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Corporate Governance Reports provide information also about the application of the CG Code’s Article concerning remunerations, approved by the Corporate Governance Committee in March 2010 and only slightly modified with the new Code, approved in December 2011.

Other information are available in the Remuneration Reports, drawn up – by the BoD of listed companies – according to Legislative Decree no. 259/2010, which introduced in the Consolidated Law of Finance (CLF) the new Article 123-ter. The analysis of Remuneration Reports provides complementary information to those that are disclosed in Corporate Governance Reports. Therefore, as in 2013, it seemed appropriate to conduct a coordinated analysis.

4.1. The structure of Remuneration Reports

The Remuneration Report is divided into two sections.

The first section describes: a) the company's remuneration policy with reference to, at least, the following year, and b) the procedures used for the adoption and implementation of this policy102.

The second section provides information, on an individual basis, for directors, statutory auditors and general managers, and, on an aggregate basis, except from specific Consob Issuers Regulation provisions, for key management personnel103:

102

The Remuneration Report should provide at least information required by Consob in the Scheme no. 7- bis, Annex 3A of the Issuer Regulation. Information required for the first section of the Report should be given also in a negative form, if they are not available since they are concerning some issues that are not provided by the remuneration policy.

103

See Circolare Assonime no. 8/2012, La disciplina sulle remunerazioni delle società quotate. Art. 84- quater of the Consob Issuer Regulation refers to the Scheme no. 7-bis, Annex 3A of the Regulation, which provides a scheme about the information to be provided in the Remuneration Report. That Scheme requires information to be provided, on an individual basis, in case of companies of “non-small” size, as defined by Consob Regulation no. 17221/2010, also for key management personnel in case their “total compensation (as a result of monetary remuneration and that one based on financial instruments, including also those received by subsidiaries and affiliated) exceeds the highest total compensation” paid to “members of the administrative or control corporate bodies or general managers”. This happens rarely

a) it provides an adequate representation of each remuneration component, including termination payments and indemnities in case of early resignation, highlighting its consistency with the company's remuneration policy, as approved in the previous fiscal year of reference;

b) it analytically illustrates the compensation paid during the year, for any reason and in any form, by the company, its subsidiaries or affiliated companies.

The AGM is required, pursuant to Article 123-ter, paragraph 6 of the CLF, to "decide in favour or against" the first section of the Report. The vote is not binding.

The Remuneration Report is therefore an extensive report, which provides a lot of information, both ex ante, on the policy adopted by the company, and ex-post, on the effectively paid remuneration. We chose to focus our analysis on directors, statutory auditors and general managers since information about their remuneration is available on an individual basis104. Therefore our conclusions are not necessarily extensible to the management of the company, whose compensation is often structured in a different way.

Information have been collected both in the Section I (describing the remuneration policy and the governance procedures put in place to define remunerations) and in Section II (reporting the compensations effectively paid).

4.2. The Remuneration Policy

The first section of the Report provides information on the remuneration policy and the governance procedures105.

The policy may have a different level of detail and specification depending on the company and on the specific topic. In particular, not all companies have expressed a precise orientation with respect to each point provided in the regulatory scheme. A number of companies either communicates not to have made specific provisions

and it is generally related to “exit situations”, when a subject hierarchically subordinate receives – exceptionally – a total remuneration which is higher than that paid to the top management of the company (MD or GM).

104

Therefore we decided not to analyse the remuneration of key management personnel, which are disclosed only on an aggregate basis. However, managers who sit in the board of the issuer are included in the analysis (generally classified as "other executives", see below).

105

relating to a specific point or state that the board "may" decide on a case by case basis106.

The following aspects were examined:

a) Benchmarks

The Scheme 7-bis of the Annex 3A to the Issuers Regulation (the so-called Consob Scheme) requires issuers to provide, in the first section of their Remuneration Reports, if the remuneration policy has been defined also with reference to the policies of other issuers and, if so, how this benchmark has been selected.

177 companies disclosed this information (i.e. 77% of the aggregate). Among those providing this kind of information, 68 companies (i.e. 30% of the aggregate) provide also information with respect to the criteria used to identify the benchmark companies (peers): or, however, companies considered as basis for comparison when fixing remunerations; the percentage is substantially higher (50%) among FTSE Mib companies. Peers identification is instead quite uncommon: the name of the benchmark has been disclosed only by 13 companies (6 in 2013), i.e. 6% of the aggregate (see Tab. 24).

b) Consistency with the remuneration policy

The Consob Scheme requires issuers to provide, in the second section of their Remuneration Reports, an adequate representation of each item of the remuneration table, underlining the consistency with the policy of reference. Therefore, we analysed the Remuneration Reports looking explicit information about the consistency of remunerations paid in 2013 and the policy “of reference”, which is, usually, the remuneration policy approved by the AGM of the same year. Information on this point has been provided by a small number of issuers: 74 companies, i.e. 32% of the aggregate (strongly increasing from 21% in 2013: see Tab. 24).

The AGM vote is, as already mentioned, an advisory vote: the exceptions are companies in the financial sector, where the AGM should “approve” the remuneration policy107. Companies providing this kind of information are usually disclosing also the consistency of the policy with the effectively paid remuneration. Only in 3 cases (5 in

106

This kind of communication is frequent in cases of termination payments. Many companies disclose that, in fact, there are no "agreements that provide a compensation" (see Art. 123-bis, par. 1, lett. i) CLF) to directors in the event of resignation or unfair dismissal. However, companies are frequently disclosing that the BoD "may" or "shall" assign such compensation in the future.

107

See par. 4.1. of the Supervisory measures of the Bank of Italy (March 30th, 2011) on “Politiche e prassi di remunerazione e incentivazione nelle banche e nei gruppi bancari” and Art. 6 of the Isvap Regulation n. 39 (June 9th, 2011) on “Politiche di remunerazione nelle imprese di assicurazione”.

2013) companies declare that that they have detached from the policy submitted to the vote of the AGM. A bank discloses its decision not to enforce the variable component of the remuneration, because of its difficult economic situation; in the other two cases the directors themselves (or some of them) spontaneously decided not to receive part of the remuneration.

c) Changes of the policy

The Consob Scheme requires issuers to provide, in the first section of their Remuneration Reports, the objectives pursued with the adopted remuneration policy, its principles and eventual changes of the policy compared to the previous year.

In 38 cases (i.e. 17% of the aggregate, decreasing from 22% in 2013) Reports are explicitly disclosing that the remuneration policy has been changed with respect to the previous year (see. Tab. 24). The reduction is stronger among larger companies (from 34% to 19% of the aggregate among FTSE Mib) and, in particular, in the financial sector (from 44% to 17% of the aggregate).

Figure 35

d) Fixed and variable remuneration

The Code recommends that a significant part of the remuneration of managing directors and key management personnel shall be linked to the achievement of specific performance objectives, also no-economical ones, set out in advance and consistent with the remuneration policy’s guidelines.

16,5% 19,4% 19,0% 16,5% 17,4% 16,4% 15,0% 15,5% 16,0% 16,5% 17,0% 17,5% 18,0% 18,5% 19,0% 19,5% 20,0%

Companies disclosing changes to the remuneration policy in 2014, by market index and sector

The existence of a variable remuneration linked to business results is disclosed by 175 companies (i.e. 76% of cases: the figure is slightly increasing from 2013, when the percentage was equal to 74%) (see Tab. 25). The frequency of such disclosure increases according to company’s size (94% in FTSE Mib, 88% in Mid Cap, 71% in Small Cap). The existence of a relevant number of companies (medium-small) where no director receives a variable remuneration may be surprising.

Figure 36

e) Parameters

The Code makes various recommendations regarding the structure of the variable component. Inter alia, it is provided that: a) the fixed component and the variable component should be properly balanced; b) it should be set a ceiling for the variable component; c) performance goals should be predetermined, measurable and linked to the creation of value for shareholders over the medium-long run; d) the payment of a significant portion of the variable remuneration should be deferred for an appropriate period of time; e) compensations provided for early termination should not exceed a specified amount or a specified number of years of remuneration.

A description of the – predetermined – performance parameters, to which the variable remuneration is linked, is almost always provided. This is true in 167 cases (95% of the companies having a variable component for directors; 92% in 2013: see Tab. 26).

76% 94% 88% 71% 87% 75% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Companies where one or more directors receive a variable remuneration, by market index and sector

Parameters’ choice may be different108

; the reference to accounting indicators (EBITDA, EBIT, Profit, EVA, etc.) is largely prevailing: it can be found in 93% of cases. Way less common (42% of cases) is the reference to "business" targets. The presence of remuneration components related to shares’ market value (stock-based compensation plans, usually options or allocation of shares, the latter often linked to the achievement of business results; more rarely phantom plans based on algorithms related to this value) is reported by 38% of companies; it is more frequent among larger companies (65% of FTSE Mib companies disclosing the presence of variable components). The adoption of stock-based compensation plans for directors is strongly decreasing (46% in 2013, 50% in 2012).

Figure 37

In 126 cases (72% of the companies having a variable component) an indication of the relative weight of fixed and variable component is provided (see Tab. 25). Such information is more frequent in the financial sector (85% of cases); less frequently, but still in a pretty high percentage (70% of cases) in other industries. It is basically impossible to report aggregate statistics on the relative weight of the two components because this information is generally provided in a non-homogeneous form, depending on the different structure of incentive plans. In particular, the variable component can

108

The following data should not be compared, because different criteria have been used (e.g. bonus defined using an Ebitda criterion and stock options linked to the shares value); this is true for the remunerations established for different beneficiaries or even for the same one.

89% 26% 50% 95% 41% 46% 93% 42% _38% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Economic results (profit, Ebit, Ebitda, EVA,…)

Business objectives Share value Parameters adopted for the definition of the variable

remuneration, over time

be referred to the target of the plan or to the maximum value, to the individual components or to the total, to the annual or to the overall amount, etc..

In the 89% of cases companies communicate to have set a cap on the variable remuneration.

f) Short and medium-long term oriented variable components

The presence of incentive components – clearly separated – in the remuneration is very widespread: variable remunerations are generally linked to short term (Management-By-Objectives plans or MBO) or medium-long term performance targets (Long-Term Incentive Plans or LTIP). The CG Code recommends that the variable remuneration should be defined in such a way to pursue the creation of value for shareholders in the medium-long term, without any specific indication concerning the timing of the performance targets. A short term oriented variable remuneration has been observed in 156 cases (i.e. 89% of companies disclosing the presence of a variable remuneration; 82% in 2013).

On the other hand, 131 companies disclosed the adoption of a long term based variable remuneration (i.e. 75% of the total, substantially increasing from 67% in 2013). Such a variable component is more frequent in the financial sector (80% of cases) and, above all, among larger companies: 94% of companies among FTSE Mib disclosed the presence of a long term based variable remuneration; the percentage drops to 80% among Mid Cap and to 65% for Small Cap).

Figure 38 75% 94% 80% 65% 80% 74% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

TOTAL FTSE MIB FTSE MID

CAP

FTSE SMALL CAP

FINANCIAL NON- FINANCIAL Companies disclosing a medium-long term oriented variable

The Code recommends that shares, share options or any other right granted to directors in connection with stock-based plans have a vesting period of at least three years. Given the great variety of plans that could be observed in reality, it is not easy to calculate aggregate statistics; this is true also because the terms of reference have changed over time. First, it should be noted that incentive plans – especially stock- based ones – are typically long-term contracts: many plans approved in years (dating as far back as 2001) preceding the formulation of the above-mentioned recommendation are still active. Therefore, the implementation of this recommendation can take place only gradually. Moreover, beneficiaries of stock grant plans may not be subjected to vesting periods but to lock-up clauses instead, a solution that can lead to similar effects.

g) Indemnities in case of resignation or dismissal

The existence of a cap for indemnities to directors in case of resignation or unfair dismissal is explicitly reported - in the Remuneration Report - in 57 cases, i.e. 25% of the aggregate, as recommended by the Code. It does not mean necessarily that each of these companies has already adopted an agreement on this point: in many cases, in fact, they have a policy which is going to be applied in the future, if and when specific agreements with directors and key managers will be signed. The frequency of such cap is much more frequent among FTSE Mib companies (47% of cases).

Figure 39 23% 47% 30% 17% 22% 23% 21% 47% 25% 12% 12% 22% 25% 47% 26% _23% 13% 26% 0% 10% 20% 30% 40% 50% 60% 70% 80%

Definition of a cap to termination payments, over time

Eventual caps are defined according to different parameters and, consequently, data are not easy to analyse on an aggregate basis. The most common situation is the settlement of the cap at two years of remuneration. However, we can also find companies where the cap is lower (for instance, 0.3 or 1 year of remuneration) or higher (for instance, 2.5 or 3 years of remuneration), up to a maximum of 6 years of remuneration. Companies are generally (even if sometimes not explicitly) referring to the global remuneration, including its variable component. On the other hand, some companies make explicitly reference only to the fixed remuneration, eventually linked to the RAL of the recipient. In some other cases, they disclose the payment of a fixed remuneration, of a more complex remuneration package, that includes a fixed component plus a component linked to the variable remuneration already received, or a “termination treatment” (trattamento di fine mandato, TFM) linked to the length of the mandate or the time prior to the natural termination of the mandate.

Some companies underlined that the policy should be understood as the “main rule and would not apply in exceptional circumstances”. Other companies declare that the BoD “can” decide to provide these indemnities; others state that the payment of an indemnity is “generally not intended” (except from law prescriptions for directors that are also managers of the company). In such cases, the cap in obviously intended as 0.

4.3. Directors’ remuneration

Data on the level and structure of individual directors’ remuneration were collected from section II of the Remuneration Report. As in the past, these data have been matched with information drawn from Corporate Governance Reports, in order to extract information about some relevant issues.

The remuneration reports disclose details on the remuneration of individual directors: in particular, they report the tables drawn up in accordance with the models set out in Scheme 7-bis of Annex 3A of Consob Issuer Regulations, which provide information on the following points:

- Table 1: Remuneration;

- Table 2: Stock options;

- Table 3A: Incentive plans based on financial instruments other than stock option;

Our analysis mostly focused on Table 1 which lists the compensation paid according to the following classification:

a) Fixed Compensation;

b) Compensation for committee participation;

c) Variable non-equity compensation, in turn divided into "Bonuses and other incentives" and "Profit sharing";

d) Non-monetary benefits;

e) Other remuneration.

After the total column are listed:

f) Fair value of equity compensation;

g) Indemnities for the end of the mandate and termination payments;

that allows us to estimate the total remuneration of directors, inclusive of the value (calculated in accordance with IFRS) for the accrual year and also inclusive of extraordinary items related to the termination of office109.

The Consob Scheme requires companies to provide the information in Tables 1, 2, 3A and 3B "separately with reference to the positions hold in the company drafting the financial statements and for those that may be held in subsidiaries and associates." The Scheme mandates the creation, in each table, of three separate lines for each member of administrative and control bodies that, following a standard pattern, should indicate: a) the compensation paid by the issuer; b) the total compensation paid by subsidiaries and associates c) the overall compensation (equal to the sum of the first two rows). Where board size is particularly large, this may lead to the creation of very complex tables, and often to the duplication of a number of information already

109

When looking at the reported data, we need to be aware that a discontinuity in the historical time series data exists, because of a change in the Consob scheme. Consequently, historical series till 2011 have been reclassified and made corresponding to the following categories: a) Remuneration for the charge = Fixed remuneration; b) Non monetary benefits = non monetary benefits; c) Bonuses and other incentives = Bonuses and other incentives; d) Other remunerations = Other remunerations. Committee’s fees were previously ranked, from some companies, as “Remunerations for the charge”, while from others as “Other remunerations”; until 2011 “Remuneration from subsidiaries” and “Indemnities for the end of the mandate” were typically ranked as “Other remunerations”. The scheme implemented thus let us make a comparison with a reasonable grade of precision.

provided in other parts of the Report110. In the following analysis (and in the tables that can be found in the annex) we preferred to reclassify the information using a more compact pattern, which gather the fees paid by subsidiaries/associates in an ad-hoc column (rather than in a line describing the individual components).

Some companies have reported the compensation paid by subsidiaries and associates with a level of detail even higher than required by the Regulation (e.g. filling - for each director – a number of lines for each subsidiary from which they received a compensation, and/or filling in separate lines depending on the nature of the compensation)111, or reported as many tables as the number of subsidiaries/affiliated companies. 7 companies (14 in 2013, 30 in 2012)112, after reporting the compensation paid by the issuer on an individual basis, have then provided information regarding remuneration paid by subsidiaries only on an aggregate basis, that is, in a single line, without distinguishing individual earners: this choice does not comply with legislative requirements (Article 123-ter, par. 4, CLF mandates companies to disclose on an individual basis all information contained in the second section of the Report). Some companies have provided the information using a tabular scheme different from the one required by Consob: this happens, above all, when the remuneration structure is quite simple and the adoption of the Consob Scheme would lead to tables with many empty boxes. A small company has reported a 4 columns table, as suggested by the