Executive Pay

Time for Capitalists to Revolt

John Cryan, bisheriger Co-Vorstandsvorsitzender und zukünftiger Vorstandsvorsitzender der Deutschen Bank, spricht am 19.05.2016 auf der Hauptversammlung der Bank in der Festhalle in Frankfurt am Main (Hessen) zu den Aktionären. Foto: Arne Dedert/dpa +++(c) dpa - Bildfunk+++
Deutsche Bank's AGM. Will shareholders rise up?
  • Why it matters

    Why it matters

    Public pressure might force companies to reduce executive pay to more appropriate levels.

  • Facts

    Facts

    • Between 2005 and 2015, remuneration of management board members of Germany’s top firms jumped by an average of 55 percent. Pay for ordinary workers rose 27 percent.
    • Pensions for top executives are an estimated 250 times larger than other white-collar employees.
    • British hedge fund TCI wants Volkswagen to scrap its executive bonus system. TCI says VW board members earned a total of €63 million in 2015, when VW lost €1.6 billion.
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    Audio

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Public uproar over excessive pay for executives is usually a knee-jerk reaction to business scandals.

For example, the Americans were up in arms when at the beginning of the millennium it was revealed how executives at Enron, WorldCom and Tyco not only cooked their books, but profited handsomely in the process.

The same thing happened after the financial crisis when bankers were publicly pilloried because of their high wages. And these days, scandals such as “Dieselgate” at Volkswagen have refreshed the heated debate over the pay and performance of top managers.

But unlike in the past, this time there are good chances that executives’ pay will remain the focus of shareholders and the public.

But unlike in the past, this time there are good chances that executives’ pay will remain the focus of shareholders and the public.

It isn’t just aggressive hedge funds managers like the head of TCI, Chris Hohn, in the case of VW, who put the subject on the companies’ agendas but also influential institutional investors like Norway’s state oil fund. After all, the Norwegians manage almost $900 billion in over 9,000 shareholdings worldwide.

And there are other high-profile calls against boardroom excesses.

President François Hollande, for example, has threatened French companies, saying shareholder votes on executives’ pay could become binding. So far, they are mostly only a matter of a recommendation.

Just prior to that, Renault’s shareholders had voted against a €7.3 million ($8.2 million) pay package for the company’s boss, Carlos Ghosn. BP chief executive Bob Dudley also faced the same fate. Mr. Dudley, despite a record loss, sought a 20 percent pay increase, bringing his earnings to over €18 million.

A change in law in the United States, however, could be even more significant. Beginning in 2018, all publicly-listed companies there will be required to disclose the wage gap between their top senior managers’ earnings and that of the average worker. European companies will hardly be able to sidestep similar moves towards more transparency.

Debates over social inequality, which are defining not only U.S. election campaigns but also could dominate the upcoming federal elections in Germany, don’t end at the companies’ factory gates. A new study by U.S.-based financial services company MSCI points to a close connection between income disparity in society and companies.

According to the researchers, there is a high degree of social inequality in those countries where the pay differences are especially gaping, such as the United States and China. 

The MSCI survey also argues that productivity and profits are smaller in those companies with large pay gaps between top management and the average earner. Researchers attribute this to the short-sightedness of an overpaid management more interested in dividends, share buybacks and quarterly profits than in increasing the value of the company for its stakeholders over the long term.

Interestingly enough, studies by the International Monetary Fund and the Organization for Economic Co-operation and Development have reached similar conclusions. They indicate that high social inequality slows a country’s economic growth. So inequality in society and inequality in business go hand-in-hand.

For that reason, institutional investors have to look very closely at the wages of the managers they employ, not only because of social and political motivations but to safeguard their company’s economic success.

In times of low interest rates worldwide, it is particularly the large pension funds that can no longer accept excesses in pay that diminish their already weedy rates of return.

The great American economist Allan Meltzer once said the only danger for capitalism is excessive pay for its chief executives. So it’s up to the capitalists (stockholders) to correct an expanding pay gap. Institutional investors have too often kept quiet and let themselves be led like lambs to the slaughter. It’s high time they intervene — sooner, and with greater force.

And only when capitalism corrects its mistakes through assertive stockholders will the economic system be able to ward off government intervention. But if industry reacts as sluggishly as it has so far, it shouldn’t be surprised if the state intervenes in the end.

 

To reach the author: riecke@handelsblatt.com

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