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THE NEW YORK TIMES: U.S.-Style Pay Packages Are All the Rage in Europe

Published: June 16, 2006

Along with hip-hop and Hollywood movies, Europeans are eagerly importing another American phenomenon: soaring pay packages for chief executives.

In Asia, Executives Earn Much Less (June 16, 2006) For decades, Europeans were far more restrained than Americans when it came to rewarding the boss. Now, executives overseas are less inhibited about asking for American-style compensation. And often they are getting their wish.

But while huge paydays have become a staple of American corporate life, in Europe this appears to be less acceptable to investors, and in some countries, resistance is building.

The pay of Asian executives remains well behind that of their counterparts in the United States and Europe. [Page C4.]

Signs are abundant that the trans-Atlantic pay gap is shrinking. Last year, Jan Bennink, the chief executive of Royal Numico, a Dutch baby-food producer, was granted $13.4 million. Lord Browne of BP was awarded $18.5 million, and Antoine Zacharias, former chairman of the French construction company Vinci, was given $22 million in compensation and a severance payment.

While those figures may seem low when compared to awards in recent years to some American executives, European bosses are increasingly winning pay packages that were unimaginable just five years ago.

“Here in France, greed has been legalized,” said Pierre-Henri LeRoy, who heads the French advisory firm Proxinvest. “Executives compare themselves to the market in the U.S., not India, when they plan their compensation.”

Compensation experts say the changes have been striking. “This is the first time I’ve seen this gap closing in 30 years, and it is closing quite a lot,” said John Viney, founding partner of the Zygos Partnership, a London-based executive search firm.

Slightly tighter controls on pay packages in the United States may be helping to narrow the difference with Europe, Mr. Viney said, but the real shift is coming from the increased use of international comparisons, which are not really all that international.

“When you talk about world compensation comparisons, you really mean one country, and that’s the United States,” Mr. Viney said.

Richer at the Top in U.S.

In 2005, the median pay package for the chief executives of the 350 largest companies in the United States was $6.8 million, including long-term incentives like stock options, according to a study by Mercer Human Resource Consulting. That was 58 percent above the $4.3 million median for top executives in the companies listed on the Financial Times Stock Exchange 100 index in Britain, according to Cliff Weight, a director at Independent Remuneration Solutions, a compensation consultant in London.

Yet that compares, Mr. Weight said, to a far broader gap in 1998, when the median in the United States was $4.6 million, more than four times the $1.1 million in Britain.

Similar studies in Germany, France and the Netherlands, using a variety of methodologies, also show that pay overseas is on the rise. In the Netherlands, the median pay for chief executives at 75 publicly traded companies studied by the management consulting firm Hewitt Associates — including those with small, medium and large stock market values — increased 17.8 percent in 2004, to $1.47 million.

In France, the median compensation for the chief executives of companies listed in the CAC-40 benchmark stock index rose to $3 million in 2004, from about $780,000 in 1998, according to Proxinvest, an adviser to pension funds and mutual funds.

In Germany, a recent survey by Die Welt, the Hamburg-based daily, showed a nearly 11 percent increase in 2005 in the average salary of management board members from the 30 blue-chip DAX index companies.

The rise in executive pay is causing some discomfort, even outrage, in some European countries with socialist economic and political traditions. In January, when the giant French hotel company Accor did not renew the contract of the chief executive, Jean-Marc Espalioux, investors were angry that he still managed to walk away with a severance package valued at $15 million. Last month, the payment was approved with only 59 percent of the shares at the company’s annual meeting. “That is an unusually low support for a motion,” Mr. LeRoy of Proxinvest said. Mr. Espalioux did not return phone calls seeking comment.

In Britain last winter, shareholders learned that United Business Media, owner of PR Newswire and other business services, would pay the departing chief executive, Lord Hollick, a $486,000 fee for a smooth handover to the new chief. Lord Hollick, who did not return phone calls seeking comment, ultimately gave it up.

And in Germany, improved disclosure has thrust the issue of greed into the limelight, setting off criticism of Deutsche Bank’s chief executive, Josef Ackermann.

A federal court ruled late last year that Mr. Ackermann and five others would be retried in October on charges of violating German corporate law. They had awarded $67 million in bonuses to a handful of executives at Mannesmann, the telecommunications company on whose board Mr. Ackermann sat. The bonuses were granted in 2000 after Mannesmann agreed to be acquired for $183 billion, the largest corporate takeover in Europe. A lower court had acquitted Mr. Ackermann of the charges. Deutsche Bank declined to comment, but the bank’s supervisory board, in a statement, said, “We continue to believe Ackermann has done nothing legally or morally wrong.”

In Asia, Executives Earn Much Less (June 16, 2006) But disclosure may have the perverse effect of whetting competitive appetites. As compensation scoreboards become more common worldwide, executives can argue that they are worth more, as many note has already happened in the United States.

In France, where the government now requires fuller disclosure of compensation, said Marco Becht, executive director of the nonprofit European Corporate Governance Institute, “a senior executive just told me privately that the new disclosure is the best thing, because we all see everybody else’s compensation and now we all think we are not paid enough.”

Royal Numico, the Dutch food producer that specializes in preoperative diets and food for the malnourished as well as infant food, uses Bristol-Myers Squibb, Colgate-Palmolive, Kellogg and H. J. Heinz as part of the group against which it determines compensation for its chief executive, Mr. Bennink. A company spokesman, Michiel Quarles van Ufford, said the company’s plan meant that if Numico performed well, both shareholders and management would benefit.

Peter de Vries, who heads VEB, a corporate governance watchdog firm, said Dutch companies “do the same thing Americans do.”

“They hire a firm that puts together a report for an international peer group,” he said, “and they make a pay package related to that.”

By VEB’s calculations, Mr. Bennink was the Netherlands’ highest-paid chief executive last year. Mr. van Ufford of Numico maintained that VEB’s figures are too high by 10 percent.

An American Model

The trend is most apparent at companies whose executives headed divisions in the United States. “When I ran Burger King for Diageo, I moved to Miami and I was remunerated in line with U.S. standards,” recalled Dennis Malamatinas, who until 2000 served as chief executive of Burger King, then a division of Diageo and now a publicly traded company. “That was how we were measured.”

But even when a company does a good deal of its business in the United States, awarding top executives big pay increases can invite trouble when most of the shareholders are not American.

British shareholders have more leverage than their counterparts in the United States in vetoing huge compensation packages. They have won the right to vote on compensation, and even though the vote is nonbinding, boards ignore it at their peril. Newspapers regularly run headlines decrying “fat cats,” with full-color photos of executives, their homes, their wives and any candid vacation shots editors can find.

And because the investor base in Europe is smaller than in the United States, corporate governance experts agree that it is easier to mobilize shareholders and to reach a consensus among investor groups, either to engage in a dialogue to avoid confrontation or to mount a fight.

That leverage may help explain a development three years ago, when Jean-Pierre Garnier, the chief executive of the huge British drug maker GlaxoSmithKline, negotiated a contract that promised him a $35 million severance payment. Investors were so angry that the package was ultimately cut in half, so he will get about $17 million when he retires. At the time, the company disputed the $35 million figure because roughly a third of that was in stock options that had become vested.

Still, the trend is inexorably toward higher pay. At United Business Media, where Lord Hollick, gave up his $486,000 severance payment, the board quietly overhauled its bonus arrangements for three senior executives, paving the way for them to make more than ever. The company created long-term incentive plans so that the executives, depending on performance, could earn 110 percent of their salaries. Rising corporate pay in Europe is following a pattern already set in London finance, where compensation at many banks is almost on par with that in the United States, and is higher at some hedge funds. In addition, the explosion of private equity funds and leveraged buyouts in Britain is offering chief executives of public companies the opportunity to make far more money.

In a telling move, Lord Hollick left publicly traded business to go to the private equity firm Kohlberg Kravis Roberts.

In Britain, what is really changing is “variable pay” — bonuses and rewards that are linked to long-term performance that may include meeting growth goals. “Base pay may be up by 7 to 10 percent, but bonuses are up 75 to 100 percent,” estimated Richard Singleton, director of corporate governance for F& C Asset Management, which has $240 billion in assets. “The opportunity is there, but there is also an increase in expected value” of the management, he said. “That’s why there has probably been more unease than outcry” from investors.

In Asia, Executives Earn Much Less (June 16, 2006) But even the highest-paid executives in Britain still cannot match their American counterparts. For example, Lord Browne of BP, Britain’s largest company by stock market value, was awarded $18.5 million in compensation, including $2.6 million in salary and $7.16 million in long-term compensation, and Jeroen van der Veer, the head of Royal Dutch Shell, last year was awarded $12.7 million, according to Mr. Weight of Independent Remuneration Solutions.

By contrast, David J. O’Reilly, chief executive of Chevron, a company whose stock market value is roughly 60 percent that of BP, was granted $37 million in salary, bonus, stock and options that become vested over several years.

History and culture may prevent European executives from catching up with their peers in the United States. Stephen Davis, president of Davis Global Advisors, argues that there are better safeguards when it comes to pay overseas. “There is no shame factor in the U.S.,” he said. “In Europe, there is more of a concern about the social impact.”

In France, the government began requiring disclosure of corporate pay in 2001, stirring investor anger. Jean-Marie Messier generated headlines by trying to walk off with a $25 million settlement from Vivendi after he was ousted in July 2002, and ultimately had to forgo the settlement.

“France is largely a Catholic country,” said Sophie L’Hélias, a French corporate governance expert, “and there is a great distrust of money, and particularly of people who make a lot of money, and of big business.” Mr. Messier did not return a call seeking comment.

More Acceptance in France

Whether or not shareholders object, an increasing number of chief executives are seeking such large payouts. “Messier took the money and ran,” Mr. LeRoy of Proxinvest said. “That kind of greed was never acceptable 10 years ago.”

Mr. LeRoy said there have also been cases of what he considers egregious payouts where investors did not protest that much. “The head of Vinci, the French construction company, walked off with $22 million,” Mr. LeRoy said of Mr. Zacharias, the former chairman. Mr. Zacharias resigned the chairmanship on June 1 after a power struggle with the chief executive. He could not be reached for comment.

“I personally think the Catholic factor is disappearing,” Mr. LeRoy said.

Under French law, investors have the right to vote on severance payments. Mr. LeRoy said that some investors privately grumbled about Mr. Zacharias’s payment, and a 34 percent vote against it showed strong opposition, but not strong enough to block it. “The big firms that do asset management want more business from the issuing company,” he said, explaining why money managers who control large blocks of shares often do not challenge executive pay increases.

When the British-listed Cable and Wireless introduced “private equity style” pay packages for its top management in May, investor groups balked immediately. The compensation could amount to as much as $409 million for 62 managers.

Although the company does not technically need shareholder approval for the bonus packages, some of which allowed individual managers to make as much as $40 million over four years, executives have spent the last few weeks trying to convince the market that the deals are necessary to keep the company from being taken over by a private equity firm.

“We do have concerns” about the bonus structure, said Lucy Butler, spokeswoman for the Association of British Insurers. “We’re in dialogue with C. and W., and looking carefully at the issues,” she said.

A spokeswoman for Cable and Wireless, Antonia Graham, said it “absolutely thinks it is the right plan for shareholders and for the company.”

Some Europeans are adopting other controversial American pay habits, like lowering performance hurdles.

Earlier this year, the Royal Bank of Scotland’s new compensation plans raised hackles at G4Owners, a firm that consults with long-term investors on corporate governance issues. Until 2005, the company’s performance had to achieve two targets before Fred Goodwin, the chief executive, and his top two lieutenants could collect new stock option grants. Last year, it failed to reach those targets.

Then, the Royal Bank changed its compensation plan so it had to reach only one of two goals for its top managers to get half their payouts.

“Now, 50 percent of your options will vest on a total shareholder return measure,” a spokesman, Mike Keohane, said, “and 50 percent in an adjusted earnings per share over a three-year period. Before, you had to achieve the total shareholder return or you got nothing.”

But Michelle Edkins, managing director at G4Owners, is skeptical of the shift. “It has gotten easier to meet the goal,” she said.

Heather Timmons contributed reporting from London for this article and Mark Landler from Frankfurt.


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