Executive Compensation: Tied to the Value Delivered to the Company

The Medef asserts it: a leader’s value is measured by what they contribute to the financial markets and the economy. Bonuses and other incentives, which now constitute the bulk of their compensation, are intended to serve as proof.

What is a CEO worth?

In its April 24 edition, the daily newspaper Les Échos addressed this very question. On average, including all bonuses and incentives, CAC 40 CEOs earn 2.2 million euros. This is, for all intents and purposes, what they earned in 2005. For the second consecutive year, the newspaper notes, their salaries—excluding stock options—have remained stagnant. Does this reflect increased restraint from shareholders and Boards of Directors? “Shareholder activism and the passage of laws aimed at modernizing the economy have led directors toward greater prudence,” notes Jean-Pierre Gouirand, partner at the executive search firm Whitehead Mann.

A Commitment to Transparency

Since 2001, the year the NRE law (New Economic Regulations) was passed—requiring greater transparency from listed companies—the legislature has introduced numerous regulations aimed at pulling back the curtain on executive compensation. These obligations, along with the penalties prescribed by law, have seemingly curbed the ambitions of our executives who—it is worth remembering—set their own salaries. In fact, upon the recommendation of the compensation committee, the remuneration terms for Chairmen, CEOs, and Deputy CEOs are determined by the Board of Directors, whose members are generally appointed by the executives themselves and are often part of their inner circle. This level of interconnectedness, which at times borders on a conflict of interest, contributes to the climate of suspicion surrounding executive pay, particularly regarding the various bonuses granted to them. Stock options, golden parachutes, “golden hellos,” sign-on bonuses, and performance incentives… The criteria for awarding these different components remain vague, fueling ongoing debate.

Risk Premiums

“When arranged upon taking office, golden parachutes allow directors to offer executives—who can be dismissed at any time—severance packages comparable to those of regular employees,” notes Didier Vuchot, Europe President of Korn / Ferry International, a firm specializing in the recruitment of executives and directors. However, of course, these severance packages have not always been negotiated in advance… As a result, when revealed during a high-profile executive departure, they create the impression of rewarding failure. This is especially true in a liberal economy, where executive compensation should be directly correlated to the value they bring to the company and the mission they have been entrusted with.

“The severance pay granted to the President of Printemps upon her departure sparked significant controversy. However, the fact remains that she fulfilled the mission entrusted to her by the Board of Directors: to oversee the sale of the brand under the best possible terms,” recalls Jean-Pierre Gouirand. Thus, the €2.5 million bonus received by Laurence Danon upon her voluntary departure corresponds exactly to the objectives set at the start of her tenure. Shocking? Perhaps, but top-tier executives are rare, which allows them to establish their compensation terms from the moment they are hired.

«An executive who destroys value would certainly be overpaid »

Three questions for Fabien Delime, Managing Partner at Delime Executive Search

What is a company actually purchasing when it selects a new leader: a track record or a vision?
Fabien Delime: Both! We are recruited based on our track record, so we are ultimately judged on our past performance. However, a track record, no matter how positive, is never an absolute guarantee. A company is also investing in a vision. “There is no favorable wind for those who do not know their port”: this adage holds particularly true for executives. For instance, within a specific role such as Chief Operating Officer, there is no greater difference between the mission of a “compromise manager” tasked with consolidating independent-minded teams and that of a manager brought in to dismantle established power structures in preparation for a new leadership team.

Executive bonuses are sparking intense controversy. Are they justified?
F. D.: Executive compensation and, more broadly, the overall remuneration of senior managers is directly linked to their ability to drive market capitalization; consequently, to create shareholder value. This is both simple and complex, especially in France, where we suffer from a lack of economic literacy. That being said, Boards of Directors have a duty of transparency when voting on executive compensation. Corporate governance best practices mandate this duty of transparency, which is the only way to dispel suspicion.

Are our executives overpaid?
F. D.: Between Zidane and Platini, who is the better player? Objectively, it is impossible to say. However, in terms of salary, they were not playing on the same field. But, given an equivalent economic climate, would someone else have performed better? If the answer is no, then an executive is never overpaid. The mere appointment of a certain high-profile figure to a company’s Board of Directors can, on its own, increase a company’s market capitalization; this is a value that warrants compensation. Furthermore, for large-cap companies, the financial impact of executive decisions is enormous, and a slight gap in expertise can generate a financial difference amounting to millions of euros. Such rare skills must be compensated in proportion to the company’s market valuation. On the other hand, since a company is a value-creation process, an executive who destroys value is certainly overpaid. This explains the justified criticism of golden parachutes, which apply when a Board of Directors parts ways with an executive deemed to be a value destroyer, yet who, in a sense, is compensated for their failure.

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