The Executive Compensation Debate

I think it was the Financier Leo J. Hindery Jr whocertainly has risen substantially in the last 10 years.
once said: 'I think there are people, includingForeign executives now run seven of the firms in
myself at certain times in my career, whoFrance's CAC 40 index and five of Germany's
because of their uniqueness warrant whateverDAX 30. American-style bonuses and long-term
the market will bear.' But the questions beg HOWincentive plans are now commonplace.
much is too much? and Should macroeconomicHowever European firms still pay a fraction of
woes slow CEO pay growth?what is paid to their counter parts in America.
I recently read in the Associated Press that evenAccording to Hay Group, a management
as the economy slowed down in America "CEOconsultancy, the median European executive
pay still chugged to yet more dizzying heights lastearns just 40% as much as his equivalent in
year.' The top 10 highest paid CEOs took home aAmerica. It's also notable that both American
total of more than $500 million, but half of thosepresidential candidates - John McCain and Barack
companies saw huge drops in profitability at theirObama - have been making compensation a
companies.campaign issue.
One of the most exasperating things toThere is an important difference though
shareholders and the public is when a CEOcompanies in Europe seem to be more
receives millions or tens of millions of dollars ofdetermined than American ones to link
compensation regardless of performance. Thiscompensation to performance. In America share
practice goes fundamentally against the culture ofgrants are often not tied to performance,
rewarding on the basis of ability and merit thatwhereas European firms usually attach
underpins the free market system. Recentperformance criteria to any share grants, typically
examples include: Marriott International chief Jdepending on a comparison with a peer group.
Willard Marriott Jr - his 2007 pay was $44m, upDan Vasella, boss of Novartis, a Swiss
22%, just six percentage points lower thanpharmaceutical giant, and a favourite target of
Marriott's stock price drop or Stan O'Neal, Merrillpay activists, earned SFr17m ($14m) in 2007,
Lynch's former boss, left with $159m after losingdown 33% from 2006, because he missed his
$8 billion.targets.
Shareholders and politicians are advocating bringingThe extreme rise in European executive pay has
in rules for companies that would allowsparked an intense debate in countries that have
shareholders to vote on executive pay.been characterised by a relatively strong sense of
Executives in Europe have home far lesseconomic solidarity and impartiality in the past
compensation than their American counterparts inseveral decades. A July 2007 Financial Times
the past. But with leadership compensation inHarris public opinion poll found that over 60
Europe on the rise, these pay increases havepercent of those surveyed in the UK, France,
citizens in European nations deeply unsettled. TheItaly, and Spain would like to see their
public indignation on both sides of the Atlantic hasgovernment set caps on top business executive
contributed to a unique political debate over whatpay. In Germany, a 47 percent plurality supports
to do about excessive executive pay. Executivepay caps.
pay figures in Asia are still not as widely accessibleIn America, only 32 percent of the public supports
as in Europe and America and it is difficult toan outright pay cap on executive earnings a
compare. A recent study conducted by the CFArecent poll shows. However 77 percent of
Institute Centre for Financial Market Integrity saidAmericans say corporate executives 'earn too
that reporting compensation of executives on anmuch.' Some members of Congress have
individual basis is the practice in the United States,responded by introducing legislation to curb
Britain and Australia and is advocated byexcessive pay through tax reform and giving
institutional investors worldwide. Prevailingshareholders the right to vote on pay packages.
regulations and practices in Hong Kong, Japan andI recently saw an interview with Sarah Anderson,
Singapore however leave much to be desired.who compiles the Executive Excess report on
Jean-Claude Juncker, president of the EuropeanCEO pay on a yearly basis. She discusses some
Commission's "Eurogroup" of finance ministers,of the issues raised in this column in her interview
recently called excessive pay a "social scourge"and I recommend that you take some time to
and demanded action. When L'Expansion, a Frenchview it. (
business magazine, calculated that pay for theFrom what I have read and heard in the last year
country's bosses went up 58% in 2007, thesigns point to a strong possibility that meaningful
finance minister, Christine Lagarde, said it wasreforms to rein in excessive executive
"scandalous" and threatened regulation. Nicolascompensation could be a prospect, as many
Sarkozy, president of France, and Horstpolitical leaders in Europe and the United States
Köhler, president of Germany, have alsoseem to be finally catching up to the public uproar.
denounced high pay.It has to be said though that compensation is a
New legislation the Netherlands will see the lawcomplex issue. Different circumstances and
setting EU500,000 as the level of annual salary orindustries dictate different packages and even
severance payment at which extra taxes mustseverance pay may be justified if a change of
be paid. Germany's Social Democratic Party iscontrol is the end goal. One would hope though
calling for legislation to curb pay, though its partnerthat politicians would reject laws about pay, which
in government, Angela Merkel's Christianare too widespread to be useful. Strict legislation
Democratic Union, has so far resisted. At themight well compel leaders away from listed
same time the European Commission is workingcompanies and create compensation packages
on a response to the Eurogroup's complaint.even more complex-and so much more difficult
Just how extreme IS executive pay in Europe?to monitor.
As European firms compete for global talent it