Remuneration of board members is usually stipulated in the agreement for members of the management board. According to Estonian law, such an agreement is not deemed to be an employment contract but an agreement for provision of services. Still, according to the Commercial Code, the remuneration of management board members has to be decided by the supervisory board or, in the absence of a supervisory board, by shareholders. Regardless, the agreement for members of the management board must be based on a resolution of the supervisory board or shareholders.
Remuneration and other monetary benefits 's e.g., bonuses 's of management board members must be in reasonable compliance with the financial situation of the company and the obligations of the management board member. In other words, the discretion of the supervisory board in determining the exact remuneration is not unlimited. If the remuneration does not comply with the above-mentioned criteria, the members of the supervisory board that adopted the resolution regarding the remuneration are liable for any financial damage to the company.
It should also be noted that since the beginning of 2006 the Commercial Code prescribes an option for companies to file a claim for reducing remuneration depending on changes in a company's financial situation. A company is entitled to file such a claim if the financial situation has deteriorated and if the remuneration and other benefits of the board member are unfair concerning the company's overall health. Thus, the aforesaid right of the company cannot be used if the remuneration of the board member simply does not observe the criteria prescribed by the Commercial Code 's e.g., as a result of a decision made by the supervisory board.
Although not obligatory to all companies, observing the corporate governance recommendations elaborated by the Financial Supervision Authority and Tallinn Stock Exchange is recommended. There are several principles, inter alia following, that should be taken into account by the supervisory board of the company:
* The bases for remuneration of board members shall be clear and transparent. The supervisory board shall discuss and review regularly the bases for remuneration;
* Upon determination of the management board member's remuneration, the supervisory board shall be guided by an evaluation of the work of management board members. Upon evaluation of the work of board members, the supervisory board shall above all take into consideration the duties of each member of the management board, their activities, the activities of the entire management board, the economic condition of the company, the actual state and future prediction and direction of the business in comparison with the same indicators of companies in the same economic sector;
* Remuneration of members of the management board, including bonus schemes, shall be such that they motivate the member to act in the best interest of the company and refrain from acting in their own or another person's interest.
In conclusion, though there are not many requirements that should be followed regarding remuneration of management board members, the remuneration has to be in compliance with the financial situation of the company and the duties of the board member.
The basic requirements described above should always be taken into account by members of the management board as well as by the supervisory board of a company.
Andres Siigur is an associate of Teder, Glikman & Partnerid, a leading Estonian law firm and a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Kronbergs & Cukste in Latvia and Jurevicius, Balciunas & Bartkus in Lithuania.