Executive remuneration: trends and policy issues

Presentation for the ETUC Worker Participation Working Group 17 Nov 2010

Sigurt Vitols Executive remuneration2

Outline of Presentation

● Why should we be concerned with Executive Remuneration?

● Concerns and trends● Policy instruments for influencing remuneration● Issues for discussion

Sigurt Vitols Executive remuneration3

Key concerns: TRANSPARENCY, LEVEL, STRUCTURE

TRANSPARENCY:● So we know managers‘ incentives

LEVEL: ● Threat to social cohesion● Drain on company resources● Fairness in state aid cases

STRUCTURE: ● Decoupling of workforce and management interests● Wrong incentives for executives ● Special problem: stock options in financial institutions

Sigurt Vitols Executive remuneration4

Key Concern: TRANSPARENCY

● Pre-1990s: few requirements for individual and detailed disclosure

● Starting mid-1990s: more European countries require more disclosure

● Great diversity in national practices● EU recommendations only partially followed● Particular concern: special payments● Disclosure in financial institutions: traders, dealmakers

Sigurt Vitols Executive remuneration5

Key Concern: TRANSPARENCY% of companies with individual pay disclosure, 2007

Note: top 300 companies. Source: Ferrarini et al (2009)

Sigurt Vitols Executive remuneration6

Key concern: LEVEL

● Social dissatisfaction with great inequalities● Worker-CEO pay ratio above 40:1 is problematic● „Catch up“ with the US – but massive differences across

countries and companies● US S&P500: top 5 executives earnings = 10% of profits ● 2010: upward dynamic has restarted after some decreases

in 2008/9

Sigurt Vitols Executive remuneration7

Key concern: LEVEL

Sigurt Vitols Executive remuneration8

Key concern: STRUCTURE

COMPONENTS OF REMUNERATION● Fixed pay● Variable pay

● Cash bonus (generally annual)● Stock and stock options● Long Term Incentive Plan (LTIP)

● Pension contribution● „Perks“ (company car, etc.)● Special payments (e.g. golden handshakes + parachutes)

Sigurt Vitols Executive remuneration9

Example of Structure of CEO Pay: Deutsche Bank 2007

Sigurt Vitols Executive remuneration10

Key concern: STRUCTURE

TRENDS● Biggest increase in VARIABLE pay● Trend of 1990s – more stock and stock options● Trend of 2000s – more LTIPs ● New development: sustainability components

● Environmental performance● Workplace accidents● Worker + customer satisfaction

Sigurt Vitols Executive remuneration11

Remuneration: POLICY MEASURES

● Disclosure requirements● Individual reporting● Standards for reporting on components● CEO-to-worker pay ratio

● Caps● Level: absolute or CEO-to-worker pay ratio● Variable versus fixed components● Special payments (e.g. golden parachutes)

● Corporate Governance● Remuneration committee● Role of board and shareholders

● Definition of comparison group for benchmarking

Sigurt Vitols Executive remuneration12

Remuneration: POLICY INSTRUMENTS

● Recommendations ● Codes● Public monitoring („name and shame“)● Legislation● Shareholder voting („say on pay“)● Worker participation

Sigurt Vitols Executive remuneration13

ISSUES FOR DISCUSSION

● What role should the EU play here?● What measures should be implemented?

● Transparency● Caps● Corporate Governance● Are shareholder rights contrary to worker participation?

● Sustainability reporting: benchmarking indicators for pay?● Job quality/employment/employee satisfaction ● Environmental performance

● Upcoming Green Book on Corporate Governance