As of 2018, France has one of the most restrictive say on pay regimes in the world. As such, it is perhaps unsurprising that issuers are beginning to find work-arounds and loopholes in Loi Sapin II. During the last proxy season, there were several examples of companies following the letter of the loi, rather than its spirit.

Take for instance the severance payment made by Eurazeo to former CEO Patrick Sayer, who stepped down from the management board prior to the 2018 AGM. The decision not to renew his mandate was taken by Eurazeo’s board well ahead of time, on November 27, 2017.

While all remuneration for the year under review (in this case, 2017) is subject to a binding shareholder vote, Eurazeo did not include Mr. Sayer’s severance package in the total. Using somewhat circular logic, the board argued that final payment was itself dependent on shareholder approval of the 2017 bonus at the 2018 AGM, as the bonus formed part of the performance conditions for payment of the severance. In their view, the payment would only be definitively made in 2018. However it still appeared on the meeting agenda — but as a regulated agreement rather than a form of remuneration, and thus subject to shareholder approval on an advisory basis, rather than binding.

Eurazeo’s approach to Mr. Sayer’s severance payment also highlights problems around the definition of the cause for payment for post-employment benefits such as severance and non-compete agreements. In some cases, executives have received severance and/or non-compete payments despite not fully departing a given company.

Following his departure from the management board, Sayer was nominated to the supervisory board at the 2018 AGM. Despite remaining on good terms with the Eurazeo, he received €4.1 million under his severance agreement due to the company’s interpretation of the cause for payment under the agreement. As the cause for payment was departure for any reason other than gross misconduct, Eurazeo was able to interpret this as meaning departure from the executive role, rather than departure from the company itself.  Going by the vote results, many shareholders disagreed, with 20% of votes cast against approval of the payment at the AGM.

Similarly, Teleperformance decided to pay Paolo César Salles Vasques almost €7.6 million under a non-compete agreement invoked on his departure from the role of CEO. This despite the fact that he would continue to act as chair of the Company’s Brazilian subsidiary, with new performance conditions applied to outstanding LTI grants made prior to his departure from the CEO role.

While those LTI grants were pro-rated to account for his departure, Teleperformance is effectively  continuing to compensate Mr. Vasques through a non-competition agreement intended to prevent him from working for a competitor for a period after departing the company, even though he continues to serve as the chair of a company subsidiary. Shareholders cried foul, with approximately 49% of votes cast against approval of the amounts paid to him during the previous year, barely passing.

The Bigger Picture

This past proxy season has exposed some of the shortcomings of the so-called best practices governing post-employment benefits. The issue finally came to a head in June, when a massive uproar at the ~€4 million non-compete agreement of Carrefour’s 68-year-old departing CEO prompted a tightening of the provisions of France’s AFEP-MEDEF code regarding non-compete agreements and pension plans.

Yet post-employment benefits isn’t the only area where issuers are complying with the letter, but not the spirit, of the law. The aforementioned Teleperformance decided not to suspend the employment contract of the chief financial officer, Olivier Rigaudy, on his appointment as deputy CEO. Instead, Teleperformance merely augmented his existing pay package slightly, meaning that a significant proportion of his remuneration was paid through his employment contract as the Company’s chief financial officer. It’s an approach that diverges from the recommendations of the AFEP-MEDEF code (and French best practice), and relies on a loophole in French law relating to subordinated employment. His dual position allowed the company to interpret that they were not obliged to subject remuneration paid under his employment contract to shareholder approval (many shareholders had a different interpretation, with 30% of votes cast against the 2018 remuneration policy for the deputy CEO).

Glass Lewis’ Perspective

In accordance with the AFEP-MEDEF corporate governance code we believe that a company should terminate the employment contract of its top executive officers appointed to corporate office. For severance packages, we expect agreements to meet best practice standards in France, including: (i) the maximum amount of compensation, when combined with any non-compete clause, does not exceed two years of fixed and variable compensation including any payment due pursuant to an  employment  contract; (ii) the performance requirements are clearly  disclosed and challenging; and (iii) payment may only be made in the event of the executive’s forced departure.

In the case of Teleperformance, we recommended against approval of the amounts paid to Mr. Vasques, which included the non-compete payment, and the 2018 remuneration policy for Mr. Rigaudy, due to the concerns noted above. As discussed above, Eurazeo did not include Mr. Sayer’s severance payment as remuneration; however, we recommended voting against the regulated agreement governing the payment.

The Takeaway

Given the recent code changes regarding post-employment benefits, the days of severance and non-compete payments effectively being used as pension payments for soon-to-retire executives may have come to an end. However, though loi Sapin II is fully in place, the legislation still has some areas of ambiguity which will take some time to clarify.


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