Director and Executive Compensation Regulations for Italian Listed Corporations

Abstract

This paper highlights the director and executive compensation regulations for Italian listed and publicly held corporations. The analysis of the provisions shows that the increased disclosure of compensation plans – during the various steps they need to be approved by shareholders - is still the main and only response (additional disclosure was introduced in 2010) to mitigate the typical agency problems of managerial rent-seeking, short term decision making and the incentives of managers to misreport. The reliance on heavy disclosure - to make “shareholders say-on-pay” as much effective as possible – in what remains a very sophisticated matter, does not seem an adequate response to the agency problems just mentioned. The paper argues that, as laws supports elsewhere (for example in Germany), a further provision should make clear that compensation has to be structured in such a way as to align the executive interests with the pursuance of the main objective of shareholder value in a medium-long term horizon and, most of all, to be based on effectively achieved corporate results. That is the path chosen by the Guidelines of the Italian Corporate Governance Code, the self-regulatory code for corporations listed on the Italian Stock Exchange. Adherent to the basic view of EU Recommendation 2009/385, the Code aims to stop the abusive and distorted use of compensation plans, that give rise to fabulous payouts to CEO's and managers, notwithstanding very poor and transient results which are frequently the direct effects of excessive risk taking. To this end, the Code recommends the adoption of remedies and strategies that avoid compensation plans which may induce their beneficiaries to act and behave in ways that favour the increase of a stock's market value in the short term, to the detriment of the shareholder value in the long and medium term.