Brussels plans fresh rules on executive pay

Europe’s corporate chiefs are facing a fresh public ordeal over pay as Brussels forces them to justify why they often earn more than 100 times what their staff are paid.

Investors and business groups hit back at “weird” and “counterproductive” draft proposals from the European Commission that would give shareholders the right to vote down the ratio between board pay and the average full-time worker.

For the 10,000 listed companies potentially affected by the shareholder rights directive, it will lay bare statistics that could drag executives even further into the fraught political debate over inequality.

News of the reforms came as Royal Bank of Scotland and Lloyds Banking Group, the UK’s two part-nationalised lenders, unveiled a share bonanza for top executives worth £35m. The ratio of worker-executive pay at the big banks often exceeds 100 times, with Barclays paying its chief executive 181 times more and Lloyds 125.

Other sectors relying on a more low-paid workforce could potentially show even bigger gaps. US chief executives at Walt Disney and Coca-Cola, for instance, are respectively paid 653 and 427 times more than the median pay of their employees.

Initiatives to give investors a bigger say on pay have gained traction around the world, but the European Commission proposal goes further than the US or UK by requiring a binding vote on a wider range of sensitive remuneration benchmarks.

Investors reacted with alarm. Hendrik du Toit, chief executive of Investec Asset Management, which manages $110bn in assets, said it would “put Europe at a disadvantage”.

“We have all heard the message from the shareholder spring that we should get the best possible management at the fairest compensation. But these kind of micro metrics will not work,” he said.

Paul Lee of the National Association of Pension Funds, which represents about 1,300 UK pension schemes, said a hard ratio “could create weird incentives”.

“Companies may end up hiving off parts of their business,” he said. One retailer warned “it’s not going to restrain pay, but it will destroy jobs”, he warned.

Business groups questioned the need for the intervention. Jérôme Chauvin of Business Europe, which represents 20m companies, queried the “very strange” timing of a “sensitive” proposal in the dying days of the EU legislative calendar. Roger Barker of the UK Institute of Directors asked: “Have shareholders asked for data on pay ratios? If not, then it’s not clear why the EU should legislate.”

When proposed next month, it is also likely to receive a frosty response from UK, Germany and other member states that disregarded such ratios after hard-fought domestic debates over corporate governance reform.

In its impact assessment on the reforms, the commission notes that in France director pay rose 94 per cent between 2006 and 2012, even though the average share price fell by a third.

FTSE 100 chief executives’ total pay in 2013 was 120 times the average earnings of their employees – up from 47 times in 1998, but down from a peak of 151 times in 2007, according to Manifest, the proxy voting agency, and MM&K, a consultancy.

The High Pay Centre, a lobby group, welcomed Brussels’ plans. “There is no convincing business case to explain why the value of managers has increased so dramatically relative to their staff,” said Luke Hildyard, head of research.

Britain’s John Lewis Partnership – the employee-owned retailer that owns John Lewis department stores and Waitrose supermarkets – has for years limited the pay of the highest paid partner to 75 times the average.

Mr Hildyard noted that management consultant Peter Drucker suggested in the 1970s that anything above 20-1 was inappropriate, while Greek philosopher Plato felt 5-1 was the proper ratio for the wealthiest Athenians.

Michel Barnier, the EU single market commissioner, is pushing the shareholder rights directive to give a legal boost to the so-called shareholder spring of 2012, which saw pay rebellions rattle companies such as Barclays, Citi and Aviva.

The draft proposal, due to be unveiled next month, requires shareholders to approve a remuneration policy for directors, which sets a maximum pay and bonus level – a similar system to that introduced in the UK, Sweden and Belgium.

The Commission’s unique twist is requiring the policy to include the envisaged director-worker pay gap and “an explanation of why this ratio is considered appropriate”.

US business mounted a fierce campaign to blunt US rules requiring the disclosure of the pay gap between executives and their workers, saying it posed a heavy logistical burden for multinationals with employees around the world.

Negotiations on the proposal would be unlikely to be agreed until late 2015 at the earliest.

By Alex Barker in Brussels and David Oakley, Brian Groom, Andrea Felsted, Sharlene Goff and Gina Chon in London

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