European business leaders have traditionally taken home far less compensation than their American counterparts. But European executive compensation has been rising, and these pay increases have citizens in European nations deeply concerned. In fact, public outrage on both sides of the Atlantic has contributed to an unprecedented political debate over what to do about excessive executive pay.
In 2006, the 20 highest-paid European managers made an average of $12.5 million, only one third as much as the 20 highest-earning U.S. executives. The Europeans earned less, despite leading larger firms. On average, the 20 European firms with the highest-paid executives on the continent had sales of $65.5 billion, compared to $46.5 billion for the 20 U.S. firms. And yet these paychecks are still staggering by European standards.
In the United States, the top 20 highest-paid executives of publicly traded companies raked in an average of $36.4 million in 2006. The top earner: Yahoo’s Terry Semel, whose $71.7 million in annual earnings consisted almost entirely of options grants estimated to be worth $71.4 million. The Internet services chief also cashed in $19 million in options last year. Semel stepped down as CEO in June, amid widespread shareholder concern over the company’s sluggish performance.
The second- and third-highest-paid U.S. CEOs last year both hailed from the oil industry, a sector that continues to benefit from record-high world crude oil prices. Bob Simpson of Texas-based XTO Energy took in $59.5 million, including a $31 million cash bonus and $27 million worth of new options grants. He cleared another $39.8 million exercising previously awarded options.
XTO Energy last year also donated $6.8 million to Baylor University, Simpson’s alma mater, for the construction of a sports complex. In exchange, the XTO proxy explains, the university will name the new athletic complex after Simpson — and provide him “access to certain sporting events.”
The sixth-highest paid CEO in 2006 was Angelo Mozilo of Countrywide Financial, with $42.9 million. While the company’s sub-prime mortgage woes have meant homelessness for many of its clients and joblessness for many of its workers, Mozilo is set for life.
French executives dominated the European list, making up 10 of the 20 highest-paid executives. The top-earning French executive, Carlos Ghosn of Renault, took in $45.5 million, mostly in stock options. This total does not include Ghosn’s compensation from Nissan. Ghosn has been CEO of both Renault and Nissan since 2005. Once considered a hero of the auto industry for resuscitating the Japanese automaker, Ghosn has had to face angry shareholders of late as both firms have performed sluggishly. Ghosn recently gave up his post as head of Nissan’s North American operations.
The top-ranked German executive, Josef Ackermann of Deutsche Bank, collected $12.4 million. Ackermann became a lightning rod figure in Germany’s ongoing executive pay debate when he faced criminal charges for having helped approve, as a board member, massive bonuses for executives at another German company. Ackermann and five other board members at this company were charged with “breach of fiduciary trust.” Ackermann’s unapologetic defense of both the bonuses and his own massive paycheck provoked charges that the Swiss-born banker was injecting a more ruthless style of American capitalism into a relatively egalitarian German society. The former head of the German Social Democratic Party called Ackermann’s behavior “disastrous to the image of democracy.”
European Pay Debate
The steep rise in European executive pay has set off a firestorm in countries that have been characterized by a relatively strong sense of economic solidarity and egalitarianism in the past several decades. Some signs of the controversy:
- In Switzerland, a CEO of a small company is spearheading an effort to gather enough signatures to force a national vote on proposals for reining in pay, such as allowing shareholders to block pay packages and banning “golden parachutes,” which guarantee that executives will receive large benefits if their employment is terminated.
- In France, new President Nicolas Sarkozy has promised to ban golden parachutes for poorly performing executives. The matter became a campaign issue when Airbus gave its top executive an exit pay package of $8.2 million, despite having announced 10,000 job cuts.
- In Germany, a government commission on corporate governance recently proposed capping executive severance payments.
- In the United Kingdom, shareholders obtained the right to cast advisory votes on executive pay in 2003. Since then, Australia and Sweden have followed suit, while the Netherlands and Norway have adopted binding annual shareholder votes on compensation. Legislation that would give U.S. shareholders similar advisory powers passed the House of Representatives this spring.
A July 2007 Financial Times/Harris public opinion poll dramatically captured the growing European outrage over executive pay. Over 60 percent of those surveyed in the UK, France, Italy, and Spain, the poll found, would like to see their government set caps on top business executive pay. In Germany, a 47 percent plurality supports pay caps.
American Opinion on CEO Pay
In the United States, only 32 percent of the public currently supports an outright pay cap on executive earnings. But average Americans appear to be every bit as outraged over CEO pay excess as average Europeans. Indeed, 77 percent of Americans say corporate executives “earn too much.” Only 11 percent admire “those who run” America’s “largest companies” either “a great deal” or “quite a bit.” Some members of Congress have responded by introducing legislation to curb excessive pay through tax reform and giving shareholders the right to vote on pay packages.
All this suggests that meaningful reforms to rein in runaway executive pay could be on the horizon, as many political leaders in Europe and the United States seem to be finally catching up to the public outcry.