Continental Divide Over Executive PayJulia Flynn
It's an elegant setting for what's shaping up to be an ugly brawl. On June 26, shareholders of WPP Group PLC will gather in a marble-lined room overlooking the Thames at London's Savoy hotel. There, they'll vote on a pay package for Chief Executive Martin Sorrell that could give him up to $39 million over five years, depending on the performance of the ad-agency group's stock. It's the smart thing to do, according to Chairman Gordon Stevens: "We intend to make our CEO's package competitive with his rivals' in New York." Yet two big British investors who control about 9% of WPP's shares noisily oppose the plan. They say it's too greedy and just not right.
WPP isn't the only company under fire for narrowing the gap between U.S. and European pay. Critics are popping up across Europe, condemning this latest American import as inimical to the European view of fair pay and fair play. As politicians, labor leaders, and even investors and other executives jump onto the issue, executive pay could become a key part of the larger debate over how--or whether--European corporations should remake themselves to become more competitive with U.S. and Asian rivals.
DEFENDERS. Higher pay does have its defenders outside the boardrooms of Europe. "I think European executives should be paid more if their pay is linked to performance," says Andre Baladi, the Geneva-based shareholder activist. Total pay for European CEOs averaged $389,711 last year, compared with $819,428 for their American counterparts, according to Towers Perrin's 1994 worldwide total remuneration survey. Some corpmrate-governance experts also argue that Eurobosses deserve American pay levels since they compete internationally--and may even be lured away to take jobs with U.S. rivals. That's why more and more European multinationals are quietly introducing U.S.-style pay packages, complete with stock options and long-term incentives (chart).
Until recently, this upward creep in compensation hadn't caused much fuss. Bourses in most European countries, unlike U.S. exchanges, don't require companies to disclose details of executive pay. In Germany and the Netherlands, what the boss makes is still largely a non-issue. But in instances where CEO pay or perks have been revealed, the result has been cries of outrage.
The most intense clashes have occurred in northern Europe. Britain and Sweden now require companies to disclose more information about executive pay, which is on the rise. Yet pay packets for CEOs are getting fatter just when many workers are worried about unemployment. The result is a situation tailor-made for controversy.
Take Lars Ramqvist, CEO of L.M. Ericsson, the Swedish maker of telecom equipment. His company's pretax earnings soared 81% last year, and he received other lucrative job offers. This year, he got a 100% raise, which included three years' worth of bonuses. His pay reached $1.5 million--still less than the $1.98 million in salary and bonus Motorola Inc. awarded its chief, Gary Tooker.
Yet Ramqvist's pay raise angered Swedes, including some fellow capitalists. "In a period when we're calling for general wage restraint, it's offensive to allow people already well paid to move that fast along the ladder," explains Leif Vindevag, the Stockholm Stock Exchange's research head. Meanwhile, Sweden's deputy prime minister has accused Asea Brown Boveri Chief Executive Bert-Olof Svanholm, as well as other executives, of acting like "spoiled children" in demanding hefty pay hikes.
Fat pay plans also offend many in France. Former Prime Minister Edouard Balladur lost support during the presidential elections because in 1993, he cashed in stock options acquired as a top executive at computer consultant GSI. Although the transaction was legal, his opponents used it to attack Balladur, who had urged the French to tighten their belts during the recession.
Politicians in Britain are using pay hikes to their advantage, as well. British Gas PLC recently awarded CEO Cedric H. Brown a 76% salary increase just as the privatized utility was in the midst of a program to shed 25,000 workers. At the company's annual meeting in late May, union members trotted out a 350-pound pig named Cedric in protest. Brown got his raise approved. Not surprisingly, the Labor Party used the incident to criticize the Conservative government's policy on privatization.
In France, Senator Jean Arthuis, now minister for economic development, helped draft a May report on stock options that called for a code of conduct to "moralize" the system. The report concludes that France's murky stock-option system has led to "fraudulent behavior." French tax authorities, for example, believe that some insiders at closely held companies have pumped up the value of their stock shortly before exercising options. And in Italy in coming weeks, prosecutors will examine whether scores of top Fiat executives were paid under the table to skirt taxes.
CLOSER SCRUTINY. The flaps over executive pay are generating cries for closer scrutiny. In France, Claude Bebear, chairman of French insurance giant Axa, owns 1.9 million options. Bebear could exercise some 1.2 million now, which would come to a $27 million aftertax profit based on Axa's recent price. The company justifies this deal because Bebear has transformed Axa from a provincial insurer into a global giant. Some 300 Axa executives have options.
Bebear's option plan is public knowledge because Axa's purchase of U.S.-based Equitable Cos. forced it to disclose his and other top executives' pay to U.S. regulators. With no such requirements in France, "how can shareholders be unhappy if they don't know what they're unhappy about?" wonders Sophie L'Helias, president of Franklin Global Investor Services, a Paris-based corporate-governance consultant. Though French companies are starting to reveal more salary information, she and others are pushing for fuller disclosure of executive stock options and pay.
Peter Wallenberg, chairman of Sweden's Investor, came under fire earlier this year when his company's annual report used a footnote to disclose a $1 million consultancy fee he had received in addition to his pay and bonus as a director. Even though his 1994 compensation was well below that of comparable U.S. executives, the foggy disclosure upset small shareholders. Institutional shareholders weren't disturbed. Still, Investor now requires that shareholders vote on directors' pay at the annual meeting, and it has banned consultancy fees outright.
Britain is going much further. This July, a committee headed by Marks & Spencer Chairman Sir Richard Greenbury is expected to recommend that companies phase out the now-popular use of executive stock options, replacing them with incentives such as bonuses linked to long-term performance.
With the Greenbury report pending, executive-pay consultants say their British clients are adopting wait-and-see attitudes. Even WPP, fearing a close vote, may renegotiate parts of Sorrell's package. Nobody wants a publicity fiasco like the British Gas uproar. "Defensible positions are becoming much more important," explains David H. Rhoads, managing director of the London office of Strategic Compensation Associates. For instance, Boots Co., the British pharmacy chain, explains at length in this year's annual report why it's phasing out options and how it set compensation levels for its top managers.
Outside Britain, most of Europe's bosses can still cherish the secrecy that cloaks their compensation--and protects them from having their employees name pigs after them. But as greater disclosure becomes the norm, European CEOs better be ready to defend their pay with superior corporate performance.