A number of regulatory changes and emerging trends will have investors focusing on incentive plans and variable pay in the Nordic markets this year. While Danish companies will begin to see the effects of new regulations on shareholder ratification of pay plans, Swedish firms are expected to diversify their methods of director pay to better tie compensation to performance.

The Nordic proxy season usually peaks around mid-March to April, but many meetings will be held early this year because companies want to meet before first-quarter reports are due. The Easter holiday, which is early this year, has prodded many Danish and Swedish firms to move up their meetings.

Denmark
This is the first proxy season since an amendment to the Danish Companies Act (lov om aktieselskaber) established a vote on executive pay. The legislation stipulates that, at all listed companies, the board must establish guidelines concerning variable pay to members of the supervisory and executive boards before making agreements on bonuses or stock compensation. Before they are implemented, the guidelines are put to a binding shareholder vote. Unlike in Norway and Sweden, which have binding annual shareholder votes on some aspect of executive pay, the guidelines at Danish firms only need to be approved when the board makes a material change, not annually like many pay votes.

Since the law was enacted in July, 13 proposals to approve guidelines for incentive-based compensation have gone to a vote. Eight of those proposals were approved by shareholder vote; the results at the other five firms have not been disclosed. According to Danish law, the complete proposals for the general meeting do not have to be made available until eight days prior to the general meeting. Market analysts are still concerned this year that the level of disclosure included in the proxy documents is not adequate to allow shareholders to make an informed decision on the pay guidelines. Large-capital Danish companies are expected to provide greater disclosure than mid- and small-cap firms, which may see more opposition to their proposed pay guidelines, analysts say.

Even under the new law, Danish shareholders will still have to separately ratify any incentive pay and bonus plans based on issuance of new shares.

Sweden
After shareholders of electronics firm Ericsson voted down the company's long-term incentive plan last year, focus on incentive plans has intensified in Sweden. Specifically, two new initiatives are drawing both analyst and shareholder attention this year.

In the past, Swedish directors have been compensated via fixed fees for board and committee work, and, in rare cases, attendance fees. Proposals for board remuneration are usually prepared by the company's nominating committee and approved by shareholders every year at the annual meeting.

During the 2008 proxy season, nominating committees at a significant number of companies, such as Ericcson, plan to propose that part of director pay be made up of variable elements. Specifically, some Swedish firms are considering offering board members phantom shares. In the Swedish system, a phantom share constitutes a cash equivalent of the share price on the grant date. Swedish companies propose to pay a certain portion of director remuneration--such as 25 percent--in phantom shares, which will be deferred for five years then paid in cash. Phantom shares differ from options in that there is potential of both upward and downward movement of the share price and therefore the value of the phantom shares. Depending on the share price, the director could receive either a higher or a lower level of remuneration when compared to fixed fees.

Swedish pension fund Alecta and Stockholm-based investment firm Investor, which have representation at many Swedish firms, urged the change in order to make board compensation more responsive to company performance. Unlike many other markets, where board nominating committees are composed of board members only, Swedish nominating committees typically consist of representatives for the company’s largest shareholders, sometimes with the addition of the board chairman. Both Alecta and Investor have representatives on numerous nominating committees because of their large holdings in the Swedish market.

The use of phantom shares is intended to replace the prevalent Swedish company practice of recommending that directors own stock corresponding to 25 percent of their net pay. Although this approach worked in the sense that most directors followed the recommendation, strict holding requirements are not legally enforceable in Sweden. Furthermore, insider trading regulations place restrictions on when directors can acquire shares. These restrictions do not apply to phantom shares, which are technically just promissory notes.

In February, the Swedish Securities Council (Aktiemarknadsnaemnden), a body that promotes good practice in the Swedish stock market, endorsed the use of phantom shares, as long as general principles on incentive plans are followed. The securities council outlined these general principles--including the need for disclosure of planned incentives, anticipated stock dilution, and reasons for adopting the incentive plans--in a 2002 statement. Swedish law dictates that the board cannot make changes to, or adopt, a plan affecting share transfer and issuance to company employees without the approval of nine-tenths of the shares present at the annual meeting.

At the moment, share-based remuneration for non-executive directors is extremely rare in Sweden. SKF Group, a ball-bearing manufacturer, pays its directors the value of a certain number of SKF shares, in addition to a fixed fee, every year. Before this proxy season, only a few companies--such as security products firm Gunnebo, medical equipment company Sectra, and pharmaceutical firm Orexo--granted stock options to non-executive directors.

In Sweden, all share-based incentive plans require the support of 90 percent of both the votes cast and the shares represented at the meeting where the plan is proposed, which means that minority shareholders have a real opportunity to influence the vote.

Sweden is a well-developed market in terms of incentive plans, with a multitude of different types of schemes. There are no signs of a decrease in either the number of plans or their complexity. Share matching plans, where participants make an initial investment in company shares in order to receive free or discounted shares after a vesting period, continue to be popular. Unlike some other markets, the initial investment has traditionally not been a portion of the employee's annual bonus. This year, however, analysts expect that a few deferred bonus plans will be seen in Sweden.

The 2008 proxy season could also see an increased number of plans in which incentive awards are adjusted for dividends accrued between the grant date and the exercise date. A method commonly seen in Finland, namely the lowering of the strike price of options by the amount of accrued dividends, is rarely found in Sweden. However, the number of shares per options will most likely be adjusted in a few plans, and in some share matching plans, accrued dividends on the matching share will be paid out at the end of the vesting period.