LA REMUNERATION DES DIRIGEANTS SALARIES

1.    Introduction

In France, as everywhere else, the salaried executive remuneration is a major topic in the life and management of companies, which concerns both the legal entity, as employer, and the executives or future executives.

However, it is not easy for the concerned persons and legal professionals to master all the issues and optimisation levers existing in this field to the extent that :

• executive remuneration covers many areas of law and requires sound skills in tax law and company law as well as labour law,

• the principles applicable in this area, stemming from international and European regulations, the law, the case law, the branch bargaining agreements and sometimes even the administration opinions, are not gathered in the same code but dispersed in many texts,

• the regulations governing the matter are fluctuating and are regularly subject to changes, which presupposes a quasi-permanent legal watch.

This chapter, the result of the combined work of tax law, company law and labour law specialists, aims to summarise the principles and practices governing the setting of executive remuneration as well as its tax and social regime.

2.    Taxation

2.1.        Income tax for employees

In France, executive remuneration is generally included in the overall income of the executive, which is thus subject to personal income tax at the progressive rate even if the category of income depends on the form of the company and the interest held by the executive in the company.

The taxable income includes all amounts paid and any benefit in kind available to the executive. It is determined by deducting inter alia mandatory social security contributions.

Professional expenses are normally taken into account through a 10 per cent deduction capped at a certain threshold, which is reviewed every year although the executive may elect to deduct the actual amount of professional expenses incurred, provided such expenses are duly justified.

In France, personal income tax is calculated on the basis of the amounts declared by taxpayers, who are required to file a single return per tax household reporting all income received in the previous year.

These amounts are subject to a progressive rate.

In 2018, the progressive rate (for one part) applicable to income received in 2017 is as follows :

In addition, an additional temporary tax (Contribution exceptionnelle sur les hauts revenus) is applicable to French taxpayers whose taxable income exceeds a certain threshold.

This additional temporary tax is based on the amount of income and capital gains of the taxpayer taken into account to calculate the income tax liability, increased by certain expenses deductible and other profits exempt from income tax or subject to a deferral.

This additional temporary tax is calculated at a progressive rate as follows :

2.2.        Social taxes for employees

In France, in principle, all the benefits granted to executives in consideration or on the occasion of work are subject to social taxes (sickness, retirement, unemployment, etc.).

This covers all the elements of fixed and variable remuneration, various bonuses, allowances, benefits in kind, etc.

Given the level of executive remuneration and in view of the capping of the social tax base, social taxes account, on average, for 40 per cent of gross executive remuneration (25 per cent of employer contributions and 15 per cent of employee contributions).

Note, however, that :

• certain benefits from which executives might profit are subject to a specific social regime: particularly supplementary defined benefit retirement schemes, share subscription and purchase options or allotments of free shares (see Section 2.3.),
• in certain limits and under certain conditions, other benefits largely escape social taxes. Thus, there are in particular employer contributions funding supplementary defined contribution pension schemes, benefit schemes and sums paid under employee savings arrangements (optional profit sharing, mandatory profit sharing, savings plans, etc.) (see Section 2.3.).

Specific rules apply in favour of executives sent abroad, as part of a secondment or expatriation. In this respect, France has entered into various social security treaties with other countries; in addition, a number of EC regulations must be observed.

2.3.        Tax deductibility for employers

Ø  Principle

Executive remuneration represents staff costs and is therefore deductible from the taxable profit of companies making industrial and commercial profits.

This deductibility covers not only salaries, emoluments, various allowances, employment costs and benefits in kind but also social taxes and various expenses incurred in the interest of executive salaried staff.

Ø  General conditions of deduction

Deductibility of remuneration paid to executives is subject to compliance with the following conditions :

• remuneration must correspond to an actual and justified cost and may affect only the results for the period during which it is incurred,

• this remuneration must correspond to actual work,

• it must not be excessive having regard to the importance of the service provided.

On this last point and in general, the authorities take the view that a payment allotted in favour of its beneficiary in return for the service provided may be regarded as excessive when it exceeds :

• that corresponding to his or her professional qualifications,
• the scope of his or her activity,
• his or her abilities specific to the company’s results,
• the amount of the company’s salaries,
• the remuneration allotted to identical jobs in the company or elsewhere,
• the employer’s salary policy.

The tax services are particularly attentive to compliance with this last condition concerning executives who personally have sizeable holdings in the capital or are united by emotional ties or interests in persons holding control of the company. In other situations, the authorities take the view that reintegration of excess remuneration must be pursued solely in exceptional situations, particularly when the remuneration paid is manifestly exaggerated in relation to the service provided, or when factual circumstances make it possible to presume that the benefit granted has not been accorded in the direct interest of the operation on account in particular of emotional ties or interests uniting the beneficiaries to persons possessing control of the company.

–       Fiscal year of deduction

In principle, only remuneration of which the company has become a debtor during any determined fiscal year is liable to be deducted from the taxable income for this fiscal year.

Staff expenses not yet paid at the end of a fiscal year such as gratuities, bonuses and contractual mandatory profit sharing may be deducted from the results for the said fiscal year only if the company has taken, in respect of executives, firm commitments as regards the principle and method for calculating the sums owed and if the obligation to pay them during a subsequent fiscal year is therefore certain.

This condition being fulfilled, these costs may, when the elements needed for calculating the sums owed are not yet known exactly on the closing date of the fiscal year, give rise to the creation of provisions corresponding, with sufficient approximation, to their likely amount, or, when the amount of them is determined exactly, be deducted in respect of the costs to be paid.

2.4.        Other special rules

Ø  Allotment of free shares and share subscription or purchase options

Subject to certain conditions, specific social and tax rules apply to the allotment of free shares and share subscription or purchase options.

These two tools originally followed a similar treatment: lawmakers now unquestionably favour allotments of free shares.

In both cases the benefit is exempt from the social contributions usually owed on remuneration elements.

On the other hand, the benefit is subject to specific social contributions.

Free shares may also benefit from a more advantageous tax regime.

From 2018, benefits derived from the sale of shares acquired under these arrangements are able to benefit from the system of a single flat-rate levy on investment income, making it possible to benefit from a reduced rate of income tax.

The benefits derived from these arrangements are broken down as follows :

• the discount that corresponds to the difference between the value of the share on the day of allotment of the option and the exercise price of the option (share subscription or purchase option only),

• the acquisition gain that corresponds to the difference between the value of the shares at the time of their definitive acquisition or exercise of the option, and the exercise price (option) or any reduced mandatory profit-sharing (free shares),

• the capital gain on disposal that corresponds to the difference between the value of the shares when they are sold and the value at the time of the definitive acquisition or exercise of the option.

The social and tax treatment of these benefits is marked by great instability.

The table below summarises the latest rules applicable, knowing that, depending on the date on which these benefits were authorised or allotted, it will be possible to apply different conditions to them.

Ø  Supplementary pension schemes

Many companies have their executives benefit from a supplementary pension scheme with a view to supplementing the benefits of mandatory schemes, whether defined contribution’ or ‘defined benefit’ schemes.

In tax terms, employer contributions paid to insurers to finance such schemes are deductible for the company on the double condition that the payments made correspond to a real legal commitment enforceable against the employer and that this commitment is of a general and impersonal nature, i.e. it concerns all staff or one or more determined categories of staff.

In respect of the treatment of the funding of these schemes regarding income tax and social taxes, it is necessary to distinguish defined contribution schemes from defined benefit schemes.

In respect of the defined contribution schemes, the employer contributions that fund them are, within certain limits and under certain conditions, exempt from social contributions and income tax.

This supposes in particular that the scheme has mandatory membership and that it benefits an objective category of staff. Otherwise, the contributions that fund them are deemed to be part of the salary and do not enjoy any particular social or tax benefit.

For their part, random defined benefit schemes benefiting from a specific social regime come under a social regime.

Funding of these schemes is excluded from the base of social security contributions owed on salaries; on the other hand, the employer pays a specific contribution based, at its option, on annuities or the funding of the scheme.

Originally advantageous, this social treatment has been eroded over the past few years by increases in the rate of these contributions and by the creation of additional contributions.

Note that the rules applicable to defined benefit schemes and their social and tax treatment are shortly likely to be profoundly altered given the necessary transposition of Directive 2014/50/EU of 16 April 2014.

The condition of completion of career in the company specified to benefit from the preferential social regime referred to above is in fact contrary to the European Directive according to which a condition of length of service to acquire supplementary pension rights may not exceed three years.

3.    Tax planning and other considerations

3.1.        Impatriates

Ø  Article 155 B of the French Tax Code

Executives who are called upon by a company based out of France to work for a limited period for a company based in France, and other executives who are directly recruited in a foreign country by a company based in France, are entitled to exemptions in respect of their earned income.

These arrangements apply to persons who were not domiciled in France for tax purposes during the previous five years and who set their tax domicile when taking up their position in France.

Such executives are exempt until 31 December of the eighth year following the year in which they take up their position for the years when they are domiciled in France.

The income tax exemption also applies to 50 per cent of certain investment income and income from intellectual or industrial property rights received in other countries (‘passive income’) and certain capital gains on the disposal of transferable securities and shares held in other countries.

3.2.        Executives carrying out part of their activity out of France

Ø  Article 81 A of the French Tax Code

Subject to treaty relief, executives which are French resident sent abroad by their employer located in France or in another Member State of the European Union are subject to taxation in France under the same conditions as a person lawfully residing in France.

However, they may benefit from full or partial exemptions.

A full exemption of income earned in consideration for their activities out of France applies if :

• executives were subject to a foreign income tax equal to two-thirds of that which would be due in France on the same basis (Section 81 AI of the Revenue Code),
• the compensation that is earned relates to an activity carried out abroad for a period exceeding 183 days during a period of 12 consecutive months if the activity relates to construction site or installation, commissioning and exploitation of industrial plants or research and resource extraction; the period is reduced to 120 days only for employees engaged in the business prospection.

A partial exemption applies if any of the preceding conditions are not met.

In this case, an executive posted abroad is taxed on the compensation he or she would have received if he or she had carried out their business in France (additional compensations paid in consideration for their stays out of France are exempt) provided that :

• time spent out of France is used in the sole and direct interest of the employer,

• time spent out of France is determined beforehand in amount and relates to duration and place of stay; the supplement of compensation may not exceed 40 per cent of earnings,

• the additional compensation is justified by a move requiring a residence of an effective duration of at least 24 hours in another state.

4.    Employment law

In France, with the exception of the legal provisions on working time, executives enjoy the same legal and contractual rights as other employees.

4.1.        Working time

Executives meeting the definition given in the Labour Code are excluded from the provisions of the Labour Code on working time, the various breaks and public holidays.

In practice, their working time is not, therefore, counted, and they cannot in particular claim payment of overtime. On the other hand, they benefit from paid leave like other employees.

4.2.        Employment contract termination

Ø  Dismissal

French law does not contain any specific provision concerning the method for terminating executives’ employment contracts.

The employment contract may therefore end in the context of a resignation, dismissal for personal or economic reasons, approved contractual termination or following a voluntary retirement or a retirement.

Any personal dismissal must be justified by a real and serious cause.

It may be decided for a disciplinary reason, which presupposes that the executive has committed one or more instances of misconduct sufficiently important to justify dismissal.

It may also be decided outside any misconduct committed by the executive.

Thus, the following may justify dismissal: inadequate results, professional incompetence or the executive’s physical unfitness for exercising his or her duties.

On the other hand, a simple change of control cannot in itself justify dismissal of an executive.

In all cases the employer must comply with a procedure defined by the Labour Code that, in particular, involves inviting the employee to a prior interview and notifying the dismissal in writing.

Ø  Severance pay

The executive dismissed for a reason other than serious or gross misconduct is entitled to payment of compensation whose amount may not be less than that fixed by law or the sector collective bargaining agreement.

Note that, when hired, executives often negotiate the insertion of a clause in their employment contract specifying payment of compensation in a higher amount. In practice, these clauses generally specify payment of flat-rate compensation fixed between 12 and 24 months’ salary.

Severance pay is under certain conditions and within certain limits exempt from social taxes and income tax.

In tax terms, severance pay paid outside a job protection plan is exempt from income tax at the highest of the following three amounts :

• amount of statutory or contractual severance pay,
• twice the amount of annual gross remuneration received in the year preceding termination,
• 50 per cent of the amount of severance pay received. In the last two cases the exempted fraction may not exceed €238,392.

In social terms, severance pay greater than €397,320 is entirely subject to social taxes. Above this, it may be exempt from social taxes¹ within the limit of €79,464.

Note that if the duties of corporate officer and employee are combined within the same company, or companies in the same group, it is necessary to group together all the compensation received to assess the social exemption and tax deductibility thresholds.

Ø  Notice of dismissal

Except in the case of dismissal for serious or gross misconduct, the dismissed executive benefits from notice whose period is fixed by law or the collective bargaining agreement.

As regards executives, dismissal notice is generally fixed at three months by sector collective bargaining agreements.

Note that the employment contract may specify a longer dismissal notice period and that, in all cases, the employer may exempt the executive from working his or her notice. In this case the employment contract is maintained and the exemption period must be remunerated.

Ø  Disputes/settlement

Dismissals of executives are very regularly followed by the conclusion of a settlement under which the executive waives contesting this measure and more generally instituting any action against his or her former employer.

On the other hand, the employer undertakes to pay him or her settlement compensation, which may be exempt from social contributions and income tax within certain limits and under certain conditions.

Ø  Non-compete

During the period of execution of the employment contract, the executive may not engage in acts of unfair competition. In principle, this obligation ceases at the end of the employment relationship (end of the notice, whether or not it is worked) unless the executive is subject to a non-compete clause, which in practice is often the case.

To be lawful and enforceable against the former employee, the non-compete clause must meet a number of cumulative conditions posed by case law.²¹ The clause must therefore :

• be vital to protecting the company’s legitimate interests,

• be limited in time. In practice, the periods of application of the clauses are fixed at between 12 and 24 months,

• be limited geographically. In practice, the scope of the clauses is generally limited to the national territory,

• take account of the specifics of the employee’s job and leave him or her the possibility of working,

• include an obligation for the employer to pay financial consideration to the employee. For the clause to be valid, this financial compensation must not be derisory. In practice, the amount of the consideration is paid monthly to the former executive and represents between 25 and 50 per cent of the remuneration that he or she received as an employee.

Note that :

• when the employee is exempted from working his or her notice, the non-compete clause binds him or her with effect from his or her departure from the company,

• the employer may waive application of the clause if this right is specified by the employment contract.

In the event of breach of the clause by the former executive, he or she loses the benefit of the financial consideration.

He or she may also be condemned to redress the loss caused to his or her former employer and to cease his or her competitive activity.

In the absence of a non-compete clause, the executive will be free to work when his or her employment contract ends. This freedom is not, however, without its limits.

In particular, the former executive must not engage in acts of unfair competition, on pain of being exposed to civil sanctions (award of damages) or even criminal damages in the event of proven corruption.

The following may, for example, constitute acts of unfair competition: diverting his or her former employer’s clients or hiring its employees after the creation of a competing company.

5.    Securities law

5.1.        Prospectus

French securities law derives from EU regulations and any share issuance reserved to employees should therefore comply with prospectus directive and regulations to the extent that they fall within their scope (please refer to EU Overview chapter).

However, it is worth noting that :

• EU prospectus directive and regulations provide for a broad prospectus exemption regarding ‘securities offered, allotted or to be allotted to existing or former directors or employees by their employer or an affiliated undertaking’, provided that :

.    the offered securities are of the same class as the securities already admitted to trading on the same regulated market,

.    a document is made available containing information on the number and nature of the securities and the reasons for and detail of the offer or allotment

• allotment of free shares and share subscription or purchase options is not deemed to be an offering under French laws as free share and share options are not actual securities (but merely rights to obtain securities); therefore, they fall outside the scope of EU prospective directive and regulations, even though the delivery of underlying shares may subsequently require compliance with rules applicable to admission to trading of new securities.

5.2.        Market abuse

Executive and other employees holding securities (or exercising options) are subject to all directives and regulations governing market abuse (please refer to EU Overview chapter), of which they are a particular focus because of the likelihood of possession of price sensitive information by executive officers.

They may notably be subject to :

• disclosure of director dealings in being specified that the de minimis threshold applied in France is €20,000 per year,
• a black-out period during which they must avoid any transaction.

5.3.        Share retention

Executive directors who benefit from the allotment of stock option or free shares are subject to certain obligations to retain all or part of the options or the underlying shares.

These restrictions must be established by board of directors.

While in listed company they have to take into account recommendation from corporate governance code, said restrictions may be more symbolic in private companies.

6.    Disclosure

6.1.        Public companies

Disclosure requirements regarding executive remuneration are primarily driven by EU rules and regulations, including in particular the prospectus regulation (please refer to EU Overview chapter) as well as Article L225-37-3 of the French Commercial Code, which provides that boards of directors of companies whose securities are admitted to trading on a regulated market (or controlled by such a company) shall disclose in a corporate governance report, inter alia, the overall remuneration and benefits (including allotment of free shares and option) paid by the company on a consolidated level for each of the directors (whether or not executive).

The report shall notably detail base and variable compensation as well as long-term benefits, such as pension plan or severance package.

6.2.        Private and public companies

In addition, shareholders of the French société anonyme and société en comandite par actions must be informed of the total amount paid in aggregate to the five or 10 (depending on company size) persons who received the highest remuneration.

7.    Corporate Gouvernance

Requirements imposed on executive remuneration derive initially from soft law requirements in France, including in particular two codes of governance drafted by employers’ associations: the AFEP-MEDEF code, mainly followed by CAC 40 companies, and the Middlenext code, followed by small and medium-sized listed companies.

However, further to press scandals, French lawmakers progressively enacted one of the most stringent say-on-pay regulations in Europe. Said regulation is applicable to executive corporate officers in companies whose securities are admitted to trading only.

7.1.        Employees who are not corporate officers in a listed company

Currently, the remuneration received by employee executives under their employment contract is governed by the principle of free setting of the salary and is not subject to particular governance rules, whether those rules are used by private companies or by state-owned companies.

Within these companies, only the remuneration of corporate officers is capped at 20 times the average of the lowest salaries of these companies (i.e., €450,000 per year).

7.2.        Corporate officers of listed companies

Remuneration of corporate officers in listed companies is now subject to a stringent two-step control by shareholders :

• Shareholders’ meeting shall approve every year the principle and criteria of remuneration of each executive director (for the coming year). This approval shall include each of the components of the remuneration, including, in particular, base compensation, yearly variable compensation, long-term variable compensation, allotment of free shares and options, exceptional remunerations and bonusses, differed benefit (retirement benefit), etc. If shareholders fail to approve the remuneration package, the relevant executive director shall benefit from the previous year’s package and, failing approval of previous packages, on the basis of previously applied practices in the company

• Shareholders’ meeting shall also approve the payment of variable and exceptional compensation (for the previous year). Failing approval of the variable and exceptional compensation (and even if previously approved in the context of the above-mentioned shareholders’ meeting), the relevant executive director is prohibited from receiving variable and exceptional compensation.

This approval process is in addition to previously existing requirements to have the shareholders approve, upon grant, the entry into force of retirement payment, remunerated non-compete undertaking and golden parachute, which will have to be approved again prior to payment.

The above requirements strongly reduce the ability for an executive director to fully negotiate a compensation package when hired. Indeed, no agreement can be binding upon the company regarding variable compensation until payment is actually approved by the shareholders.

8.    Specialised regulatory regimes

Although they cannot be detailed in this review, two layers of specific rules shall be mentioned to outline the French legal context regarding compensation.

8.1.        Collective agreements

Branches, companies and establishments may negotiate collective agreements, which may provide for additional rules and regulations.

These rules need to be reviewed on a case-by-case basis.

They may notably set a minimum wage requirement, improve the amount of severance pay provided for in the payment of seniority or 13th-month bonuses, or introduce additional social protection guarantees.

8.2.        Specific regulations

Some sectors may be subject to additional binding requirements regarding the setting of compensation packages.

This is notably the case regarding the banking and financial industry where lawmakers have tried to impose a shift towards long-term incentives by limiting yearly bonuses.

These specific regulations need also to be reviewed on a case-by-case basis.

9.    Developments and conclusions

9.1.        Equity remuneration

After a great deal of toing and froing by French lawmakers in this respect, the allocation of free shares seems to now be considered in a positive light, to the extent that the amount at stake does not exceed €300,000.

On the listed company side, the remuneration of executive corporate officers was put under high scrutiny to the extent that it was claimed it would be detrimental to French companies when competing to hire the best managers.

The medium or long-term consequence of this new regime remains to be seen, notably in order to understand whether it will be amended or is here to stay.