July 6 (Bloomberg) -- French President Francois Hollande’s plan to cap pay in the corporate suite of state-held companies is making them unattractive to both executives and investors.
The Socialist president plans to limit the gross annual pay of chief executive officers at state-controlled companies such as Electricite de France SA at 450,000 euros ($565,000), or about 20 times the salary of the lowest-paid employee. The measure will be debated in parliament later this year before taking effect.
“The French state won’t be able to attract and retain the best talent,” Florence Magne, managing partner at executive recruiter CTPartners in Paris, said in an interview.
The pay ceiling puts French executives, who already make less than their European counterparts, even further behind. It also makes the companies less appealing to investors by showing the government’s stranglehold on their functioning, said Pierre-Yves Gauthier, head of strategy at Alphavalue SAS in Paris.
“State-owned companies will suffer,” he said. “Quasi-civil servants will run them and their share price will continue to trade at a discount because the government has such a heavy hand in them.”
France’s large state companies have underperformed benchmark indexes. EDF, the world’s biggest power producer, has fallen 37 percent in the past year, while its German rival EON AG has slid 15 percent. Areva SA, the world’s largest nuclear reactor builder, tumbled 59 percent in Paris in the period, while the benchmark CAC 40 index declined 19 percent.
The pay-cap measure is among Hollande’s efforts to bring “more justice” to France, and comes as he seeks to raise taxes and reduce spending to meet deficit-cutting targets. The nation is under pressure to improve finances as concern that Europe’s economic health is worsening roils markets.
Prime Minister Jean-Marc Ayrault has called on the “patriotism” of corporate leaders during the debt crisis.
The cap will come with a proposed 75 percent tax on income of more than 1 million euros, which has raised the possibility of an exodus of entrepreneurs from France. According to Christian Babusiaux, a judge at state auditor Cour des Comptes, tax evasion already costs the state as much as 50 billion euros annually. The pay cap and the millionaire tax may make corporate ambition and entrepreneurship a hard sell in France.
“Patriotism isn’t to flee France for tax havens so that those who stay have to pay,” Ayrault said during his policy speech on July 3.
The corporate-pay plan was part of Hollande’s presidential campaign that pitted him against former President Nicolas Sarkozy, who positioned himself as the business-friendly candidate in the May 6 election.
EDF CEO Henri Proglio, named in 2009 to the top job at the Paris-based company, was among a handful of people to celebrate Sarkozy’s election win in May 2007 at a restaurant on the Champs Elysees avenue. On Sarkozy’s watch, Proglio’s salary rose 60 percent, compared with his predecessor. Hollande’s proposed pay plan will result in a 72 percent pay cut for the executive.
More than any French CEO, Proglio, 63, who heads the biggest nuclear operator with 156,000 employees, has focused the debate over executive compensation. Hired while still heading water utility Veolia Environnement SA, the previous government fought to maintain a comparable salary at EDF for him.
The ensuing political battle gave rise to legislation known as the “Proglio Law,” which is still under consideration in parliament, to tighten rules on nominations and pay at state-controlled entities. The 1.6 million euros Proglio earned last year is almost four times Hollande’s proposed limit.
The new cap also would be about a 10th the amount paid last year to Johannes Teyssen, CEO of rival German utility EON, and Fulvio Conti, who heads Italy’s Enel SpA.
Gerard Mestrallet was paid 3.3 million euros last year as head of France’s gas utility GDF Suez SA in which the state owns 35 percent.
“Many government-owned companies are competing internationally and need to be able to pay market rates for salaries to get good people,” said Magne of CTPartners.
Proglio will be one of as many as two dozen executives, including at companies such as Areva and La Poste, the national postal service, who risk being forced to sign up for lower salaries if the measure goes through parliament later this year.
“It will make their management more difficult,” said Anne-Marie Idrac, a former minister who sits on the boards of Total SA, Cie. de Saint-Gobain SA, Bouygues SA and Vallourec SA, in an interview.
As ex-head of national railway SNCF, Idrac said she recruited people with salaries above her own. At EDF, Proglio’s salary is lower than that paid to about 20 other employees.
CEOs at state-controlled companies making more than the proposed cap last year include Aeroports de Paris’s Pierre Graff at 736,000 euros, Areva’s Luc Oursel at 679,048 euros and La Poste’s Jean-Paul Bailly, who was paid 626,174 euros. By contrast, Frank Appel, CEO of Deutsche Post AG, the region’s biggest postal service, earned 5.8 million euros last year.
What’s less clear about Hollande’s plan is whether the rule would apply to top managers at companies like GDF Suez, Air France-KLM and France Telecom SA, where the state holds stakes.
Meanwhile, Hollande’s pledge to raise the tax rate for people earning more than 1 million euros a year may drive French professionals abroad.
“The current economic context means Europe will go through hard times for the next five or 10 years so a lot of young people are looking to build their careers abroad where they can deal with growth and not restructuring,” Magne said. The proposed higher tax is being “watched carefully,” she said.
While the French government has so far offered few details about the tax, Laurence Parisot, head of the country’s employers’ lobby Medef, has warned it would be “dangerous for keeping and attracting the best” people in France.
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