Remuneration of Managing Directors, BoD Members, and Supervisory Board Members

Czech Republic: The new Corporations Act, has brought major changes to the legal framework within which the elected bodies of corporations are being remunerated.

In the opinion of a majority of experts, an incumbency agreement (manager agreement) ought to be concluded if the person acting in the office of managing director, BoD member or supervisory board member is to perform ‘for consideration’ (i.e., if the corporate office is a paid position). The manager agreement (in Czech: ‘agreement on performance as a corporate officer’ – smlouva o výkonu funkce) must be in writing, must be approved by the general meeting, and must include certain mandatory content as set forth by law. Specifically, it must contain the following:

(i) all components of the compensation, including benefits in kind (company car, flat, notebook, mobile phone, etc.) and including retirement security (e.g. in the form of premium payments towards a private pension plan),

(ii) the cash amount of the compensation, or else the rules for determining this amount (which must be sufficiently specific), and the form in which it will be granted (whereas certain components may be tied to the results of the company’s performance),

(iii) rules for the payout of special bonuses or of a profit share (whereas a share in profit may newly also be distributed among persons other than the shareholders themselves, as long as the memorandum/articles of association expressly provide for this possibility), and

(iv) compensation in the form of stock options.

If the provisions agreed in the manager agreement are at odds with statutory law, then the corporate officer is deemed to render their performance in office for no consideration – with the exception of cases in which the rules of remuneration (or the manager agreement as such) were not agreed in accordance with the statutory requirements for reasons attributable to the company. In such a case, the affected members of elected corporate bodies are entitled to ‘customary compensation’.

No performances may be rendered beyond the compensation agreed in the manager agreement unless the law or an internal policy approved by the general meeting, or tolerated by the general meeting (and by the supervisory board if such body has been installed at the company), expressly provides for it. In all other cases, the member of the elected corporate body would have to surrender the received performances, in line with the principles that apply to unjust enrichment.

If the member of an elected body is at the same time employed with the company, then it may only draw a salary (or other benefits tied to their employment) if the general meeting (and the supervisory board, if it exists) gave their approval. This also applies to employees of the company who are close to the member of an elected body (i.e., if they are the spouse or child of that member). That being said, the consequences of the potential absence of such approval by the general meeting are contentious: to conclude that the employee in question must have been discharging their employment duties free of charge would collide with the protection that employees enjoy under the provisions of labor law.

The incumbency agreements of managing directors, BoD members and supervisory board members who were elected to their respective office prior to 31 December 2013 must be amended (restated) so as to reflect the statutory requirements regarding compensation (i.e., in particular, the mandatory structuring of compensation packages). If this is not done by the beginning of July, then the respective members of elected bodies must be deemed to discharge their duty without being entitled to any compensation whatsoever, beginning as of 2 July 2014. We also recommend that companies formally approve the salaries (and other benefits) to which members of statutory or supervisory bodies and the persons close to them are entitled.

Lola Laštovičková, Lawyer


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