IN-DEPTH: European pay standards spark competitiveness concerns
As European companies move to address a growing disparity in CEO pay when compared to U.S. peers, discerning investors are assessing such revised pay plans with a heightened level of scrutiny.
Diligent Market Intelligence data show that between 2021 and 2022, CEOs at companies in the CAC 40, FTSE 100 and FTSE 250 saw their average realized compensation increase by 12.2%, 8.9% and 12.3%, respectively. These increases came despite each index’s total shareholder returns (TSR) declining in the period.
Meanwhile, S&P 500 and Russell 3000 companies' average realized compensation declined by 68% and 52.4%, respectively.
“It is long-term incentives where I think multiples are completely different in the U.S. versus Europe and the U.K.,” Michael Vogele, managing director at Alliance Advisors, told DMI. “In the latter, you might find a two-times the salary multiple, maybe three, but in the U.S., you will probably see five, six, seven-times multiple, and then there is the question of the metric this is being linked to.”
Raising the bar
Due to the Shareholder Rights Directive II, an EU-wide initiative aimed at enhancing pay transparency, an increasing number of companies in Europe are consulting their shareholders on pay plans. In 2023, 3,108 such advisory resolutions faced a vote, up from 1,910 in 2020 and 2,435 in 2021. With more discussions on pay come more engagements concerning quantum, a topic proving divisive among investors.
In the U.K. market in particular, investors are observing increases to all elements of pay, across salary, bonus and long-term incentive plan (LTIP) awards, and often simultaneously, as Legal and General Investment Management noted in a recent report.
“Within the U.K., companies are competing globally with some of the largest U.S. domestic and global producers, and their balance sheet and income statement are similar. Yet those executives are not paid comparable amounts,” noted Vogele.
“The level of compensation that can be paid to senior executives in the U.K. is a real point of focus as the government, regulators and market participants are engaged in a broader assessment of the attractiveness of the U.K. market for listed companies,” Tom Matthews, partner at law firm White & Case, told DMI.
Competitiveness is also becoming an increasingly common subject in activist campaigns, with U.K. oil and gas equipment and services company Wood Group having faced pressure to relist in the U.S., amid claims from Sparta Capital Management that this would improve shareholder returns.
In its letter to Wood Group, Sparta noted “recent successful attempts by corporates to move their primary listing away from markets which they have determined do not recognize the true worth of their businesses,” adding that the U.S. would seem a logical potential listing venue, given it is where the company has “significant operational and executive presence.”
Investor scrutiny
As companies move to increase European- and U.K.-based executive pay to rival their U.S.-based peers, the market has also seen investors ramp up opposition to compensation plans that could be viewed as excessive.
While CAC 40 and FTSE 250 executives recorded a more than 12% increase in average realized pay in 2022, the wider European region also saw record levels of “say on pay” opposition in the period. According to DMI's Voting module, European “say on pay” proposals averaged 92.5% support in 2022, down from 94% two years prior. A record 241 corporate pay plans received less than 80% support in 2023, more than double the 107 to face such a level of pushback in 2020.
A U.K. home furnishings company’s pay plan faced 36.7% opposition at its January annual meeting, with Royal London Asset Management criticizing excessive bonus payouts.
However, not all investors are against the idea of compensation overhauls for top executives. When, earlier this year, U.K. drug maker AstraZeneca came under fire from shareholders and proxy advisors Glass Lewis and Institutional Shareholder Services (ISS) for CEO Pascal Soriot’s proposed 1.8 million pounds ($2.2 million) pay rise, shareholder GQC Partners publicly advocated for the increase, claiming Soriot was “massively underpaid.” Ultimately, at AstraZeneca’s April 11 annual meeting, Soriot’s new compensation package won 64.4% support.
After the meeting, an opinion piece authored by AstraZeneca Chair Michel Demaré hit out at proxy advisors for “double standards” that “do serious harm” to the competitiveness of U.K. companies. Demaré argued that advisors are often “inconsistent” in their recommendations to shareholders, advising them to vote against pay policies at FTSE-listed companies but supporting U.S.-based companies that typically have higher compensation levels and a lower degree of performance-indexed pay.
“Improving the incentivization upside should result in improved performance, and if that isn't the case, then companies are doing it wrong,” said Patrick Sarch, partner at White & Case. “If you’ve increased the level of compensation to be more competitive, it should be on the basis it is delivering commensurate value. If so, rather than overspending, that is money well spent.”
To read more about corporate governance in Europe this year, download DMI's recently released Corporate Governance in Europe 2024 report here.
