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Home arrow Economics arrow Boards of directors of state-owned enterprises : an overview of national practices.

Practices and trends

The state's concern with pay issues is largely political in nature. The general public expects remunerations paid by the government to be “fair”, but there is no commonly shared definition of fairness. One of the goals of government is to create a “level playing field”, i.e. fairness of opportunity within society. But another goal may be to encourage fairness in outcomes, and money is a clear indicator of outcomes. In the first view of the world it would be perceived as unfair to differentiate between public and private employees; in the second it might be seen as unfair to remunerate State employees more generously than the earnings of members of the general

public. Faced with this choice, governments generally wish to avoid public controversy over excessive pay in the public sector.

Remuneration criteria are determined by a variety of factors and are very often related to the size of the SOE, work load, risk level, wage indices in the sector or company, as well as usual practice in the sector concerned. In establishing remuneration, the observed low levels probably reflects concerns regarding board remuneration generally, but may also reflect the fact that there are significant non-monetary rewards from accepting an SOE board position. For example, association with an SOE may bring a director reputational benefits and/or create longer-term opportunities that go beyond immediate financial gains. Due to these advantages, the prevailing view in most, but not all, governments is that remuneration does not currently affect the recruitment of candidates for serving on SOE boards.

Where civil servants sit on boards, the most common approach is for them to receive no remuneration in addition to their civil service salaries. While this may be necessary to avoid controversy, given their existing remuneration from the state, the risk with such a policy is that it creates a perception of these directors' activities as guardian of the public interest, rather than in the interests of the company. It may also dis-incentivise the most qualified civil servants from accepting such assignments.

Good practice: Board remuneration should reflect the market conditions to the extent that this is necessary to attract and retain highly qualified directors.

Ongoing efforts, discussed elsewhere in this report, to enhance board professionalism and performance are unlikely to be successful unless board remuneration allows SOEs to attract and retain directors with the required expertise and experience. However, a distinction needs to be drawn between SOEs operating in a competitive environment which, by extension, conditions offered to the board also need to be competitive, and SOEs with largely sector policy priorities whose board members are likely to have significantly different professional profiles. As a point of illustration (refer to the tables in Annex A) countries that practice centralised models of ownership generally have the most market-consistent board remunerations, largely because they also tend to be the ones that have gone the furthest in commercialising their SOEs (characteristically, one of the few “dispersed” systems with broadly market consistent board remuneration is found in the United Kingdom, a country with a well documented commercial approach to state-owned enterprises).

This is an area which has attracted recent attention. A stocktaking of SOE reform in OECD countries found that three Nordic countries (Finland, Norway and Sweden) as well as the Czech Republic have in the past few years issued policies or guidelines aimed at imposing some limits and restrictions on the

remuneration and employment conditions of SOE directors and executives (OECD, 2011). Still, national practices differ. Governments that limit, or at any rate regulate, board remuneration do so in a number of different way, that can be clustered into the following three categories (broadly, in increasing order of “generosity” of remuneration):

  • Attendance allowances. In a few countries SOE board members are not remunerated except for a certain allowance per board meeting attended. Obviously, the ultimate remuneration for board work then depends on the generosity of the allowance, but the tendency is (fuelled by a public perception of a board attendance being just “a few hours of somebody's time”) to keep attendance allowances low. Countries practicing this system include Greece, Spain and Slovenia. In the latter country, low levels of remuneration have been frequently cited as an impediment to attracting private sector expertise to SOE boards.
  • Caps or limits. Other jurisdictions have capped SOE remuneration at certain maximum levels. The maximums may be fixed, or they can be set according to a percentage of the respective SOEs' employee or managers salaries (as in Brazil, Hungary, Latvia, Poland,[1] and Portugal). For example, in Brazil the cap is 10% of the median manager's salary. In Hungary and Poland it is set by reference to a multiple of employee wages, and in Portugal the limit is struck by reference to the pay of executive directors. Latvia expresses Board member remuneration in relation to the CEO salary. At the same time, it is also the only country reviewed in this report to mandate a minimum (based on the national minimum wage). In some countries maximum limits are subject to a degree of flexibility, such as Poland which allows a possible exception for very important SOEs where remuneration can be 50% higher than otherwise stipulated. In the Slovak Republic, the board remuneration is capped at five times the national average wage salary.
  • • An overall remuneration structure. Some countries have developed more elaborate structures for differentiated board remuneration according to enterprises size and other indicators of workload. This is for example the case in Canada, Estonia, Israel, New Zealand and Sweden, which grade each SOE according to a ranking system and let remuneration levels depend on the rankings. However, the overall finding remains that, notwithstanding these more sophisticated methods of differentiation, board remuneration generally remains below the levels of comparable private enterprises.

A particularly flexible system is applied in New Zealand, where a lump sum is approved for each board, based on COMU's methodology which places SOEs into one of six remuneration bands (based on size and complexity). The

lump sum covers directors' fees for all normal duties (including board subcommittee attendance). The board chair and deputy chair receiving a higher proportion of the distributed amount given the weight of their responsibilities.

Good practice: Remuneration policies of civil servants serving on SOE boards should be carefully considered to ensure the right incentives.

  • [1] Remuneration levels are currently under review in Poland.
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