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New methods of determining remuneration due to management and supervisory board members

Amendments to the Salary Cap Act

Legal Alert (24/2016)

On 08 September 2016, after the allowed 30-day vacatio legis, Act of 09 June 2016 on the rules of determining remuneration due to individuals managing certain companies (Journal of Laws of 2016, item 1202) came into force. The new law introduces restrictions in respect of salary amounts and modifies the current rules of establishing remuneration of management and supervisory board members in a much broader sense than the Salary Cap Act did, thus seriously interfering in the internal affairs of companies with the State Treasury or local government interest. [1]

The purpose of the amendments, as indicated in the explanatory statement, is on the one hand to make the mechanism of establishing the remuneration due to managers more flexible and on the other, to align it with the market rules, taking into account the constitutional principle of social justice. 

The most consequential changes introduced in the new law include:

1.    A broader range of entities that fall within the scope of restrictions

The provisions of the Salary Cap Act only concerned companies in which the State Treasury held the majority interest. The new law applies if the State Treasury, a local government unit or an association of a local government unit, a state-owned or a local government-owned legal person have their shareholdings in the company.  In result, public entities have much more authority in respect of the remuneration due to members of management and supervisory bodies.

2.    Significant changes in the methods of determining remuneration due to management and supervisory board members

The newly-introduced regime puts the General Meeting under an obligation to adopt resolutions on the amounts of remuneration due to members of management bodies in State Treasury companies. In line with the new rules, the remuneration is divided into two portions: a fixed and a variable one.    The fixed part is a monthly base salary expressed as a specific amount, whereas the variable part is a complementary amount due for the company's financial year. Only members of the company's management body are eligible to receive it, which means that supervisory board members are solely entitled to the fixed portion of the remuneration. The amount of the fixed portion of the remuneration is conditional upon the size of the enterprise, i.e. the scale of its business activity, in particular its assets, revenues and headcount.

The variable portion, which will only be due to management board members, will depend on the accomplishment of the management goals and it cannot exceed 50% of the management board member's annual remuneration. In the case of public companies and the largest enterprises, the maximum threshold will be 100% of the management board member's base salary from the previous financial year.

3.    Eliminating the possibility to apply the regulations that allow members of management bodies to provide services based on management contracts if they are employed under the Salary Cap Act.  

Until now the provisions of the Salary Cap Act allowed members of management bodies to increase their remuneration through employment in subsidiaries or provision of management services as part of their own businesses.  The new regime eliminates that option at the same time putting the entities governed by the Act under the obligation to implement the new rules at the latest by the date of the General Meeting approving the report on the company's activities and the financial statement for the financial year beginning in 2016, i.e. not later than by 31 May 2018.   

Before that date it will be possible follow the contracts that are binding at the moment the Act takes effect.  

4.    Guidelines concerning certain provisions of contracts entered into with members of governing bodies

The new Act introduces a rule to the effect that only service contracts can be concluded with members of management bodies, regardless of whether the services in question will be provided as part of the business activity carried on by the specific individual or not.  Furthermore, the Act defines certain detailed terms of such contracts, including the obligation to perform the function of the management board member personally and restriction of the maximum notice period to three months.  The new regulations also put a limit on the severance pay which cannot exceed three times the fixed amount of the remuneration with an additional proviso that the individual must fill their function for at least 12 months before the contract termination. 

The use of competition bans related to the period after contract termination will be restricted too. In particular, under the new regime, the competition ban period cannot exceed six months and may only concern individuals that fulfilled managerial functions in the company for at least three months.

The underlying assumption of the new Act is to motivate the persons filling managerial positions in state treasury companies, because under the new regime their remuneration will reflect their performance.  One cannot help but notice that this is yet another attempt to tackle the publicly sensitive issue of remuneration paid to managers of State Treasury companies, and time will show if it is more effective than all the previous ones. Without doubt, new rules are a serious interference in the internal functioning of entities with public interest and - at least during the initial stages – they will add many new duties linked with implementation of the new remuneration system.

[1] Act of 03 March 2000 on remuneration due to individuals managing certain legal entities).

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