Parliament adopts report on executive pay in bid to curb abuse
In July 2009, the parliamentary Committee on constitutional laws, legislation and general administration of the French state adopted a report on the remuneration of leading company board members and managing directors, as well as traders in the financial services sector. The report put forward 16 proposals with the aim of ending abuses in relation to executive pay and increasing transparency regarding remuneration by establishing legal rules.
On 7 July 2009, the parliamentary Committee on constitutional laws, legislation and general administration of the French state (Commission des lois consitutionnelles, de la législation et de l’administration générale de la République) adopted the report on The remuneration of elected chairs of boards and traders (in French, 725Kb PDF), which was presented by Philippe Houillon, a member of parliament belonging to the governing conservative Union for the People’s Movement (Union pour un mouvement populaire, UMP). After much debate on chief executives’ remuneration when they leave big corporations, and especially when there is restructuring, the parliamentary committee began a survey in December 2008.
The members of parliament identified the existence of unacceptable abuses in relation to senior executives’ pay, generally based on the grounds that it was difficult for public opinion to accept the amounts in question. The committee also pinpointed various levels of remuneration of elected chairs of boards (dirigeants mandataires sociaux), which sometimes involve combining different types of remuneration, including:
- basic pay;
- options regarding subscribing to and buying shares and stock-options;
- free shares;
- golden handshakes;
- special top-up pension schemes.
Thus, the report highlights the limited success of various attempts to render the situation of executive pay more ethical and socially responsible. Such efforts have developed cautiously and are leading now to:
- greater transparency regarding executive remuneration;
- limited use of stock-options – and ensuring that they are taxed;
- subjecting golden handshakes to performance-related criteria and more equitable taxation;
- a temporary ban on variable remuneration of elected chairs of boards of companies that have received state help.
The report also observes that employer organisations prefer self-regulation approaches, such as the:
- Code of recommendations on the remuneration of elected chairs of boards (in French, 459Kb PDF), adopted by the Movement of French Enterprises (Mouvement des entreprises de France, MEDEF) and the French Association of Private Enterprises (Association française des entreprises privées, AFEP) in October 2008;
- rules drawn up in February 2009 by the High Committee of the Paris Financial Centre (Haut comité de place) regarding the remuneration of financial market professionals.
In order to supervise the remuneration of elected chairs of boards and traders, the report proposes to:
- set a ceiling of €1 million on all kinds of remuneration and advantages annually awarded to elected chairs of boards which remain deductible from corporate tax;
- stipulate that the remuneration of elected chairs of boards of directors, supervisory boards and executive boards, as well as the remuneration of appointed managing directors and acting managing directors, ‘should be in line with the general interest of the company’;
- establish a regulatory basis to MEDEF’s and AFEP’s Committee of experts (Comité des sages), by transforming it into an observatory of the remuneration of leading company board members and managing directors. The committee’s composition and area of competency will be increased.
Moreover, in order to democratise the process of fixing remuneration and clarifying the status of leading company board members and managing directors, the report proposes to:
- give legal status to remuneration committees;
- oblige boards of directors and supervisory boards to consult ordinary general assemblies of shareholders about all elements of remuneration and all types of undertaking, such as golden handshakes;
- limit to three the number of positions as elected board members that can be simultaneously held by the same person (as opposed to the current five positions);
- prohibit combining a position as an elected board member and an employment contract;
- create a top-up pension system with defined contributions to replace existing schemes with defined benefits;
- envisage an annual publication of the budget attributed to remunerating traders.
In order to put an ‘end to the worst abuses’, it is proposed to:
- forbid awarding attendance fees (jetons de présence) to the chairs of boards of directors and supervisory boards, as well as to managing directors and acting managing directors;
- provide for attendance fees being awarded on a pro rata basis in line with board members’ actual presence at meetings;
- abolish the 20% reduction of the attribution price of stock-options for directors;
- set these prices in line with the average rate over the previous six months (not one month, as is currently the case);
- examine the taxation of stock options depending on whether their attribution is a discretionary measure or applies to all employees.
Finally, the report indicates that it is of interest to implement these measures, provided that they are accompanied by an international initiative that will become legally binding. Moreover, such measures should be formulated in a European Commission directive of recommendations on the system of remunerating board members of listed companies.
The employer association CroissancePlus, representing the interests of directors of companies with high growth potential, had advocated already in 2008 the creation of decent stock-option plans for company board members and managing directors. CroissancePlus therefore ‘welcomed seeing proposals that it had presented in 2008 ratified in the report on the remuneration of leading company board members and managing directors’.
MEDEF’s President Laurence Parisot believed that the members of parliament ‘are involved in the wrong battle’ by wishing to legislate on the remuneration of leading company board members and managing directors. At the same time, however, Ms Parisot indicated that she personally considers as excessive some of the special top-up pension schemes that elected chairs of boards of big corporations receive when leaving.
The Chair of the Financial Market Authority (Autorité des marchés financiers, AMF), Jean-Pierre Jouyet, believes that it is ‘very difficult to legislate’ on the pay of leading company board members and managing directors. He considers that ‘if the code of good conduct is respected properly, there is no need for a law’.
Benoît Robin, Institute for Economic and Social Research (IRES)