As CEO pay in Europe rises, so does talk of curbing it

As losses pile up on balance sheets and stock prices drop, Europe is threatening to rein in U.S.-size compensation for its top corporate executives.

From Paris to Amsterdam to Berlin, finance ministers, politicians and government watchdogs are talking of curbing soaring executive pay, bonuses or golden parachutes for CEOs who depart with big severance packages.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of eurozone finance ministers, has called rising corporate pay a "social scourge" and wants higher taxes on what he calls "golden goodbyes." Fifteen nations use the euro as their currency.

French President Nicolas Sarkozy is urging debate on European-wide pay limits when France takes over the European Union's rotating executive presidency Tuesday.

Behind the threats is growing public and shareholder ire with multimillion-dollar compensation packages that are starting to rival American CEO pay at the same time European economies and financial markets are sagging.

Europe's financial industry has posted huge write-downs from investment losses in the U.S. subprime housing loans market. Stock prices in many sectors have dropped: On Europe's biggest exchange, London's FTSE 100 stock index is down 12% since January. And consumers face rising prices, as the inflation rate across Europe has surpassed 3% on higher energy and food costs.

Unhappy stockholders

At banking giant HSBC's annual meeting here last month, many shareholders howled before approving a compensation package for the bank's six top executives of $240 million, or 12 times their annual salaries, if they hit targets the next three years. The protest came after the bank in March reported write-downs of $17.2 billion, mostly from bad U.S. housing loans last year, although overall profit was up. "People see these (CEO compensation) numbers that they think are ridiculous for companies that have underperformed," says Cliff Weight, director of British consulting firm MM&K, which analyzes executive compensation. "Some of these figures are egregious. It just isn't comprehensible to the man in the street."

Many in the Netherlands objected to the windfall reaped by top executives who sold ABN Amro, a Dutch banking institution, to a group of European banks. Rijkman Groenink, ABN chairman, netted about $34 million upon retiring after the sale. Five others made $17 million to $26 million. The Dutch also were outraged when Jan Bennink, CEO of Numico, left last year with about $125 million in options, shares and bonuses after selling the baby food company to French yogurt giant Danone. Bennink later said he'd give his bonuses to his children and charity.

Germans raised eyebrows when top executives of Daimler got a 45% salary increase in 2007, the year the German carmaker sold its money-losing Chrysler division.

Against the backdrop of growing public resentment, Willie Walsh, CEO at British Airways, this year passed up a $1.5 million bonus due him for meeting an earnings target. Walsh was paying penance for the botched opening in March of the big new BA Terminal 5 at London Heathrow.

Total compensation for CEOs of big British companies with market capitalizations in excess of $20 billion rose 33% last year to a median of about $9.2 million, according to an MM&K analysis last month.

In the past decade, MM&K found, the average compensation package for a CEO of a British FTSE 100 company has risen 287%. British workers' pay rose just 47%. An average private-sector worker makes about $44,500 a year, according to Britain's Office for National Statistics.

Leaders of France's 40 biggest companies saw a 58% rise in compensation to an average $6.2 million last year, French business magazine L'Expansion found last month. Combined, the magazine reported, the CEOs pocketed a record $250 million, vs. an inflation-adjusted $158 million in 2006. That makes it hard to ask ordinary workers to hold down wage demands, Luxembourg's Juncker told reporters at last month's meeting of eurozone finance ministers in Brussels. "People won't understand" why they shouldn't get big pay raises, too, to help make up for higher food and energy prices, he said.

Yet, higher wages contribute to inflation, which hit a record 3.6% last month in the eurozone. That's prompted members of the European Central Bank to say they'll raise the zone's 4% lending rate next month to combat it.

'Europe is catching up'

CEOs in Europe have traditionally earned less than their U.S. counterparts, says Vicente Cuñat, who analyzes CEO compensation at the London School of Economics. But in the past 15 years, he says, "Europe is catching up."

French CEOs made 56% of what American CEOs did in 2005, according to the latest figures compiled by the Economic Policy Institute in Washington. German and British CEOs made 55%, and Italians, 53%.

In the USA, the median compensation package (half were paid more and half less) rose to $8.4 million last year for CEOs of 410 companies in the Standard & Poor's 500 index, the Associated Press reported earlier in June. That's a rise of $280,000, or 3.5%, in a year. The 10 best-paid made more than $500 million last year, AP found.

Cuñat says the rise in pay in Europe is driven by several factors, including the growth of multinational corporations, growing worldwide competition for top executives and growing power by CEOs to extract compensation from their boards: "The CEO has always been able to leverage higher pay in the United States as the size of (his or her) business goes up. Europe is catching up in this, too."

Wayne Guay, who studies executive compensation worldwide at the Wharton School at the University of Pennsylvania, warns that European governments would be making a mistake in capping CEO pay.

If governments limit what executives at public corporations make, he says, they're inviting them to convert to privately held firms or move their headquarters.

In the Netherlands, the top executives of such firms as the ING banking group have threatened to pull up stakes if compensation is capped or more heavily taxed. Other big firms such as Royal Dutch Shell, Philips and Unilever have warned that a clampdown would ruin the Netherlands' competitiveness and drive away top managers.

That's one reason Sarkozy is looking at limits that would prevent companies from moving to another nation.

As in the USA, Guay says, CEO pay becomes a hot-button issue when the economy isn't doing well. It cools when times get better. Over time, he says, public outcries have rarely had a big effect on either side of the Atlantic. "It really hasn't altered the path of pay over the last 15 years," Guay says. "We still see pay rising. I think it will continue."