The Executive Remuneration Review: Denmark
The regulation of executive remuneration and applicable restrictions in Denmark mainly depend on a basic distinction in Danish employment law, namely whether the executive in question is subject to the Danish Salaried Employees Act and other legislation adopted to protect the position of wage earners (the Legislation) or not. If not, the regulation of the employment relationship is the executive agreement.
In general, only executives who hold an independent overall management position and who are not subject to the managerial right of others in respect of the day-to-day affairs of a company and – in general – those who are registered as part of the daily management system generally applied by Danish companies (registered executive management) are exempt from the provisions of the Legislation.
The distinction is relevant in the application of a lot of the regulation referred to in this chapter. Executives who are subject to the Legislation also enjoy the protection afforded by other regulation than the Salaried Employees Act, specifically when it comes to the use of stock options and restrictive covenants. The legal status of equity-based incentive schemes – for instance, in the form of management incentive programmes for private equity fund-held companies is under on-going development and is mainly regulated by case law.
For regulated financial services, remuneration restrictions are in the Danish Financial Business Act. The remuneration restrictions apply to members of the board of directors, executive management and such employees who, because of their position and scope of responsibilities, are designated by the board of directors of the company as risk-takers (MRT).
i Income tax for employees
Employees resident in Denmark, whether executives or registered executive management, are taxed on their remuneration as personal income. Employees resident in Denmark are fully liable for taxes on their worldwide income. Non-resident employees may be subject to limited tax liability if they perform services in Denmark.
Personal income tax is levied on a net income principle, meaning that taxes are levied after the deduction of relevant qualifying costs spent on obtaining and securing the income.
Generally, income is taxed when an employee obtains a final legal right to the income. However, if payment is delayed, the tax liability can be postponed for up to six months. At what point a legal right is obtained depends on the underlying agreement or applicable legislation. If the award of taxable income is subject to suspensory conditions, the time of taxation may be deferred.
Personal income is taxed at up to 52.06 per cent (2020) excluding a mandatory labor market contribution (8 per cent of the gross salary prior to any deductions). In 2020, all employees over 18 years of age have an annual personal allowance in their personal income of 46,500 Danish kroner that is exempt from tax. Capital gains on shares up to 55,300 Danish kroner are taxed at a rate of 27 per cent, while sums exceeding this amount are taxed at 42 per cent. For spouses, the levels are doubled.
Generally, personal income consists of cash remuneration including cash bonuses, benefits (e.g., company cars, telephones, internet and newspapers), shares and options. Severance pay made as a result of termination of employment is, with a few modifications, taxed as personal income.
In general, remuneration in the form of shares, options and warrants are taxed as personal income.2 The remuneration is taxed when the employee obtains a final legal right to it. However, there are two different schemes in place to allow for deferral of taxation or a reduced tax rate.
One scheme, applicable to all employees and members of boards of directors, allows for remuneration in the form of options and warrants to be subject to a deferred tax payment. Taxes are not levied until the options or warrants are exercised. The income is still taxed as personal income. The employer can deduct the costs of such remuneration as described in Sub Section II.iii.
|Options/warrants||Restricted Stock Unit (promise to deliver stock in the future)|
|Tax treatment upon grant||No tax (under certain conditions)||No tax (under certain conditions)|
|Tax treatment upon obtaining a final legal right||No tax (under certain conditions)||Personal income tax|
|Tax treatment upon exercise||Personal income tax||No tax (under certain conditions)|
|Tax treatment upon sale of underlying shares||Personal income tax||Capital gains tax up to 42 per cent|
Under certain conditions, employee share programmes may qualify for a more favorable tax treatment, which is described in the table below. Under this scheme, taxation is both deferred and reduced to the capital gains rate.
|Options/warrants||Restricted stock unit (promise to deliver stock in the future)|
|Tax treatment upon grant||No tax (under certain conditions)||No tax (under certain conditions)|
|Tax treatment upon vesting||No tax (under certain conditions)||No tax (under certain conditions)|
|Tax treatment upon delivery||No tax (under certain conditions)||No tax (under certain conditions)|
|Tax treatment upon sale of underlying shares||Capital gains up to 42 per cent||Capital gains up to 42 per cent|
To qualify for this favourable tax treatment, several conditions must be met. These include, inter alia, the following:
- the tax scheme only applies to employees rendering personal services in an employment relationship. Members of boards of directors, consultants and such like are not considered employees under the scheme;
- the remuneration must consist of shares, stock options or warrants and must be granted to employees personally. Thus, employees cannot receive shares, etc., through a holding company;
- the shares etc. may not constitute a separate class of shares (i.e., the granting company cannot create a separate class of shares specifically for employees under the scheme); and
- the value of the shares etc. may not exceed 10 per cent of an employee's annual total remuneration. However, if it is a general scheme for not under 80 per cent of a call of employees, the value of the shares etc. may be up to 20 per cent of an employee's annual total remuneration.
The value of shares and such like is calculated differently depending on the type of remuneration and the terms of the share plan, however, the mechanism in the plan and how the executive acquires final right to the shares is important as to whether the shares are considered remuneration and taxed at such or shares subject to capital gain taxation and also to decide when the taxation is effective which must always be considered.
The value is for the schemes subject to the favorable tax treatment assessed at the time when the actual exercise price or purchase price is known and at the latest when the relevant employee obtains a final legal right to the shares.
ii Social taxes for employees
All by legislation prescribed social contributions are included in income taxes which is the gross tax of 8 per cent, also known as the labor market contribution. In addition, employees and employers pay a minor amount per annum to a mandatory labour market supplementary pension scheme (ATP).
Employers are required to include the value of share and cash remuneration in the basis for payroll taxes.
iii Tax deductibility for employers
The general rule for deductibility of costs is that companies may deduct costs incurred to acquire, secure and maintain the income. Costs related to remuneration that satisfy this criterion are consequently deductible. This includes cash bonuses and most forms of severance pay. No general distinction is made between ranks and titles regarding deductibility.
Dividends are not deductible. Companies may deduct an amount equal to, for example, the discount given in an ESPP to an employee in relation to shares, options or warrants. The deduction is made the year in which the employer is incurred with the cost.
Costs related to employee share programmes under the favourable tax scheme as described above are specifically excluded from deduction by employers.
iv Other special rules
Pension contributions made by an employer on behalf of an employee are under certain conditions tax free for the executive and deductible as cost for the employer. Taxation is postponed until realisation of the pension account.
Benefits included in an executive's remuneration package are taxed as personal income or has certain specific tax values – for example, a free phone, free internet or car arrangement. Generally, the value of these is set at the market value of the specific usage or corresponding to the private cost saved by the executive.
Members of boards of directors are as a main rule taxed personally on fees for the board position.
Tax planning and other considerations
Under certain conditions, non-resident key employees can be recruited to work in Denmark and become resident in Denmark for tax purposes and qualify for a preferential tax treatment. Employees who qualify for the scheme can opt for a 32.84 per cent (27 per cent rate plus labor market contribution) gross tax on their cash remuneration, taxable value of company car, company paid telephone and company paid health care insurance etc. All other income, including other benefits, are taxed at ordinary tax rates. Taxation under the scheme can be used for seven years in total. Only employees who have not been liable to pay taxes in Denmark for the past 10 years can qualify for the scheme. Key employees are not allowed to have a controlling influence on the employing company and cannot hold more than up to 25 per cent of the share capital or 50 per cent of the votes in the company of employment.
i Severance terms
Fair reasons for dismissal
Executives who are exempted from the legislation are not protected against unfair dismissal. They would instead usually have agreed to longer notice periods and maybe even certain severance benefits enhanced compared to those following from the legislation.
Executives subject to the Salaried Employees Act are protected against unfair dismissal after 12 consecutive months of employment, and it is often seen that executives by virtue of agreement apply the Salaried Employees Act to their terms of employment. Such agreement will not automatically imply that the remainder of the legislation applies. An employee is treated as dismissed if the employer gives notice of termination or invokes misconduct by the employee as reason for considering the employment relationship as terminated. No third-party consent is required.
In cases of gross misconduct (e.g., theft or acts of disloyalty), the employer may summarily dismiss the executive. Otherwise, the fairness of a termination with notice depends on the materiality of the misconduct of the employee. In many cases, a prior written warning is required to ensure a fair termination procedure, but at executive level warnings are not used.
The entitlement to dismiss for business-related reasons is very broad (e.g., in cases of lack of work or restructurings, it is essentially a management assessment of how many employees and whom to dismiss). An executive is typically employed at will, but as mentioned with enhanced notices.
Unless no notice period applies – which is typically due to short seniority or special regulation in individual employment contract – employees are entitled to be provided with a notice of termination.
The notice period would follow from:
- the Salaried Employees Act;
- a collective bargaining agreement; or
- the individual employment contract.
For executives the notice will typically be agreed in the contract. Depending on seniority, the Salaried Employees Act provides that notices can be given by a company with up to six months to the end of a month. An executive subject to the Salaried Employees Act may terminate the employment with one month's notice to the end of a month, regardless of seniority. It may, however, be agreed in writing that a longer notice must apply, provided the notice to be given by the company is extended correspondingly. Such prolongation is commonly agreed for senior executives.
The Salaried Employees Act also provides for statutory severance pay. A salaried employee who has been employed for 12 and 17 years respectively is entitled to severance pay corresponding to one- or three-months' salary when the employment is terminated by the company.
A salaried employee who is dismissed without reasonable cause, and who has been employed for at least one year at the time of dismissal, is entitled to compensation for unfair dismissal.
Provided the executive has reached the age of 30, the maximum compensation equals three months' salary. The maximum compensation is increased to four- and six-months' salary after 10 and 15 years' seniority, respectively. Maximum compensation is rarely awarded but is within the range of two-thirds of the maximum level.
Collective bargaining agreements rarely applies to executives.
For executive management not subject to the legislation, both the length of the notice periods and the right to severance pay (if any) are based solely on agreement. Usually, it will also read from the contract if the executive is entitled to garden leave during the entire or part of the notice period.
ii Right to bonus in connection with termination of employment
Under Danish employment law, variable remuneration is generally governed by two separate sets of rules: Section 17a of the Salaried Employees Act and the Stock Options Act. Neither of these sets of rules applies to executive management being exempted from the legislation. Section 17a of the Salaried Employees Act applies to cash bonus schemes and similar benefits (such as a discounted share price, phantom shares and shares granted free of charge) and provides that executives are entitled to pro rata bonuses for the qualifying bonus period in which termination is effective – that is, subject to the Salaried Employees Act payment of bonuses and the like cannot be contingent on continuous employment at the date of payment, however, always contingent on the criteria for bonus otherwise being met.
The Supreme Court has with only one very special deviation confirmed that the pro rata principle applies also to stay-on bonuses.
When calculating the length of employment, the entire notice period (including periods of garden leave) is included. The right to a pro rata bonus applies irrespective of whether the employment is terminated by the company or the executive and irrespective of whether the termination is considered fair. Even in cases of gross violation, the pro rate principle applies.
In some executive contracts for executives not subject to the legislation, it is not unusual that there is an entitlement to bonus if the executive is terminated by the company, whereas if the executive terminates the employment, the bonus entitlement lapses.
The Stock Option Act applies to stock option schemes in which the time of the grant and the time of exercise are not identical. The Act presupposes that the exercise of an option results in ownership of an actual share meaning that, for example, phantom shares are not governed by the Act.
The Stock Options Act does no longer include a statutory distinction between good leavers and bad leavers. The former rules entailed that executives who terminated their employment or whose employment was terminated due to misconduct would forfeit outstanding options at the end of employment.
Executives whose employment was terminated by an employer or who would terminate the employment due to breach by the employer would have a mandatory right to retain their outstanding options and to exercise them on the terms under which they were originally granted.
The new rules that apply for programmes established after 1 January 2019 no longer distinguish between good and bad leavers. There is now a hypothetical3 increased freedom of contract in relation to leaver rules and enforcement of buy-back clauses.
The amended Stock Option Act now has a prohibition on agreements that entitles the employer to buy back shares acquired pursuant to the exercise of options under the Act at a price lower than market price.
iii Restrictive covenants
The Danish legal regulation of restrictive covenants does not only comprise white-collar workers, but all kinds of employees save for executives with a few exceptions.
During a business sale, and when hiring temporary workers through a temporary employment agency, no-hire clauses are recognised, however, on a more general basis, no-hire clauses have been prohibited since 1 January 2016. Existing no-hire clauses (entered prior to 1 January 2016) are enforceable until 1 January 2021 whereupon they will become invalid.
Covenants are enforced through injunction, liquidated damages (if agreed to) and payment of damages for any financial loss suffered.
Non-competition and non-solicitation of customer covenants can typically be enforced after the cessation of employment, however, may also apply during the ordinary course of employment, where violation of such clause typically also will constitute a material breach of the employment relationship.
The length of the covenant depends on what has been agreed, but for non-competition or non-solicitation of customer clauses, the maximum duration which can be agreed by the parties is 12 months after the effective date of termination. For combined covenants, the maximum duration is six months after the effective date of termination.
Non-competition clauses become null and void if the employment relationship is terminated unfairly or because of reasons attributable to the employer, including gross violation of contract on behalf of the employer.
As a peculiarity, other personal non-competition restriction agreed outside of employment relationships, for example, in a shareholder agreement or in a managing director contract, will under the same circumstances become null and void.
The employer must pay the employee compensation in the period after cessation of employment during which the covenant applies.
For covenants with a duration of up to six months, the monthly compensation payable amounts to 40 per cent of the employee's monthly salary level immediately prior to resignation.
For covenants with a duration of up to 12 months, the monthly compensation payable amounts to 60 per cent of the employee's monthly salary level immediately prior to resignation.
For combined covenants with a duration of up to six months, the monthly compensation payable amounts to 60 per cent of the employee's monthly salary level immediately prior to resignation.
Compensation for the first two months is paid up front at resignation. If the employee has other income during the period in which the restriction applies, such income can be set off in the compensation, however, the minimum compensation is 24 per cent and 16 per cent, respectively, depending on the duration of the covenant or whether it is a combined covenant.
Following the implementation of the Market Abuse Regulation, it is no longer a formal requirement for companies whose securities are listed on Nasdaq Copenhagen AS to prepare internal rules for the members of their boards of directors and employees trading in their securities. The former requirements in this respect of the Danish Securities Trading Act and the Nasdaq Copenhagen Rules for Issuers have been repealed. The Nasdaq Copenhagen Rules for Issuers, however, still recommend that such internal rules are in place as a minimum, reflecting the Regulation rules on closed trading windows and considering whether further restrictions are relevant. It is common practice for Danish-listed companies to have such rules in place.
Members of the boards of directors and the executive management of listed Danish companies as well as higher-ranking executives, to be identified by the company based on their position, responsibilities and exposure to confidential information, are obliged to report their trading of securities and that of their relatives in company securities. The transactions subject to reporting are those listed in Article 10 of Commission Delegated Regulation 2016/522. The methods for reporting are those set out in Commission Implementing Regulation 2016/523.
The Companies Act does not provide a general obligation on Danish companies to disclose executive remuneration. For listed companies (see below), a corporate governance recommendation applies to the effect that companies adhering to these rules are recommended to disclose the individual remuneration of members of their board of directors and executive management. These rules are set to change when the implementation of Directive 2017/828 will be directly applicable from 3 September 2020.
For companies listed on Nasdaq Copenhagen, the rules applicable to issuers prescribe that companies must publicly disclose any decision to introduce a share-based remuneration programme for the executive management and other employees, including the dilution effect of the programme. The disclosure is generally required to include specifics about:
- the types of share-based remuneration;
- the groups of persons covered by the programme; and
- the timing, scope and total number of shares and the period within which the programmes can be exercised, along with strike price and information on conditions to be fulfilled under the programmes, and the aggregate market value of the share-based incentive programme.
The disclosure obligation relates to share-based and synthetic programmes, and thereby also applies to cash or cash-like programmes tied to the share price. The disclosure requirement is met by a company announcement. There is no requirement to publish plan rules or individual agreements, or to summarise these in any greater detail.
The Danish Financial Statements Act has a rule according to which Danish companies comprised by accounting class C and D regulation must in their financial statement specify, for example, the aggregate remuneration for the financial year to current and former members of their board of directors and executive management, as well as any obligations to provide pensions for these persons.
If a separate incentive programme exists for members of a board of directors or executive management, the category of members of the board of directors or executives covered, and the type of remuneration and information necessary to determine the value thereof, must be included. Information is to be provided for the year of the financial statements.
The Companies Act sets out the fundamental corporate rules for both private and public limited companies. The Act contains regulation according to which the members of board of directors or supervisory committees and executive management may receive either fixed or variable remuneration.
Irrespective of form, the remuneration cannot exceed an amount that is considered ordinary with respect to the character and activity of a company and must be financially reasonable with due regard to the company's financial position. If the company is the parent company of a group, remuneration to executive management must be financially reasonable with due regard to the financial position of the group.
For public limited companies, additional requirements apply. Rules for Issuers of Shares exist. These Rules entail that companies must specify the extent to which they comply with the Danish Recommendations on Corporate Governance or the recommendations on corporate governance that apply in the country where they have their domicile. The Recommendations are soft law.
The Recommendations on Corporate Governance contain best practice recommendations for the board of directors and executive management of public listed companies; however, in practice the recommendations have a broader application as some larger non-listed companies also choose to comply with some or all these recommendations.
Specialised regulatory regimes
Denmark has adopted rules to implement the EU Capital Requirements Directive IV. The rules are incorporated in the Financial Business Act. The rules are applicable to the financial sector broadly, including banks, insurance companies and securities businesses. The rules apply to the board of directors, registered executive management and employees deemed MRT.
The rules relate to financial businesses subject to Danish financial supervision. The key components of the limitations on remuneration are the following:
- variable remuneration must not exceed 50 per cent of fixed remuneration (including pensions) for members of the board of directors and executive management;
- variable remuneration for MRTs must not exceed 100 per cent of fixed remuneration (including pensions);
- the board of directors may under certain conditions apply an exemption and allow the variable remuneration of MRTs to amount to up to 200 per cent of fixed remuneration; no less than 50 per cent of variable remuneration must consist of a balanced mix of shares, share-based instruments or other instruments (e.g., subordinated debt) reflecting the company's credit rate;
- payment of not less than 40 per cent of variable remuneration (60 per cent if the amount is significant) should be deferred over at least a three-year period commencing one yearafter the time of determination of the amount. For members of the board of directors and executive management, the deferral period is four years. The sequence of release of the payment may not be front-loaded;
- claw-back rules must apply if a company at the time of payment does not comply with the capital or solvency requirements as applicable; and
- for boards of directors and executive management, stock options and similar instruments must not account for more than 12.5 per cent of the fixed remuneration.
Appropriate lock-up provisions must apply to shares or instruments as successively released, and recipients must not hedge the risk attached to such shares and instruments pending release.
Companies must ensure that the criteria forming the basis for determination of the variable remuneration are satisfied at all times at the time of payment, and that the recipients remain in good standing and have not been responsible for behaviour causing considerable losses for the company, and that the company's financial situation has not materially deteriorated from the time of calculation of the variable remuneration.
Developments and conclusions
Continued strong focus on executive remuneration from companies, media and politicians
The focus on executive remuneration schemes continues, particularly from politicians and the media concerned about their size and fairness, compared to the average remuneration of employees.
Various politicians have been expressing their desire to control the maximum remuneration of executives, including the prime minister.
The root of the criticism especially stems from the large difference in remuneration between executives and employees. This has increased in Denmark over the past decade, and Denmark is now the country in the Nordic region with the largest difference in salary between executives and employees.4
Some very favourable equity schemes for private equity fund held companies released during IPO during recent years have also fueled the debate. These schemes are generally not regulated by law and the legal status is therefore not yet decided especially in terms of leaver provisions and valuation clauses. Further, a lot of work lies in the narrative of such schemes and explaining them to the public, and specialist counselling should always be sought in order to have all aspects covered.
Political influence on executive remuneration seems, however, to be quite unlikely in practice. Owing to the inherent risk of damaging international competition, but also as a political regulation of executive remuneration would act against the very foundation of the Danish labour market – the free right of negotiation and the long tradition of Danish legislators not regulating terms of salary on the Danish market – this is up to the labour market parties.5
Increasing focus on equal executive remuneration for women and men
In 2020, increasing attention has been drawn to the difference in level of remuneration between men and women, also for executives.
Studies show that the difference between men and women increases the higher the level of income is which has received a great amount of attention in the media.
Reactions on recent change on Stock Option Act
On 10 June 2019, the amended Shareholder Rights Directive II (SRD II), which was implemented into Danish law on 4 April 2019, entered into force. The framework gives shareholders of listed Danish companies the right to vote on the remuneration policies in a company and the right to vote on a remuneration report providing an overview of remuneration paid to a company's management and board of directors (advisory vote only). The shareholders' right to vote on the remuneration policies is, in practice, already incorporated in most Danish listed companies' general meetings as similar requirements are set out in the Danish corporate governance recommendations.
Compared to the current Danish corporate governance recommendations, the new rules regarding remuneration policies and remuneration reports are more detailed. Irrespective of the new rules not being applicable for annual general meetings convened in financial years that began before the 10 June 2019 deadline, there has been an increased focus on remuneration policies and reports among large companies. However, in 2020 general assemblies, it has had little effect, if any, because of the covid-19 situation.
Stock options are not widely used any longer, it is complex, highly uncertain as to enforceability and content, and compared to expected outcome they are often affiliated with great costs to draft and implement. Those that do are in substantial need of both legal and financial advice, and it is not advisable to implement such schemes without having sought legal and financial advice.
For executives comprised by the Legislation, more and more companies refrain from introducing restrictive covenants as it is considered too expensive. Instead other routes are pursued to protect company interests.
1 Michael Møller Nielsen is a partner and Helene Lønningdal is a legal consultant at Lund Elmer Sandager.
3 Hypothetical because the new legislation and the preparatory work is highly ambiguous in respect of the actual increased freedom of contract. Consequently practitioners are concerned that this will give rise to even more cases than the change actually assists in solving.
5 https://esg.ugebrev.dk/tema/toplederloenninger-top-100/her-er-danmarks- hoejest-loennede-topchefer-2019/; https://www.a4nu.dk/artikel/danske-topchefer-saa-meget-tjener-de; and https://politiken.dk/oekonomi/art7647393/Danske-topledere-tjente-meget-mere-sidste-%C3%A5r-og- det-er-i-b%C3%A5de-aktion%C3%A6rer-og-medarbejderes-interesse.