The Executive Remuneration Review: Finland


Remuneration of companies' senior executives and the appropriateness of such remuneration has, over the past few years, been increasingly discussed in Finland. In 2021, one important legislative amendment has been introduced, namely the tax beneficial employee share offering for non-listed companies.


i Income tax for employees

Residents2 and non-residents are treated differently for tax purposes. The worldwide income of persons resident in Finland is subject to taxation in Finland. Non-residents are taxed only on Finnish-sourced income. The applicable tax rates are also different.

Resident individuals are always taxed for their employment income regardless of where the employer is situated. Resident individuals are not taxed for earned income if a tax treaty removes Finnish taxing rights, or the individual works continuously abroad for longer periods of time, provided that certain criteria are met. Non-resident individuals are only taxed for income from employment if it is considered to be Finnish-sourced income. Salary is sourced in Finland if the employer is a Finnish entity,3 and if the employment has been physically carried out in Finland completely or for the most part. Employment income is not Finnish-sourced (and hence not subject to tax if received by a non-resident) if an employer is a foreign entity, and the non-resident person does not exceed the six-month threshold for becoming resident in Finland. The same applies even in the case of a Finnish employer if the work has mainly been carried out abroad.4 Remuneration paid to members of the board of executives of a Finnish company is taxable in Finland irrespective of whether the meetings have been held in Finland or overseas.

Currently, Finland does not apply any economic employer concept. However, a government proposal is expected to introduce the economic employer concept in Finnish legislation with effect from 2022. Hence, any structures where work is conducted physically in Finland, but for a legal employer, which is situated abroad, would have to be reviewed carefully.

The earned income of a tax-resident individual is taxed at progressive tax rates of up to about 55 per cent, while salaries paid to a non-resident are subject to a flat withholding tax of 35 per cent, if subject to tax in Finland.5 The capital gains and other capital income of Finnish tax residents are taxed at rates of 30 per cent for capital income up to €30,000, and 34 per cent for capital income exceeding €30,000 per year. Capital gains received by non-residents are, in many cases, exempt from Finnish taxation (a few noteworthy exceptions are capital gains from immovable property, as defined in the Finnish Income Tax Act).6

Generally, there is a broadly applicable substance-over-form principle in the taxation system, and progressive employment income taxation covers any payments regarded as compensation for employment. It is therefore difficult to structure a compensation plan in such a way that the compensation would qualify for taxation as capital income. Capital income taxation should be applicable only in genuine arm's-length investments (e.g., in the employer company's shares) by employees.

Qualification of the executive share ownership under the capital income taxation regime has sometimes been sought through arrangements involving heavily leveraged holding companies. Such a holding company would be owned by the executives, often receiving loan funding from their employer company and investing in the employer company's shares. Such management holding company arrangement by a listed company has been considered tax avoidance in a Supreme Administrative Court ruling leading to earned income taxation of the benefits received from the arrangement.7 However, in a recent ruling by the Supreme Administrative Court, a management holding company arrangement was not requalified when the financing was drawn directly by the management and not the holding company (i.e., the management carried de facto the investment risk). In any case, such management holding company arrangements need to be carefully analysed from a tax perspective.

Taxable income is, as a main rule, triggered in the taxation of individuals when the income is paid to the individual or when the individual gains control over the income in question. Employees gain control over deferred income items, for example, when they have the opportunity to choose, upon salary payment, whether certain items are paid directly to them as cash payments or into deferred account arrangements. If there is no possibility to opt for a cash payment or otherwise dispose of the funds, a tax-effective deferral of the income item may be accepted if properly structured, and taxable income is triggered only at the point when the deferred income is paid to an employee.

 OptionRestricted stockRestricted stock unit (promise to deliver stock in the future)
Tax treatment upon grantNoneFair market value at grant taxable as earned income at progressive rates*None
Tax treatment upon vestingNoneNoneNone
Tax treatment upon deliverySpread taxable as earned income at progressive ratesNoneFair market value taxable as earned income at progressive rates
Tax treatment upon sale of underlying sharesCapital gains taxation at rates from 30 per cent to 34 per cent. Amount taxed as earned income deductible as acquisition costCapital gains taxation at rates from 30 per cent to 34 per cent. Amount taxed as earned income deductible as acquisition costCapital gains taxation at rates from 30 per cent to 34 per cent. Amount taxed as earned income deductible as acquisition cost
* Typically, there is no possibility for downward adjustment if the share price decreases. If restricted stock is conditional upon continued employment and, for example, reaching a set share price goal, the rules described for options and restricted stock units would be applicable.

ii Social taxes for employees

Persons covered by Finnish social security are generally subject to Finnish social security contribution obligations. Employees covered by the social insurance system of another state and seconded to Finland may be exempt from Finnish social security contributions. The contributions applicable to employment in Finland are uncapped. Lately, the rates have increased almost every year. The currently applicable payment percentages are as follows (2021 figures):

EmployerHealthcare charge1.53 per cent
Pension insurance contribution in the average16.95 per cent
Accident insurance contribution in the average0.7 per cent
Unemployment insurance contribution0.5 per cent to 1.90 per cent
Group life insurance contribution in the average0.07 per cent
EmployeePension insurance contribution7.15 per cent (for employees who are 17 to 52 years of age or 63 to 67 years of age); 8.65 per cent (for employees who are 53 to 62 years of age)
Unemployment insurance contribution1.40 per cent
Employee's healthcare charge (included in tax withholding percentage)0 per cent to 1.65 per cent
Employee's daily allowance contribution (included in tax withholding percentage)1.36 per cent

Benefits from share-based incentive plans may, in many cases, be exempt from most social security contributions in Finland, if the underlying plans are constructed correctly.8 This exemption may apply to benefits from an employment stock option plan or a phantom option plan. It may be applicable also to shares awards granted to employees, provided that certain criteria are met, for instance that the shares granted are listed on a stock exchange, and there is a vesting period of at least one year between the promise of the award and the actual award of the shares to an employee. There are also employee share subscription plans, which may be beneficial from a social security perspective, even if shares are subscribed below fair market value, provided that certain criteria are met.

iii Tax deductibility for employers

Costs accrued because of employment are generally fully deductible for employers, even in cases where costs are a result of employment of the senior management of a company. The employment cost item is deductible in the corporate income taxation of the employer company in the tax year during which the work in question was carried out. The year of payment of the compensation item does not determine the tax year applicable to the deduction in the employer's corporate income taxation.

Special rules govern deductibility of costs for shares used to settle share-based incentive plans, considerably limiting employers' right to deduct such costs. The issue of new shares to settle an incentive plan does not give rise to a deductible cost in the corporate income taxation of the Finnish employer company issuing the shares. If existing shares of the company are used to settle the benefits under the plan, a deduction may be available if the shares used have been obtained from the stock exchange.9 However, a recharge of costs of a share-based incentive plan paid by a Finnish employer company to a group company abroad operating the plan should, as a starting point, be fully deductible, regardless of whether new or existing shares of the foreign group company have been used.

iv Other special rules

There is a specific 32 per cent flat rate tax regime applicable to expert-level expatriates moving to Finland that may apply during the first 48 months of their stay in the country. The applicability of the regime has to be carefully planned, as a non-fulfilment of the technical requirements10 for qualifying may easily prevent the applicability. In contrast to the normal progressive taxation of employment income, no deductions are allowed under this regime.

Pension benefits of executives that exceed the mandatory pension cover are normally arranged by means of a collective pension scheme, which generally allows fairly flexible insurance terms and full deductibility of the pension insurance payments by an employer in calculating its corporate income taxation, while not triggering any taxable income to executives prior to the payment of the pension benefits to them upon retirement. At least two persons must be covered by the pension insurance for this tax treatment to be applicable.11 In addition, individual pensions can be provided by the employer; however, certain criteria need to be met, and the annual tax-exempt payment per person is limited to €8,500.

A voluntary health insurance taken out by employers for the benefit of employees generally gives rise to taxable income to insured employees unless the insurance covers all employees and offers all employees benefits at a similar reasonable level. Life insurance payments paid by an employer for the benefit of employees do not generally trigger taxable income for the employees if the insurance is purely risk insurance. Insurance payments made to a unit-linked life insurance policy constitute taxable income for the insured employees.

Tax planning and other considerations

Personal service company arrangements and other similar structures are used to some extent in Finland in the tax planning of remuneration paid to senior executives. There is, however, a quite well-established practice in Finland to pierce through minor consultancy firms and to tax consultancy proceeds as the salary (or board fee, as the case may be) of the person carrying out the consultancy tasks in practice, if the arrangement is considered as de facto employment of the consultant by the client company. This may be the case especially if the person carrying out the consultancy tasks has previously been employed by the company purchasing the consultancy services, if the consultancy firm has no other clients of importance, or if the consultancy firm is very small. According to Supreme Administrative Court case law and tax authorities' guidelines, remuneration for services as a CEO or a board member may not be accepted as income of a consultancy company, but it is personal earned income of the CEO or board member.

There may also be planning possibilities when determining the timing of the entry into Finland and the departure from Finland. According to the Finnish rules, foreign income referring to the part of the year prior to the commencement of tax residence or after the cessation of tax residence enjoys full exemption and is not taken into account when determining the progressive tax rate applicable to the income taxable in Finland. A well-planned timing of arrival and departure may hence significantly cut the progressive tax rate applicable to the part of income taxable in Finland in the year of arrival or the year of departure. In addition, various split salary arrangements may offer planning opportunities if executives are working only a part of their working days in Finland and the other part, for example, in another Scandinavian country. Due to the economic employer concept potentially being introduced shortly, even working short periods in Finland for a foreign employer may trigger taxation. Cross-border work should therefore be carefully planned to avoid unwanted tax exposure.

One of the most anticipated changes especially in the start-up and growth company segment has been the employee share offering for non-listed companies. The new regime allows employees to subscribe for the employer company's shares (not for any other company's shares) at low prices without triggering taxation on the discount at the time of subscription. Instead, taxation is postponed until disposal of the shares. At disposal, the income is considered as capital income (not earned income, which is taxed progressively). The regime can only be applied if numerous requirements are met. The old tax regime for employee share offerings, which is significantly less beneficial, remains in force in parallel with the new regime. The old regime is, however, broader in its scope of application.

Employment law

i General

The Finnish Employment Contracts Act (ECA)12 is applicable to most employment relationships in Finland. Managing directors of limited liability companies are, however, excluded from the scope of the ECA. The terms of assignment for managing directors are determined by the service contract between a director and a company. In addition, the Finnish Companies Act13 regulates the managing directors' position as an organ of a company. In practice, most of the agreed terms of assignment of managing directors do not, however, differ to a large extent from those of other executive directors.

The ECA provides for a loyalty obligation for employees, according to which employees must avoid everything that conflicts with actions reasonably required of an employee, considering the employee's position. In addition, the ECA explicitly prohibits competing activities. During the term of employment, an employee must not work for other employers or engage in activities that would apparently cause harm to the employer as a competing activity contrary to fair employment practices. The nature of the work and the position of the employee are taken into account in this assessment. In the event of a breach of a non-competition obligation, the employer may claim damages from the employee for any losses caused by the breach. Furthermore, an employer may be liable to pay damages jointly with a new employee if the employer knew upon recruitment that the new employee was precluded from working on the basis of a non-competition covenant.

ii Post-contractual non-competition and non-solicitation obligations

The ECA sets limits to non-competition undertakings applicable after expiry of employment. Under the ECA, a non-competition undertaking may limit an employee's right after the end of an employment relationship to conclude an employment contract with an employer engaged in operations competing with his or her previous employer, and also to be otherwise engaged in competing operations, either directly or indirectly.14 A non-competition obligation should always be supported by particularly weighty reasons in order to be valid.15 In practice, a non-competition clause is typically included in management level contracts.

When assessing the particular weight of the reason for a non-competition clause, one of the criteria taken into account is the nature of an employer's operations and the need for the protection of trade secrets.16 Special training given to an employee by his or her employer and the employee's status and duties must also be taken into account.

The prohibited activities may be restricted to cover only a certain geographical area or certain parts of the employer's business. It is also possible to limit the restriction to cover activities with specified competitors, or to cover specific products or services of the employer.17

A non-competition clause may, under the current ECA, restrict an employee's right to conclude a new employment contract or to be engaged in the trade concerned for a maximum of six months.18 If the employee receives reasonable compensation for the restrictions imposed by a non-competition clause, the maximum duration of the restriction is one year. Based on established practice, the level of reasonable compensation in such cases is set at a minimum of 50 per cent of the normal salary for the full duration of the restricted period. The compensation is typically paid either as a lump sum or in monthly instalments after the end of employment.

In cases of a breach of the non-competition covenant, an employee may be liable to pay either damages for loss, or alternatively the agreed contractual penalty. The level of such penalty may not exceed the amount of salary received by the employee for the six months preceding the end of the employment relationship.

According to the ECA, a non-compete clause that does not comply with the above is void. If the duration of the restriction or the amount of contractual penalty exceeds the maximum amount provided by law, the restriction does not apply for the part by which it exceeds the limits set by the ECA.

The restrictions related to the duration of a non-competition undertaking and the maximum contractual penalty do not, however, apply to employees who, in view of their duties and status, are deemed to run an enterprise or an independent part thereof, or to have an independent status comparable to such managers. Even if the restrictions on the duration of the non-competition undertaking and the level of contractual penalty provided for in the ECA are not applied to the aforementioned managers, terms unreasonably restricting competition are prohibited under the Finnish Contracts Act.19 Therefore, a contract under which a person, in order to prevent or restrict competition, has undertaken not to engage in a certain activity or not to conclude an employment contract with another person engaging in such activity, may not bind a party who has made such a promise to the extent that it unreasonably restricts his or her freedom. In practice, the non-competition undertakings applicable to managers rarely exceed 12 months in duration; the amount of contractual penalty is also usually within the range set in the ECA. Managing directors of large companies form an exception to this rule.

The term of a non-competition undertaking applicable after employment is calculated as of expiry of the notice period. Therefore, a release from duties during a notice period does not, unless otherwise agreed, affect the duration of the non-competition undertaking. A non-compete clause is not, however, applicable if the employment relationship has been terminated for reasons deriving from the employer, for example, in the case of collective redundancies.

Amendments to the legislation regarding post-contractual non-competition undertakings have been considered and prepared for years. The government finally issued a legislative proposal in November 2020, which is now being considered by Parliament. The amended act is expected to enter into force as of the beginning of 2022.

Based on the proposal, the obligation of the employer to pay compensation for the duration of the restricted period would be extended to apply to all post-contractual non-competition undertakings irrespective of their duration. The level of compensation would be 40 per cent of the employee's salary for any restricted period lasting no more than six months, whereas the compensation would be at least 60 per cent of the salary in case of a non-competition undertakings longer than six months. The compensation would be paid on the customary paydays of the employee during the restricted period, unless otherwise agreed with the employee at the time of resignation.

The maximum duration of the restricted period would remain at 12 months and in cases of a breach of the non-competition covenant, an employee could still be liable to pay either damages for loss, or alternatively the agreed contractual penalty. The level of such penalty would remain at an amount corresponding to the employee's salary for six months. In addition, non-competition undertakings of employees who, in view of their duties and status, are deemed to run an enterprise or an independent part thereof, or to have an independent status comparable to such managers would remain to be exempt from such limitation in time as well as the restriction of the maximum contractual penalty.

The suggested amendments would also introduce a right for the employer to renounce the non-competition agreement. This would allow the employer to serve notice of termination of the non-competition undertaking during the employment relationship in case of, for example, a change of the circumstances of the employer, by observing a notice period corresponding to one-third of the agreed restricted period, but not less than two months. However, no unilateral right of serving notice of the non-competition undertaking would exist in case of a resignation served by the employee.

Based on the proposal, the new regulation would also apply to non-competition agreements concluded before the entry into force of the amendments after a transitional period of one year.

The objective of the amendment is to steer employers to consider whether and to what extent the use of restrictive post-contractual covenants are necessary, and in this way to reduce the use of post-contractual restrictions and to increase the flexibility of the labour market. Finnish law does not recognise the concept of non-solicitation and no provisions regarding restrictions related to non-solicitation are expected to be included in the aforementioned new regulations either. Based on legal practice, however, a non-solicitation clause restricting the solicitation of clients or employees of a former employer has been considered to correspond to a non-competition undertaking. Therefore, a non-solicitation obligation can only be enforced when particularly weighty reasons related to the operations of the employer are at hand and the restrictions regarding its application correspond to those set for non-competition covenants.

In the case of a transaction, non-competition covenants applicable in the employment relationship remain in force as such. However, the presence of the particularly weighty reasons referred to above is determined on a case-by-case basis (see footnote 16). Based on recent legal practice, courts tend to interpret non-competition obligations restrictively, or even conclude that the weighty reasons needed for a non-competition obligation to be possible do not exist. A non-competition obligation should therefore always be drafted carefully to suit the particular case in question.

In situations where an employee is also a shareholder, or where a former shareholder continues to be employed by a company after the sale of his or her shares, the shareholder agreement or transactional documentation may impose a non-competition undertaking exceeding the limits in duration and the maximum contractual penalty set by the ECA. The assessment of the fairness of the restrictions relating to the separate non-competition undertakings in shareholder or transactional agreements must then be made on a case-by-case basis, based on the general prohibitions of unfair terms of contract and restricting competition.

iii Termination of service relationship

Managing directors of Finnish companies are not covered by the restrictions related to the termination of employment of employees. All other employed executives are covered by applicable employment legislation and the provisions on termination of employment relationships.

An employment relationship can be terminated based on an agreement or based on a notice from either party. Employment legislation in general does not regulate termination of an employment relationship with an agreement. Owing to the mandatory nature of provisions in the ECA, a company cannot, however, freely agree with an employee on all issues related to termination of employment.20 Instead, general standards of reasonableness will limit the contents of such an agreement regarding both managing directors and employees. A typical clause of such an agreement is a release of claims against the employer.

For an employer to be able to terminate an employment contract legally, valid and weighty grounds for termination are required, which may be either organisational or related to an employee. When assessing whether sufficient grounds for termination exist, the situation is always evaluated as a whole, taking all relevant factors into account.

Organisational grounds relate to the economy, production or organisational change of the employer company. Employment can be terminated if work available has diminished materially and permanently. Valid organisational grounds are not considered to exist in a situation where an employee can be offered other duties that are suitable for his or her training and skills, or where an employee can reasonably be trained in new duties.21 The ECA also lists other situations where valid organisational grounds are not deemed to exist.22

Regarding termination grounds related to an employee, the grounds for termination must be weighty and proper. The concept is not defined in the ECA; rather, the ECA includes a list of reasons that do not fulfil this requirement. Employees who have neglected their duties or have breached their terms of employment may normally not be given notice before they have been specifically warned and have thus been given a chance to change their conduct.23 The warning should specifically refer to the possible termination of the employment relationship if similar problems continue.

Constructive termination or voluntary termination for good reason as concepts are not defined in the ECA, but the issue is recognised.24 Cases of voluntary termination for good reason are, once an employee has shown it probable that a good reason for terminating the employment relationship exists, treated as cases of unfair dismissal. The number of cases where voluntary termination for good cause is claimed to exist has been on the rise during recent years. Likewise, the number of cases relating to harassment and unfair treatment of employees in general has risen.

Severance payments to employees are not mandatory under Finnish law. Often, an employer will pay voluntary severance in addition to salary for the notice period. The amount of severance varies greatly depending on the position of the employee and the type of business in which the employer operates, and also depending on the general economic and organisational situation of the company.

Change of control as such is not a ground for terminating employment contracts. In a transfer of business, however, employees are entitled to terminate employment relationships applying a specific, shorter notice period.25 The transfer of employment to a new owner in connection with a corporate transaction will not give rise to a severance payment if an employee terminates the employment relationship, and no custom regarding payment of such severance exists.

All companies that employ at least 20 employees in Finland26 on a regular basis must follow a specific negotiation process before decisions to terminate employees' contracts are taken based on economic or organisational reasons.27 There is no limit regarding application of the process based on the number of employees who would be given notice of termination, and this process must thus also be followed when the organisational reason relates to just one employee in a senior executive position. The process does not relate to termination of employment, which is made based on agreement between the employer and the employee.

Securities law

The EU Prospectus Regulation (PR)28 provides that an issuer of securities is responsible for preparing and publishing a prospectus when offering shares to the public or listing shares on a stock exchange. There are exemptions from the obligation to publish a prospectus that relate, inter alia, to the offering of shares to directors or employees. The publication of a prospectus is generally not required if securities are offered to existing or former directors or employees by their employer or by an affiliated undertaking, provided that a document containing information on the number and nature of the securities as well as the reasons for and details of the offer shall be made available and, if seeking admission of such shares to trading on a regulated market, provided that the said securities are of the same class as the securities already admitted to trading on the same regulated market. The issuer of the shares is still required to make adequate information available to all offerees regarding factors that may affect the value of the offered securities so that they are able to reasonably assess the feasibility of the investment.

There is no legal requirement in Finland for an executive to hold stock of his or her employer, but shares or option rights commonly form part of executive remuneration. Executives buying or selling shares of their employer entity on the public market must comply with the relevant public trading rules. In particular, executives that have been defined by listed companies as persons discharging managerial responsibilities under the EU Market Abuse Regulation (MAR)29 must comply with the rules regarding closed-window and insider trading.30 In addition to the members of the board of directors and the managing director, such persons usually include the chief financial officer and other senior executives, as deemed appropriate.

According to the MAR, all persons discharging managerial responsibilities and their closely associated persons must notify a company of every transaction relating to that company's shares, options and other financial instruments. The company in turn is required to disclose such information as a stock exchange release. The company is responsible for maintaining a list of such persons.

There are no specific short-swing trading or anti-hedging rules related to executives in Finland. However, many listed companies recommend that the persons discharging managerial responsibilities do not actively trade in the shares or financial instruments of the company or engage in short-term trading or speculative transactions, but rather make investments in the company on a long-term basis.

In addition, according to the Finnish Securities Markets Act (SMA),31 executives and the company are subject to an obligation to publicly disclose a flagging notification if their holding in the company reaches, exceeds or falls below the thresholds set by law.

There are no restrictions regarding executive shareholding in private companies.


The SMA, the MAR and the rules of Nasdaq Helsinki Ltd regulate the disclosure obligations of listed companies. In addition, the Finnish Corporate Governance Code 2020 (the Code) includes provisions regarding, inter alia, the disclosure of information related to remuneration. Even though the Code is based on the comply or explain principle,32 no departures from reporting of the required information are allowed. The provisions of the Code apply to listed companies, irrespective of their size.

In accordance with the Code, revised in 2020 due to the new EU Shareholders' Rights Directive (SHRD),33 listed companies shall prepare an annual remuneration report that provides a comprehensive overview of the remuneration, including all benefits, awarded over the last financial year to the members of the board of directors and the managing director and their deputy, and present it to the annual general meeting. The disclosure shall include, inter alia, the fixed and variable remuneration components (short-term and long-term incentives) and information on their proportional shares, information on how the predetermined performance measures have been applied in variable remuneration components, information on share-based remuneration schemes, supplementary pension contributions, and other financial benefits. The remuneration report must also describe how the fees paid to the directors and managing director have developed over at least the preceding five years compared to the development of the average remuneration of employees and to the company's financial development over the same period. Generally, the first remuneration reports were prepared for the financial period commencing on 1 January 2020 and presented to the annual general meetings in 2021 for an advisory vote.

According to the Code, listed companies must also provide information on the principles for the remuneration of the board of directors, managing director, and the rest of the management team on their website. Remuneration of the directors must be disclosed pursuant to the resolutions of the latest general meeting. With respect to the managing director, the website must provide up-to-date information on the amount of the managing director's fixed salary, description of long- and short-term remuneration systems, and other main terms of the managing director's service contract. The same information needs to be disclosed on the rest of the management team on an aggregate level. There is no requirement to keep the agreement with the managing director publicly available in its entirety as long as the required information is made publicly available in accordance with the Code.

In addition, the company must, in accordance with the rules of Nasdaq Helsinki Ltd, disclose a decision to introduce a material share-based incentive programme by way of a stock exchange release setting out the most important terms and conditions of the programme.

Corporate governance

The Finnish Companies Act and the articles of association of a company set the basis for the corporate governance of both public and private companies. The Code also seeks to maintain and promote good practices of listed companies and harmonise the procedures with regard to corporate governance and remuneration. Finnish companies listed on Nasdaq Helsinki Ltd must comply with the Code, but a company with a domicile other than Finland shall generally follow the corporate governance recommendations that are applied to it in its home state.

The body that appoints a person to his or her position must decide on his or her remuneration. Thus, the general meeting of shareholders decides on the remuneration payable for board and committee work as well as on the basis for its determination. The board of directors decides on the remuneration and other compensation to be paid to the managing director. Companies must specify the decision-making procedure for the remuneration of the other executives; this is usually the responsibility of the board of directors. If remuneration is to be granted in the form of shares or option rights, the general meeting of shareholders must either approve such issue of shares or option rights, or authorise the board to do so. According to the Code, the board of directors may establish a remuneration committee to prepare matters pertaining to the remuneration of the managing director and other executives as well as the remuneration principles observed by a company. The remuneration committee must have at least three members who must have the expertise and experience required by the duties of the committee; the majority of the members of the remuneration committee must also be independent of the company. The managing director or other persons in the management team of the company may not be appointed to the remuneration committee.34

Pursuant to the SHRD, listed companies are required to prepare a remuneration policy concerning the decision-making process and principles of remuneration of the board of directors, and the managing director and his or her deputy, and submit it to an advisory vote at the general meeting. The remuneration policy shall include principles regarding remuneration components and their proportional shares of overall remuneration, grounds for determining any variable remuneration components, other key terms applicable to the service contract, and terms for deferral and possible clawback of remuneration. The remuneration policy shall also include information on how the remuneration policy contributes to the business strategy and long-term interests of the company. The remuneration policy must be submitted to an advisory vote at the general meeting at least every four years and always in the case of a material change in the policy.

In Finland, there are no union or works council approval requirements that need to be met in relation to remuneration of executives. Further, there are no specific legal provisions related to clawback or recoupment of remuneration previously paid. However, remuneration that has been paid out without grounds should be reclaimed in accordance with the general regulations on returning an unjust enrichment.

Specialised regulatory regimes

i State-owned companies

The state is the majority owner or a significant minority owner in many Finnish companies. The ownership steering department of the Prime Minister's Office makes decisions on most issues concerning ownership steering and the use of shareholder authority; government approval of executive remuneration arrangements is thus not required. The government has, however, in recent years been interested in the remuneration policies applied in state-owned companies, and has issued guidelines in that respect.35 The remuneration in state-owned companies should support the long-term financial performance and overall success of a company, and the remuneration paid to management should be target-based and take into account criteria related to corporate responsibility. Based on the guidelines, remuneration should be transparent and moderately aligned with the nature and size of the company's operations and the varying business environments. In addition, the total amount of variable remuneration should have a maximum limit calculated from the fixed annual remuneration. All bonuses shall include conditions according to which they can be cancelled or adjusted. The government also expects that companies shall describe their remuneration policy at their annual general meetings and justify the realised performance bonuses. The government also encourages the management and personnel to buy shares in their own company. Although decisions on remuneration are made by companies, the state does not approve of the use of options or other measures requiring the issue of new shares or supplementary pension benefits.

ii Specific business sectors

There are specific rules relating to executive remuneration in the financial sector; Finnish rules apply to most financial institutions, such as credit institutions and investment service firms in general, as well as to mutual fund management companies and alternative investment fund managers. The rules restrict the awarding and payment of variable remuneration to senior staff members of regulated entities as well as members of staff who, in their position, may materially affect the risk profile of the relevant entity, members of control functions and staff members who receive remuneration of the same magnitude as members of the management and risk-takers.

Awards and payment of variable remuneration to the above-mentioned members of staff must be aligned with the performance and financial condition of the relevant entity and the performance of the relevant staff member. The entity must have in place remuneration policies and practices whereby the payment of a significant part (at least 40 per cent) of variable remuneration must be deferred for a period of between three and five years of the end of the period during which the remuneration was earned, at least one-half of the remuneration must be paid otherwise than in cash (i.e., in financial instruments linked to the equity of the entity or group company), and the disposal of such instruments must be subject to a lock-up period.36

Developments and conclusions

Remuneration of top executives and tax-beneficial arrangements related to high remuneration continue to be topics subject to sharp discussion in the Finnish media and by politicians, even in cases where there is no question that such an arrangement is legally acceptable. Furthermore, transparency of executive remuneration programmes in listed companies has increased as the remuneration policy needs to be presented to the annual general meeting at least every four years. In addition, the remuneration report stating the remuneration paid and due for the financial year needs to be presented to the annual general meeting each year. Another interesting development is the recent case law of Finnish courts regarding the applicability of non-competition obligations. Based on Finnish Supreme Court precedent, a non-competition obligation restricting an executive from pursuing a career in a competing business after his or her executive contract has ended needs to be drafted carefully to protect the relevant business interests and know-how of the company that he or she previously worked at, which cannot be protected by other less restrictive methods (e.g., a confidentiality undertaking). Following the expected legal amendments imposing an obligation to pay compensation for the duration of the non-competition undertaking, employers are also likely to consider more carefully whether the enforcement of a restricted period is essential for the protection of the employer’s interests.


1 Johanna Haltia-Tapio is a specialist partner, Joakim Frände is a counsel, and Anniina Järvinen is a managing associate at Hannes Snellman.

2 An individual is deemed a resident of Finland if the permanent home and abode of such a person is in Finland or if such person stays in Finland for a continuous period of more than six months. A Finnish citizen who has moved abroad is considered to be a resident of Finland until three years have passed from the end of the year of departure, unless it is proven that no substantial ties to Finland existed during the relevant tax year.

3 A Finnish permanent establishment of a foreign entity is treated similarly to a Finnish entity in this respect. Specific rules apply with respect to the taxation of individuals employed by the government or other Finnish entities of public administration.

4 The assessment of whether the majority of the work has been carried out in Finland is made separately for each salary payment period (typically monthly).

5 However, it is possible under certain conditions for non-residents to request their earned income to be taxed at progressive tax rates instead of the 35 per cent flat tax at source.

6 1535/1992.

7 It is yet to be seen whether similar disputes will arise even in companies related to private equity funds, where similar co-investment arrangements have also been used. Carried interest paid in the private equity fund context has, in some cases, been considered to not constitute salary income: there were, however, some specific circumstances in these cases, and the outcome could be different in future cases if the circumstances differ.

8 An employee's healthcare charge is, however, always payable at a rate of 1.65 per cent.

9 In cases where a deduction is available, there are, furthermore, specific rules limiting the maximum deductible amount.

10 The requirements to qualify for the regime include a monthly cash salary of at least €5,800, the non-Finnish nationality of the employee in question and a specific application that has to be filed within 90 days of the beginning of employment in Finland. The actual paid cash salary has to meet the €5,800 threshold each month, which has to be taken into account, for example, when planning unpaid leave or benefits in kind.

11 It should be noted that the tax benefits discussed above may be denied in cases where the arrangement has the characteristics of tax avoidance or of substituting taxable salary payments by means of pension insurance contributions (e.g., if the amount of the insurance payments made by the company is disproportionately high in comparison to the taxable salary paid to an executive). Granting additional pension benefits to executives may in some circumstances also include a negative publicity risk, as such arrangements have been scrutinised and viewed very critically in the Finnish press recently. The government has also issued a general guideline that no new additional pension benefit arrangements should be made to executives in state-owned enterprises.

12 55/2001.

13 624/2006.

14 As the ECA does not generally apply to managing directors, the terms of non-competition obligations can be agreed more freely.

15 Employers have the burden of proving that the specific, weighty reasons related to an employee's position, or the company's operations, do exist. The reasons need to exist both at the time when the non-competition obligation is agreed and at the time when the employer refers to the obligation: that is, when the employment relationship has been terminated. The fact that weighty grounds exist at the time of termination is not sufficient if, at the time of entry into the agreement, the grounds were not considered weighty enough.

16 Based on recent case law, the existence of an extensive confidentiality obligation in force also after the expiry of employment may in certain cases be considered a sufficient means for protecting the employer's interest, as a consequence of which weight grounds for enforcing a non-competition undertaking have not been considered to exist.

17 In addition to actual competing activities, preparations for such activities, such as the establishment of a company intended to be involved in competing activities, may also be prohibited. For preparatory actions to be considered prohibited competing activities, an intention to harm the employer is usually required.

18 Please note that an amendment to the ECA concerning post-contractual non-competition undertakings is expected to enter into force as of the beginning of 2022. The proposed amendments are described in the article below.

19 228/1929.

20 Regarding an executive in the position of an employee, based on legal practice, it is not possible to agree that the company will not have the re-employment obligation (exceptionally, this would be possible under specific collective bargaining agreements). The re-employment obligation relates to situations where employment has been terminated for organisation-related reasons.

21 A company's size and other factors are taken into account when evaluating what is reasonable, but in general the training would only amount to a few days or, at the most, weeks.

22 These include an employer having employed, either before or after the notice of termination was given, a new employee to carry out tasks similar to those that a redundant employee had even though there has not been a material change in the operating circumstances related to the company; and where the reorganisation of the work at the company has not led to the work at the company actually diminishing.

23 If the breach is so serious that an employer cannot reasonably be expected to continue the employment relationship, no warning needs to be given. In even more serious cases where the breach is so severe that the employer cannot be expected to continue the employment relationship even for the notice period, the employer may terminate the employment without notice. This would typically relate to serious violence at the workplace, theft or similar breaches.

24 The situation comes up when an employee terminates the employment relationship without notice and claims that the employer has breached its obligations related to the employment relationship so severely that the employee could not reasonably be expected to work even for the length of the notice period.

25 Employees are entitled to terminate the employment relationship to end on the date the business is transferred to the new owner if they have received information on the transfer at least one month before the transfer date. If an employee has received the information later, he or she may terminate the employment relationship to end either on the transfer date or on another date not being more than one month from the date on which the employee received the information about the date of transfer.

26 The managing director of a company is not counted as an employee.

27 The process is specified in the Finnish Act on Co-operation within Undertakings (334/2007). Under the Act, a company risks paying a compensation of a maximum of €34,519 to each employee whose employment has been terminated or changed to part-time employment without following the negotiation process (see Chapter 9, Section 62).

28 1129/2017.

29 596/2014.

30 The MAR, related EU regulations and the Guidelines for Insiders of Listed Companies issued by Nasdaq Helsinki Ltd contain more detailed provisions on the insider issues.

31 746/2012.

32 Companies must comply with the recommendations of the Code, or disclose a possible departure from an individual recommendation together with an explanation for the departure.

33 2017/828.

34 Recommendations 15 and 17 of the Code.

35 On 8 April 2020, the government updated its resolution on state ownership policy to set the strategic guidelines and describe the policies regarding ownership steering.

36 Deferred remuneration may become payable at once at the end of the deferral period or pro rata during the life of the deferral period. As regards fund managers and management companies, the applicable deferral period depends also on characteristics (e.g., recommended holding period and risk profile) of the fund units that form part of the remuneration.

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