Executive remuneration: trends and policy issues Presentation for the ETUC Worker Participation Working Group 17 Nov 2010.

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Presentation transcript:

Executive remuneration: trends and policy issues Presentation for the ETUC Worker Participation Working Group 17 Nov 2010

Sigurt Vitols Executive remuneration 2 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 remuneration 3 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 remuneration 4 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 remuneration 5 Key Concern: TRANSPARENCY % of companies with individual pay disclosure, 2007 Note: top 300 companies. Source: Ferrarini et al (2009)

Sigurt Vitols Executive remuneration 6 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 remuneration 7 Key concern: LEVEL

Sigurt Vitols Executive remuneration 8 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 remuneration 9 Example of Structure of CEO Pay: Deutsche Bank 2007

Sigurt Vitols Executive remuneration 10 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 remuneration 11 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 remuneration 12 Remuneration: POLICY INSTRUMENTS ● Recommendations ● Codes ● Public monitoring („name and shame“) ● Legislation ● Shareholder voting („say on pay“) ● Worker participation

Sigurt Vitols Executive remuneration 13 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