Value, Risk and Sustainability in the compensation policy

    Remuneration policy in businesses

    The “Report on the remuneration policy and on the remuneration paid” is not a mere implementation that listed companies must fulfill annually, but rather it constitutes an important piece of the corporate governance model that allows the company to communicate externally and internally how it intends to direct the management’s actions in the direction of sustainable growth for a medium-long period.

    This report is based on the guidelines and recommendations indicated in the Shareholding Directive II, in the Legislative Decree 49/19 and Legislative Decree 58/98 (Consolidated Finance Act) and the Corporate Governance Code.

    These regulatory guidelines attribute great importance to the variable component of the remuneration, especially for a long-term period, and also recommend the adoption of non-financial targets.

    The preparation of the remuneration package therefore appears to be a fundamental step in defining the remuneration not only of the CEO but also of the top and middle management.


    Value, risk and sustainability in the remuneration policy: the Enav and Eni case

    Here is an analysis of the remuneration policy which shows how “Value”, “sustainability” and “risk” are distributed in the short- and long-term incentives and which are of greater importance when defining the objectives. Let’s take into consideration the folowing two Italian companies which work in two different sectors. The first is Enav, it is involved in the management and control of air traffic and the second refers to Eni which works in the sector of oil and gas. In this way, it is possible to observe how the targets (risk, value and sustainability), present in the Remuneration package of the CEO and top management vary in companies of different sectors and different degrees of maturity.

    From the analysis of the Report on the remuneration policy and remuneration paid in 2019 of the companies mentioned above, the following information emerges:

    • In the case of Eni it is possible to find that a significant importance is given to the variable component with respect to the fixed component, with prevalent incidence of the Long-Term Incentive (LTI) component;
    • measures relating to value creation carry greater weight than non-value financial measures financial (especially for ENAV) and are in line with the best practices of marketing at both a Short-Term Incentive (STI) and LTI level;
    • however, measures relating to sustainability show increasing emphasis, furthermore greater for Eni. In particular, the greater weight of the sustainability objectives for Eni would appear to depend on the specificity of the sector in which it operates and also on a greater degree of seniority in relation to these issues.

    Risk measures, on the other hand, appear at first to be less represented in the Reports on remuneration policy and the remuneration paid. In light of this last point, it is worthwhile considering further reasoning on risk measures.


    Risk Adjusted Performance Measures

    First of all, it must be said that Risk Adjusted Performance Measures (RAPM) are typical of entities which manage financial risks (i.e. banks and insurance companies), while in the case of non-financial entities and therefore in the presence of industrial risks, the application of these measures appear to be much more complex and therefore not widespread at all.

    However, it should be underlined that Eni indicates a target linked to Net Debt / EBITDA and therefore to the financial discipline, or to the management of liquidity risk (which is not the case for ENAV which highlightsa positive net financial position in 2019).

    It is therefore possible to state that the objectives related to risk management are not absent in the remuneration policies of non-financial entities.

    Finally, it can be said that when economic-financial objectives are assigned (eg. EBIT, EBT, FCF), these must be planned and implemented ensuring that a suitable amount of resources are allocated (OPEX and CAPEX) for risk mitigation activities and therefore useful to comply with the risk appetite, and that such mitigation activities are effectively implemented.

    However, considering the Report on the remuneration policy and on the remuneration paid, often it is unclear how often this actually occurs. This relationship is probably not responsible enough for providing evidence of risk management. A greater emphasis on management measures of the risk, however – especially from a design point of view – could find space in the relationship in the report in question especially if this occurs in the remuneration policy.

    On the other hand, this is what is happening in relation to the management of the risks associated with the Covid-19 pandemic, mainly in relation to the STI, as emerges from recent market research.

    Therefore, greater disclosure within the report eg. about mitigation projects of the risk, if any, could represent a desirable evolutionary trend.



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