European investors angry at execs' rising pay

Sunday, July 21, 2002

FRANKFURT, Germany -- European investors, who felt the pain along with U.S. shareholders as markets plummeted, now get to share another emotion: outrage over executive salaries that soar while a company's stock sinks.

It's an old story in the United States, where the superstar theory of compensation -- big bucks as incentives for elite managers -- has been an article of capitalist faith for decades. But U.S.-sized bonuses and jumbo stock options only made it to Europe in the late 1990s, and even then only at around two dozen or so of the biggest multinational companies.

Several members of that select group, such as Vivendi Universal, Vodafone and Deutsche Telekom, have felt shareholder ire over executive compensation -- and sometimes have actually done something about it.

Boos and whistles

In the most notorious case, Deutsche Telekom chief executive Ron Sommer resigned Tuesday after a boardroom battle ignited by public dismay over a 90 percent drop in the company's stock price, coupled with news that top managers got a 90 percent pay raise for 2001 -- although the figure was inflated by severance pay to two managers.

Sommer endured boos and whistles at the company's annual meeting in May. After that, he said he and his top managers would forego this year's installment of the stock option plan.

Many shareholders were small investors who joined the bull market in the late 1990s by buying Telekom stock at the government's urging.

Opposition politicians seized on news that the company's eight top managers got an aggregate pay raise to 17.4 million euros from 9.2 million (the equivalent of $17.2 million and $9.1 million), while the stock plummeted by about the same amount, to around 12 euros from a 2000 peak of 100.85.

Sommer's departure suggests pay outrage might be a stronger force in Europe, in part because many people find the practice violates ingrained notions of collective fairness and social justice. That's especially true in Europe's two biggest economies, Germany and France, where unions are strong and workers get seats on corporate boards.

Chancellor Gerhard Schroeder denied having a hand in Sommer's departure, but the government was widely seen as responding to attacks from opposition leaders, including conservative challenger Edmund Stoiber.

"These are things that among our people are felt as extremely unfair," said Stoiber about Telekom executive pay during a debate. "Is this social justice? I say no."

Anger was stoked by the fact that the stock option plan would pay off even if shareholders' value rose by only 20 percent over as much as 10 years.

"That's not an ambitious target," said Rolf Drees of Union Investment Group, a mutual fund company. "That means 2 percent a year. It's less than you get on a savings account."

In Britain, Vodafone tried to answer criticism of its pay practices by consulting with pension funds and insurers that own much of its stock, and scheduling a shareholder vote on the plan at the July 31 annual meeting. The result: excluding high-salaried U.S. executives from the benchmark for the company's top executives despite the fact Vodafone owns 45 percent of Verizon Wireless, the largest U.S. mobile operator.

France's Vivendi Universal dumped CEO Jean-Marie Messier in part over outrage at his 5.1 million euro($5.2 million) salary and bonus -- a 20 percent increase -- and 835,000 stock options. Messier got the pay package after his company suffered a record loss in 2001 and its shares fell more than 50 percent.

The theory behind such programs -- as in the United States -- is that to get and keep the world's best executive talent, multinational companies must pay on a globally competitive scale. DaimlerChrysler established what is considered a lucrative stock option plan for executives after the 1998 merger of Germany's Daimler-Benz and Detroit-based Chrysler showed the American managers making far more.

But in general, European companies still resist mega-pay packages. Duncan Smithson, a compensation consultant for Mercer Human Resources Consulting in London, said that beyond the very top tier of multinationals, most European bosses make from 1 1/2 to 10 times less than U.S. counterparts, especially in manufacturing. "Once you're out of the top band, things look a bit more reasonable," Smithson said.

Luxury car maker BMW doesn't give its executives stock options at all, although the company made 1.87 billion euros ($1.85 billion) last year.

Some 80 percent of top BMW manager's pay is performance based -- but it's tied to the size of the dividend that shareholders get, and is paid in cash, not stock.

One reason for the lack of options, economists say, is tight oversight from a powerful group of shareholders belonging to the Quandt family, heirs of former chairman Herbert Quandt, who together own 46 percent of the stock.

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