The European Commission has unveiled a tougher approach to executive pay and said it will issue draft laws that will allow regulators to intervene in financial sector pay awards.

The Commission’s last guidance on executive remuneration, issued in 2004, was widely ignored, but Internal Market Commissioner Charlie McCreevy insisted these two new missives would make a difference.

The new rules take the form of two non-binding “Recommendations” from the Commission. One relates to all listed companies, the other just to financial institutions. Neither recommendation is binding, which means the European Union’s member states are not obliged to turn them into national laws. But McCreevy said the Commission will publish scorecards next year showing what states have done to implement them.

And tougher measures are in the pipeline for financial firms. McCreevy said the Commission will propose new laws that will bring financial sector pay deals within the scope of regulators. And in June it will issue a proposed change to the Capital Requirements Directive that would force banks with risky remuneration policies to hold more regulatory capital.

Our message is very clear: Directors’ remuneration must be clearly linked to performance and should not reward failure, he said.

The Recommendation for listed companies sets out what the Commission thinks a best practice remuneration policy looks like. This includes no severance pay in cases of failure, a balance between fixed pay and bonuses—with clear and measurable targets—and a pay clawback if financial data has been mis-stated. It also calls for tougher remuneration committees and greater shareholder influence over pay decisions.

The Recommendation for financial firms provides extra guidance on pay policies for “risk-taking staff.” This calls for changes such as risk-based performance measures, transparent pay policies, better internal oversight over pay awards, and greater involvement of internal control functions and independent board directors in pay policy.

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