Wed, Aug 30, 2006 - Page 9 News List

Are governments right to restrict executive pay?

Trust in the capitalist system falters if salaries are perceived as being unjust, but legal solutions can also be problematic

By Raphael Hadas-Lebel

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 chief executive officer (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: a salary of 4.3 million euros (US$5.5 million), retirement bonus of 13 million euros, pension of 2.2 million euros and stock options estimated at 173 million euros. But the focus of debate was an exceptional bonus of 8 million euros 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 euros 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 US counterparts, and their remuneration has grown in step with corporate share prices, increasing six-fold 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.

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