The Hindu Business Line : Europe: The pay swings

Business legitimacy is getting craggy, wrinkled and battered as Europe’s citizens are shocked by patterns of the new creed of self-indulgence, ravenousness and sheer greed. The rising level of executive pay is becoming a controversial topic all over Europe.

Mohan Murti

An attention-grabbing bit of writing I enjoyed reading recently is Swaminathan S. Anklesaria Aiyar’s list of ten commandments for political social responsibility — in retort to Prime Minister Manmohan Singh’s ten commandment of corporate social responsibility he lectured to CII and the wealth-creating elite of the nation.

Ironic that India’s politicians, who live in palatial barricaded bungalows and travel in cavalcades of vehicles, should be preaching these homilies. For, their counterparts in Europe — Prime Ministers and Ministers — walk or pedal to work! Yes, bicycles and community buses are the most-favoured mode of transport for Europe’s political elite.

The German Chancellor, Ms Angela Merkel, continues to live in her own Berlin Mitte apartment and her official residence in Willy-Brandt-Strasse 1 — one of the most desirable addresses in the Berlin city — remains empty. From her current abode near the city’s Museum Island, Merkel easily gets to work in the morning by foot in less than half an hour while taking a pleasant route along Berlin’s River Spree.

A contrast to the above is the rising level of executive pay that is becoming a controversial topic all over Europe. Indeed, business legitimacy is getting craggy, wrinkled and battered as Europe’s citizens are shocked by patterns of this new creed of self-indulgence, ravenousness and sheer greed. For this handful, life is a sweet concoction of mega-kismet, luxurious bungalows, beach houses, jet planes and gigantic yachts.

European Pay Package Trends

European executive packages may not have reached the heights of those of their US counterparts but Mr Josef Ackermann, chief executive of Deutsche Bank, who received €14.5m in 2006, has faced stiff criticism in Germany, especially when announcing job cuts.

In France, mistrust of the highly-paid business elite was exacerbated by the €13m severance package, supplemented by an estimated €250m of stock options, won by Mr Antoine Zacharias, when he was ousted as chairman of the construction group Vinci, last summer.

Europe is also witness to a recoil developing against outsized executive compensation. In Switzerland, which has been a resort for big money, Mr Minder, a CEO of a small company, is going to shareholder meetings of Swiss giants such as Novartis SA to challenge their CEO pay packages. Mr Minder has been amassing signatures to call a national referendum — as permitted under the Swiss Constitution — to make corrections in Swiss laws to compel more perspicuity and accountability on executive compensation.

In Europe, we also have examples of the farthest. Some years ago, Fortune Magazine had a feature on the founder of the Swedish furniture group, IKEA Ingvar Kamprad.

He is estimated to be worth $18.5 billion by Forbes, continues to fly economy, takes the metro to work, drives a ten-year-old Volvo, and avoids expensive garbs of any kind.

The gag in Sweden is that if Kamprad happens to swig an overpriced beer out of a hotel minibar, he will go to the corner shop to buy a replacement. Now that is clearly a penny-pinching CEO.

Overall, median hourly earnings range from €27.89 in Denmark to €14.08 euros in France and down to just €0.32 in Moldova. The biggest salary increases during the last year were in Slovakia (+11.3 per cent), Estonia (+9.8 per cent) and Latvia (+9.6 per cent) while hourly rates went down in Portugal (-1.8 per cent) and were virtually unchanged in Switzerland (-0.3 per cent).

A typical middle manager working a 35-hour week in a company employing 500 people would earn a basic annual salary of €3,565 in Russia, €5,000 in Poland compared to €43,316 in France and €55,929 in Germany.

Deserve the Reward

The disparity between those European chief executives who have walked away from their companies with multimillion euro pay-offs, despite their perceived poor feat, and what happens to every other group of worker when they fall short, has struck as a little peculiar.

For people at the top of private companies, there are three main reasons given for why they deserve to be so well rewarded:

The risks they put up with in taking the spot of CEO.

The verity that they are more endowed and have more accountability than anyone else.

The fact that they are working in a global labour market where Adam Smith’s indiscernible hand of market forces is at work setting pay levels and contract terms on an ever upward twirl.
Stock-based Pay

A major trend in executive compensation in Europe in the last decade is the increasing share of stock-based pay of total compensation. In fact, the escalation of option grants was not restricted to CEOs or even top-level executives.

It has occurred across a wide range of industries, but is especially pronounced in the so-called “New Economy” firms related to computers, software, the Internet, telecommunications or networking.

The European Governments and the European commission, where appropriate, are in the process of setting ground rules to:

Ensure that supervisory boards discuss and decide on the structure and amount of remuneration (all parts) that are fixed and variable such as retirement schemes, etc. These decisions can only be prepared in relevant sub-committees when employees’ representatives are involved.

Guarantee maximum transparency, structure and amount of remuneration of each and every member of an executive board of a company, which has to be published on an individual basis in the company’s annual business report.

In all West European countries, the average CEO pay is the highest in Switzerland, followed by Germany, Italy, and the UK.
Pan-European Approach

I have seen little or no indication of a dwindle in the rate at which basic remuneration for executives has been swelling over the last few years, but I am seeing a swing in the ratio of pay at risk to basic salary.

The opportunity to earn higher annual bonus payments together with potential earnings by way of long-term incentives has enlarged, in West Europe.
(The author, a former Europe Director of CII, lives in Cologne, Germany. Feedback may be sent to mohan.murti@t-online.de)

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