment must be made as to what any equity-related schemes involve in terms of transfer of value from the shareholders to the executive personnel of the companies.
It is important, to ensure the required long-term perspective and to prevent unfavourable strategic choices, for equity-related schemes and option schemes to be subject to certain minimum lock-in periods. Folketrygdfondet looks favourably upon combining any purely performance-oriented bonus schemes with the purchase of company equities.
The design of appropriate incentive schemes can be challenging, but one must aim for the structure and scope thereof to enjoy general acceptance amongst the shareholders and not to impair the reputation of the company. This implies that there must be a correlation between company performance and overall remuneration. If these prerequisites are not in place, or if the executive remuneration scheme fails to conform to key elements of the guidelines set out below, the matter will be raised directly with the company. If no sound reason is given as to why the company has chosen to adopt different principles, it needs to be examined whether such situation conflicts with the qualitative and quantitative assessments that formed the basis for the investment of the capital of the Government Pension Fund Norway in such company.
The Shareholders’ Meeting shall, pursuant to Section 6-16(a) of the Private Limited Companies Act, deliberate the statement of the Board of Directors on executive remuneration and its guidelines on the determination of salaries and other compensation, hereunder its account of the executive remuneration policies pursued by the company. Folketrygdfondet will examine the executive remuneration statement submitted by the Board of Directors to the Shareholders’ Meeting in relation to the determination of salaries and other compensation, from the perspective of Folketrygdfondet’s guidelines for executive remuneration schemes. The executive remuneration statement shall be submitted to the Shareholders’ Meeting for consultative voting. If the statement encompasses remuneration in the form of equities, warrants, options, etc., or otherwise linked to developments in the equity price, it requires the approval of the Shareholders’ Meeting. Since the Shareholders’ Meeting shall in such cases decide on two different issues, such a statement ought to be presented as two separate resolutions; one pertaining to the consultative voting and one pertaining to the approval of schemes relating to the company’s equities, warrants, options or developments in its equity price.
Folketrygdfondet attaches weight to the following factors in its assessment of executive remuneration schemes:
1. A statement on salaries and other compensation of executive personnel pursuant to Section
6-16(a) of the Private Limited Companies Act shall be set out in the Annual Report.
2. Incentive-based remuneration schemes shall be based on actual performance over and above what could normally be expected, shall be evaluated in view of general market developments, and shall not be determined by external circumstances outside the influence of executive personnel.
3. There should be a maximum cap on the annual remuneration of executive personnel that is not perceived to be unreasonable in view of actual performance. Nor should the scope of pensions, other supplementary benefits or severance pay be unreasonable.
4. The incentive schemes shall be designed such as to motivate, to the maximum extent possible, executive personnel to long-term value creation and the creation of robust organisations with a good working environment.
5. One should facilitate the investment of a portion of any paid-out performance bonus in company equities, for purposes of ensuring a long-term perspective and correct strategic choices.
6. Proposals for authorisations to grant options shall specify the allotment criteria, and should calculate the real value of the option schemes, accounting implications for the company and potential dilution effects.
7. When using option schemes, the strike price should be adjusted annually. As far as equity-based schemes and options are concerned, a significant portion of the equities should be held for a minimum of three years.
8. The Directors shall not be encompassed by incentive schemes.