PARIS — Ever since 2001, when France enacted a law requiring listed companies to reveal their executives’ pay packages, newspapers have had a field day denouncing greedy bosses. Not only are fixed salaries revealed, but so are bonuses, fees for serving on boards of directors, returns on stock options, pension packages, and other perks such as corporate jets or chauffeur-driven cars.
But executive remuneration has usually faded from view once the journalistic spotlight shifts elsewhere — that is, until now.
This year, executive heads have started to roll. In June, Antoine Zacharias, chairman and CEO of Vincy, France’s biggest public concessions and construction company, was obliged to resign when a majority of the board of directors judged his remuneration to be outrageous: 4.3 million euro in salary, a 13 million euro retirement bonus, a 2.2 million euro pension, and an estimated 173 million euro in stock options.
The focus of debate was an 8 million euro exceptional bonus that he requested after successfully executing a financial operation at the end of his tenure.
More recently, Noel Forgeard, the French co-CEO of the Franco-German aeronautical and defense company EADS, was forced to resign under a cloud of suspicion: He sold his EADS shares in March, before the company announced a costly delay in production of the Airbus A380.
Whether Forgeard acted illegally is still under investigation, but with the announcement causing the share price to plummet by 26 percent overnight — wiping out 5.5 billion euro of the company’s value — his position became untenable.
Such events have brought old questions back to the fore in almost every rich country: Are bosses being paid too much? Should laws governing stock options be reformed? Although the circumstances are different, the fundamental issues are always the same, for they touch on questions of legitimacy and morality. If remuneration is perceived as unjust, trust in the capitalist system will suffer.
The French debate about executive compensation is particularly striking in this respect, because managers’ salaries are in fact lower than those paid to their German, British and American counterparts, and their remuneration has grown in step with corporate share prices, increasing sixfold in 25 years. Moreover, like managers everywhere, their responsibility is great, making their positions less secure, while companies must compete for the relatively few good ones, driving up their price.
But critics argue that the best managers are not necessarily the best paid, that the market for them is not transparent, and that boards of directors are often partial to their presidents when setting compensation. Likewise, they insist that mergers and acquisitions, which make big companies bigger, should not be motivated by salary considerations, and that “golden parachutes” should not be granted to failed managers.
More fundamentally, they claim that it is simply immoral that bosses should earn as much in a day as their employees do in a year. No manager is a superstar, a Tiger Woods or Michael Schumacher of the boardroom.
Stock options, too, often stir passionate criticism. Allowing managers to buy shares at prices fixed in advance was intended to align their interests with those of other shareholders by giving them a personal stake in building the value of the company. But, for some managers, stock options have created an incentive to inflate profits and hide losses, thereby enriching themselves artificially while jeopardizing their companies and other shareholders.
The question is not specific to France. In the United States, a recent study by two university professors showed that more than 25 percent of the companies reviewed had manipulated the dates of stock-option allowances to increase the profits of the beneficiaries. The U.S. Securities and Exchange Commission and the U.S. Department of Justice apparently decided to fight the “backdating” practices, which where especially common in Silicon Valley.
In France, a law adopted in 2005 requires that severance pay for company managers now be subject to a shareholder vote, and the EADS scandal has spurred consideration of further legal changes. A bill proposed by former Prime Minister Edouard Balladur seeks to eliminate perverse incentives by barring corporate officers from exercising their stock options until they leave the company.
French President Jacques Chirac more cautiously stated that stock options should be legally framed. Others suggest broadening the scope of stock options to include more employees. Some Socialists are more radical, advocating, as Laurent Fabius recently did, the suppression of stock options.
The problem with legal measures, however, is that they can have pernicious side effects and unintended consequences, especially when they are tailored to a particular crisis.
The state’s function should be to enact and enforce laws on corporate governance and taxation of managers’ compensation. In all other areas, legislation cannot serve as a substitute for the exercise of common sense, discernment and responsibility by a company’s board of directors.
If we must have laws to bolster our ethics, their guiding principle should be that remuneration is always linked to the performance and services it is intended to compensate. Only measures that ensure that companies reward true merit will be considered legitimate by employees, shareholders and the public.
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