ey 2018 executive and board remuneration report, norway · the industry sector had the highest...

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EY 2018 Executive and Board Remuneration ReportNorway

Contents

01 Foreword 4

02 Base salary 6

03 Short-term incentive payouts 8

04 Long-term incentive programs 10

05 Sector analyses 12

06 Diversity 14

07 Board remuneration 16

08 Looking ahead 18

09 Appendix 20

10 EY team 22

01Foreword

EY’s 2018 Executive and Board Remuneration Report — Norway | 5

Foreword 01

In this report, we present and discuss key executive remuneration trends for 2017, identified through published data from annual reports of companies listed on the Oslo Stock Exchange Benchmark Index (OSEBX).

Compared with 2016, we have seen a 9% increase in total executive remuneration on the OSEBX. Higher short-term incentive (STI) payouts drove the increase, however all other total compensation elements increased to some extent. There are significant differences between sectors on the OSEBX. The industry sector had the highest total compensation increase with 33%, while the financial sector had the highest decrease with 13% compared to last year.

In OSEBX, the median ratio of chief executive officer (CEO) total compensation to the average cost per full-time equivalent (FTE) was 11:1 in 2017. In the UK, the median CEO to FTE pay gap ratio is 64:1. This illustrates that the differences in the Norwegian market is relatively small.

As a new addition to this year’s report, we will highlight the ratio of men and women in executive management positions in the OSEBX and their respective pay levels. We will also offer you an insight to our thoughts regarding the future executive remuneration in Norway.

Pension in government-owned companiesSince 2015, government-owned companies have not been allowed to offer company pension schemes. As such, we have expected that this would be adjusted with an increase in base salary for newly hired executives. Our analysis indicates that the majority of newly hired executives in government-owned companies have been compensated for not being included in company pension schemes, however not to a full extent.

Are you ready for the implementation of Shareholder Rights Directive (SRD)?In 2017, the European Parliament approved the new SRD, which will come into legislative power in the European Union (EU) and European Economic Area (EEA) by June 2019. The directive is expected to strengthen corporate governance by encouraging long-term shareholder engagement and transparency between companies and investors, which involves increased demand on how companies disclose and report remuneration policies, and actual remuneration is paid.

We expect Norwegian companies to comply with the new regulations in their annual reports for FY19, i.e., the annual report published in 2020. If the board of directors considers amending executive remuneration policy in 2019, they need to make provision for the impact of the new rules. Moreover, because of the high number of institutional investors in the OSEBX, the board of directors has to place emphasis on proxy advisor guidelines (e.g., ISS, Glass Lewis).

EY can assist your company in the process of preparing and implementing the necessary changes in your remuneration policies. With our extensive experience in the Norwegian market and our global network, we can review and redesign your remuneration policy to suit your business strategy, meeting your investors’ expectations and being compliant with the SRD.

Regards,

Trond OlsenPartner, EY PAS Reward

Base salary 02


Base salary 02

The total executive compensation in OSEBX companies consists primarily of base salary. This distinguishes the executive remuneration of Norway-based companies from that of other countries, where both annual and long-term bonuses make up a greater part of total compensation.

”At EY Reward, we assist clients in developing remuneration policies, which consider the company’s strategy and culture. Using our vast remuneration database, we can provide clients with appropriate executive remuneration levels based on an in-depth benchmark analysis.”

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

CEO CFO OE CEO CFO OE CEO CFO OE

2017 2016

Top 10 All Bo�om 10

Figure 1: Median base salary in all OSEBX companies; top-10 companies and bottom-10 companies ranked by market cap in NOK’000

Median base salary levels in 2017 increased for both CEOs and CFOs, and decreased for other executives compared with the OSEBX 2016 Index among all companies. In the top and bottom 10 companies, ranked by market cap, all executives experienced a median base salary increase. The median base salary for CEOs in bottom 10 companies experienced the highest increase at 15%.

03Short-term incentive payouts


Short-term incentive payouts 03

0%

25%

50%

75%

100%

CEO CFO and OE

72%

59%

Figure 2: Median achievement of annual bonus opportunity in all OSEBX companies

As the main driver of the increase in total compensation, we have analyzed to what extent executives with an STI bonus payout achieved their annual potential.

As our analysis illustrates, the median bonus paid compared to the annual bonus opportunity is well below 100%. While some companies operate with a bonus opportunity equal to the yearly base salary, most companies operate with an opportunity less than the base salary, typically 50%.

Typical examples are government-owned companies, as their annual bonus opportunity is restricted by government guidelines to not exceed 50% of annual base salary. Figure 3 takes a closer look at those companies.

As our analyses of paid annual bonuses compared to annual bonus opportunity illustrates, executives in government-owned companies realized more of their annual bonus potential than executives on the OSEBX. As companies on the OSEBX report vaguely on key performance indicators (KPIs) linked to bonuses, it is not possible for us to accurately measure why government-owned companies have realized more of their potential compared to OSEBX as a whole.

0%

25%

50%

75%

100%

CEO CFO and OE

75%72%

Figure 3: Median achievement of annual bonus opportunity in government-owned companies

04Long-term incentive programs


Long-term incentive programs 04

We found that 75% of OSEBX companies have long-term incentive (LTI) programs. LTI programs can be a potent tool to align both executives’ and investors’ long-term interests, as they are designed to reward executives for achieving long-term strategic and financial objectives.

We believe that the implementation of the new SRD will lead to a growing influence of proxy advisors on the OSEBX. As such, companies will need to take into consideration the proxies’ stringent criteria to base their recommendations on. In general, LTI programs need to be in line with long-term shareholder interest and the award has to be aligned with shareholder value.

We have in-depth knowledge of these criteria and historical proxy voting recommendations, allowing us to tailor LTI programs to suit your company’s business strategy, while being compliant with proxy recommendations. This helps you to reach your long-term objectives, while maintaining a good relationship with investors.

The most popular LTI program among OSEBX companies continues to be the share option plan. The median vesting period of LTI programs is still three years. As illustrated in figure 5, the

”The share option plan is by far the most popular LTI vehicle among companies on the OSEBX.”

Share op�on Other

32%

68%

Figure 4: Types of LTI programs

44%

56%

CliffGraded

Figure 5: Percentage of graded and cliff vesting of LTI grants.

Grant No grant

45%

55%

Figure 6: Percentage of companies with LTI programs that had an LTI grant to the CEO in 2017

majority of companies continue to apply a graded vesting schedule as opposed to cliff vesting, where all instruments vest at a specific time.

Maintaining the focus on share options, we have noticed that several OSEBX companies operate with a vesting schedule where portions of the options vest annually. This is not in line with proxy advisors’ guidelines, where a minimum three-year vesting period is required before any graded schedule can begin.

Over half of the companies that have an LTI program provided their CEO with an LTI grant in 2017.

Sector analyses 05


Sector analyses 05

0100020003000400050006000700080009000

10000

Energy Finance Retail Industry IT

Base STI Pension Other benefits

Figure 7: An overview of median total compensation and remuneration mix of selected sectors in NOK’000

The following figure shows the median total compensation levels for CEOs in key OSEBX sectors, with their corresponding remuneration mix. The analyses provide insight to each element’s value and contribution to total compensation.

The energy sector stands out in total compensation, with an overall level that is significantly higher than the rest of our selected companies. This has been a recurring trend in our selected sectors since 2014. The remuneration mix in this sector is also quite different from the rest of the OSEBX, as base salary only contributes to half of total compensation.

Compared with 2016, the industry and retail sectors experienced an increase in all four compensation elements. The retail sector did also have a high portion of bonus payouts in its remuneration mix, with all but one CEO earning a bonus payout in 2017. The Norwegian seafood industry and other consumer staples companies that all performed well in 2017 are included in this sector. In the finance, industry and IT sectors, there is close to no variation in the STI portion of total remuneration mix.

”The energy and retail sector had the highest median STI payouts as a portion of total compensation.”

06Diversity


Diversity 06

Diversity has been a highly debated topic in Norwegian media. We believe that executive teams will be able to achieve better results when members have different perspectives, backgrounds and opinions.

Females in executive managementMen outnumber females in executive management positions in the OSEBX. The following analysis is a count of those who held an executive position in the OSEBX in 2017.

No remuneration data for female CEOs have been included, as the two females who held such positions did not hold them throughout the year. However, females had a higher median base salary, compared to their male counterparts in all other executive positions in 2017. As men significantly outnumber female executives, the median values might not provide an accurate illustration of the OSEBX gender pay gap.

”No OSEBX company had an incumbent female CEO at the beginning of 2017.”

MaleCEO

Female CEO

MaleCFO

Female CFO

MaleOE

Female OE

51 2 45 7 248 74

Figure 8: Gender count throughout 2017 among executives

0500

10001500200025003000350040004500

Male CEO Female CEO Male CFO Female CFO Male OE Female OE

Figure 9: Median values of base salary in NOK’000

”Female CFOs and other executives had a higher median base salary compared to their male counterparts.”

07Board remuneration


Board remuneration 07

39%

61%

Own shares No shares

Figure 11: Percentage of board members owning shares in companies they represent

0 100 200 300 400 500 600 700

Bo�om 10

Top 10

All

Board chair Deputy chair Board member

Figure 10: Median board fees in NOK’000

The Norwegian Corporate Governance Code (NUES) encourages board members to own shares in the company where they are elected. Our analysis shows that relatively few board members are active owners in the companies they represent. As active ownership could be an effective tool to strengthen the link between the governing body and the owners of a company, we believe a board member should use a portion of the board fees to buy shares in the company.

Because non-executive board fees in OSEBX companies are modest compared to what we see in most other countries, we believe that companies that require board members to own shares might have to increase the overall board fee levels going forward.

”Active ownership among board members could create a clearer link between the governing body and the company owners.”

08Looking ahead


Looking ahead 08

How will the new SRD affect listed companies?We expect the Norwegian state to favor a strict implementation of the new SRD. As such, companies will need to consider the consequences brought in by the increased reporting requirements on their remuneration policies. In addition, SRD will give investors increased power in determining companies’ executive remuneration policies, consequently increasing the power of proxy advisors. Based on our research, companies in Norway are frequently non-compliant with the demands of proxy advisors. Most companies should therefore expect their remuneration policies will need to be redesigned.

Should companies rethink how KPIs are used to determine bonuses?News articles highlighting large discrepancies between executive bonuses and actual performance is bad publicity for companies. We believe that there should be a clear link between pay and performance. Thus, KPIs should be chosen on the basis that they give a fair and accurate representation of how the company has performed, and reward executives accordingly.

How may sustainability and diversity affect KPIs?The focus on sustainability and diversity is increasing worldwide. We believe that the increase in attention will lead to an increased demand for companies to include metrics regarding sustainability and diversity to their performance-based pay. Companies should prepare now, as the demand might not only be raised from investors at annual general meetings, but from the employees as well.

What are the other factors influencing Norwegian remuneration?In 2017, the Norwegian sovereign wealth fund, the largest of its kind in the world, published a report on executive remuneration. The fund raised a strong opinion where they emphasized higher transparency and simplicity in remuneration, with a strong link to long-term value creation. While the fund only invests in companies listed overseas, we believe that their opinions will affect remuneration voting outcomes at annual general meetings in companies in Norway, as investors globally take note of the fund’s clear stand.

Key influences on future executive pay, we believe that asking better questions will yield better answers. Throughout this section, we will provide some insights on what we believe will influence executive pay in the near future.

09Appendix


Appendix 09

AF GruppenAker GroupAker SolutionsAteaAxactorB2HoldingBakkafrostDNBDNO InternationalEkornesEntra Equinor (Statoil)EuroprisGaming Innovation GroupGjensidigeGrieg SeafoodHexagon Composites

IdexKitronKongsberg AutomotiveKongsberg GruppenLerøyLink Mobility GroupMarine HarvestNEXT BiometricsNordic NanovectorNordic SemiconductorNorsk HydroNorwegian Air ShuttleNorwegian Finans HoldingNorwegian PropertyOlav Thon EiendomsselskapOrklaOtello

Petroleum Geo-ServicesPhotocureREC SiliconSalMarScatec SolarSchibstedSR-BankStorebrandTargovaxTelenorTGS-NOPECThin Film ElectronicsTomra SystemsVeidekkeWallenius Wilhelmsen LogisitcsXXLYara

Companies included in our analyses of remuneration data for 2017

What we offerEY Reward helps clients design compensation programs for employees and executives that help meet corporate objectives. Our Reward specialists have expertise in most aspects of compensation and benefits, and can offer services related to overall compensation strategy, benchmarking, equity design and implementation, transactions, and HR due diligence, and assistance with operational issues such as proxy disclosure, communication support, taxation and reporting obligations. EY’s globally integrated teams enable us to provide services to most of your corporate locations.

10EY team


EY team 10

EY teamTrond Olsen Partner and [email protected]+47 908 23 452

Kristian Ytterdal [email protected]+47 915 26 335

Silje Johansen [email protected]+47 901 25 818

Andreas [email protected]+47 926 50 534

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EY | Assurance | Tax | Transactions | Advisory

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