In the 1970s, chief executives of major corporations (and we have to say, mainly American) were paid around 40 times as much as the average worker. By the late 1990s, that figure had risen (driven mainly through stock options) to a heady 360 times the average workers’ pay. Then came a meltdown. Or did it? Despite much breast beating, government commissions and, so called, self policing, 21st Century compensation is still on the rise. And while Europe may not have seen quite so many fat corporate cats getting stuck with fingers jammed into the cookie jar of greed, there is little doubt that there’s a long way to go for corporate governance to meet its selfstyled aims.
A few things have caused this:
  • The runaway success of many businesses over the last two years, leading to ongoing, massive compensation pay-outs, notably in the IT and financial services industries
  • A host of high-profile, highvalue mergers and acquisitions (especially from acquisitive French, German and Spanish firms), which have dramatically changed the composition of the top executive suite in many companies and the consequent reward model.
  • The increasing trend for supersmart high-performers to seek the relative – or complete – anonymity of private equity businesses
  • Difficulty to find really independent board members willing to serve on boards, either through concerns about legal action or lack of time to do the job right.
“Across Europe, my view is that the majority of boards of directors are still highly incestuous and I don’t think members can be called truly independent,” says a organisational consultant in London. He adds, “rewards for top executives are – I feel – still on the increase and, while not at the level of U.S. compensation, are still accelerating ahead, leaving average workers’ pay lagging behind.”
“…the majority of boards of directors are still highly incestuous…”
He’s right. Bosses in Europe now earn close to 100 percent more than average workers’ wages in their countries. And it has accelerated hugely this century. Consider this. In 2000, CEOs of the top 100 UK companies earned (in salary and bonus) an average of 39 times that of a worker. By the end of 2006, that figure had risen to 98 times the average wage. Indeed the 21st Century is turning out to be pretty good for those at the top. Since 2000, average earnings have risen by 102 percent, while those of full-time staff have moved just over a quarter of that (28.6%). [1] Comments a human resources director of a major French company in the transportation business, “Yes, I do see that some senior executives – those at the very top – are getting much bigger rewards than before. Much of that because there have been significant changes in the make-up of the industrial landscape in Europe, due to acquisitions and other activities.” They add, “however I think that there are some sectors – and that includes our own – where rewards are not as hugely different from the average shopfloor worker.”
“…getting towards a model like that of football players…”
Adds a finance director, recently involved in a merger in Germany. “My view is that there are a lot more casualties at top management level, either due to poor performance or to being in the wrong place at the wrong time.” She continues, “It seems to me we are getting towards a model like that of football players, where you need to make a lot of money in a short space of time because there aren’t many long-term guarantees.” Certainly if Europe begins to mirror the U.S. (and history shows that it usually does) the casualty count in used-up CEOs is set to rise. In 2006, around 1,400 CEOs of major U.S. corporations got booted out of the top job, up from just 600 in 2004. Observers put that down to the increased independence and vigilance of boards of directors. Others are not that sure and feel other dynamics are also in the mix. “These high-profile CEOs may lose their jobs, but they don’t exactly leave with nothing,” explains a Boston based compensation consultant. “On average, those departing CEOs had a payoff of $16million, that’s not a bad return for doing a poor job, making you wonder just how “independent” boards really are.” And it does seem that poor performance is quickly punished. “Learning from your mistakes and having a long-term plan just doesn’t cut it anymore,” points out a recruiter for a finance house in New York. They go on, “The results have to be immediate, strong and consistent and as long as U.S. managers continue to pay homage to quarterly results and their consequent impact on stock prices we aren’t going to see much incentive for a change.”
Top Talent Seeks Refuge in Private Equity Firms Increasing public scrutiny and the clamorous demands for accountability have sent a growing number of top executives scurrying for the relative anonymity of private equity firms. According to Global Recruiters’ research, senior managers quitting the spotlight of public corporations can expect a threefold jump in earnings and the added bonus of a less stressful life, safe from the scrutiny of shareholders, regulators and the media. Our investigations show that there are hundreds of private equity firms in Europe, the Americas and Asia sitting on vast mountains of cash who are not averse to using that wealth to tempt the very best out of the public eye and into the calmer and more richly rewarded waters of the private business elite. Not only are they able to manage any way they want and get compensated by huge earnings for their results without having to declare it on annual returns, they are also instantly part of the get-richer-quicker school of money-making. Free of the shackles of corporate accountability these “chosen ones” have an even greater pay-day in the pipeline when the business gets sold or goes public again. It is certainly a trend of the times that greater scrutiny, more independent boards and tougher legislation has had the effect of driving top talent away from the public corporations it was trained and schooled to serve. The toughest, hardest, meanest operators know a good thing when they see it, ostensibly leaving the “B” list in charge of many of the major public corporations. And, we would add, contributing to the growing global talent shortage. The recent media circuses, pillorying highly successful, longserving chief executives and other senior managers on both sides of the Atlantic, have added to the notion that a quiet life in a private equity firm beats hands-down the adrenalin rush of captaining a public company, open to the vagaries of the market and the poisoned pens of media jealousy.
Outrageous Payments And in Europe – which lags the U.S. in much of these outrageous payments - there are other issues at work. “My experience shows me that there are boards that lack any real teeth, “says a Zurich based management consultant.
“…too many boards that lack any real teeth…”
“There are still too many organisations across Europe where senior executives serve on each other’s boards.” And while there are some genuine moves to really shake up corporate governance, recent scandals in France, Germany and the UK, show that all is not yet cleaned up – far from it. In fact, in our discussions with senior executives it is clear that market pressures are at their peak. And with rising share prices and the smell of massive bonuses in the air a CEO can perhaps be forgiven for looking particularly cheerful. Until, of course they don’t perform, or step out of line. And that points to another trend in Europe that has gone largely unreported. While traditionally a company’s board composition was based on the nationality of the firm, there is a strong trend to bring in outsiders. Although this may look like an intelligent move to bring more diversity and the best possible experience to the organisation, some view it differently. Cosy Clubs “I think that the cosy clubs of senior managers who took turns serving on each others boards realised that it was time to do some house cleaning, “says a Frankfurt based human resource manager. “So they bring in some outsider as a senior player of even as CEO. But then if they don’t come up to expectations there is no compunction in firing them, because they were never really part of the system.” And then, of course there is the difficulty of getting really good, experienced candidates for board service. Consider this view from our Zurich based management consultant, “I think it is more and more difficult to appoint independent board members in Europe, because the risks involved – personal liability, loss of reputation – are not to be underestimated. And in many places too, the financial rewards are limited when compared with the risk factor.”
“…more and more difficult to appoint independent board members…”
At Global Recruiters we have our own experiences of this. Indeed, it is one of the growing challenges for professional search firms who, tasked with finding independent board members, have to cast the net very wide to produce experienced and knowledgeable candidates. [2]
Dead Reckoning The spirit of a well-loved business leader can linger in the corridors of power long after they have passed away. But getting paid after you are dead and gone makes a nonsense of the phrase “you can’t take it with you.” Why? Because in corporate America at least, you can keep getting profits after you have passed on. As the scandals of backdating stock options to hugely increase their value prove, you can take it with you beyond the grave. At one firm, active in the TV cable industry, not only did at least one executive get his stock backdated to a time when the price was languishing at an all time low, they went back far enough to make it appear that he had received them while he was still alive – he had, in fact, been dead for months. By awarding options to an already dead executive, his heirs were able to cash in as the share price had sky-rocketed after his demise.
But if you are going down this road and there is a real determination to have a fully independent board – with real teeth to act in the interests of the shareholders and employees – what do you need to look for? Here’s our list to get you started (or at least thinking). Independent board members need to:
  • show visible evidence of having the very highest ethical standards (this means scrutinising their professional history and credentials in some detail: ideally by an independent “auditor” with no stake in the business)
  • have a deep interest in the industry the company is in
  • possess a deep knowledge of at least one core aspect of that industry (i.e. functional, geographical)
  • be fearless (and we mean that word) in terms of wanting to deal with the truth, whatever it is
  • have an ability to “check their ego at the door” and exhibit strong team-player skills
  • bring with them a global mindset with strong cross-cultural sensitivities ...and a few others…
  • be able to seek out information from non-company sources to make more informed, independent judgements on the business
  • have the drive to influence other board members and directly challenge/confront executives if need be.
A board composed of business professionals possessing these criteria might be a nightmare for a CEO to manage, but it will be independent and ultimately good for the long-term health, reputation and direction of the business.
Global Recruiters say that…
  • it is getting tougher to find good professionals who want to serve on boards
  • no doubt that rewards for top executives are still on the increase
  • there will be increasing casualties at senior levels as today’s performance becomes the only thing that matters
  • pay-outs to exiting managers will stay high
  • creating a truly independent board requires a strong focus on the qualities that candidates need to possess
Global Recruiters – Human Capital Solutions Global Recruiters are a human resources and consulting firm, offering senior and mid level executive search services to a select group of corporate customers around the world. Clients are leading-edge, world-class performers in their respective industry sectors and recognised for their high professional and ethical standards. The firm specialises in focused, cross-border search providing international candidates for clients with a broad range of needs across the entire management spectrum. Global Recruiters bring to our clients the unique possibilities of combined skills, professional knowledge and geographic and industry coverage. Global Recruiters offer the skills of:
  • A global boutique firm with no geographic or industry boundaries
  • Consistency in speed, quality, service and communication
  • Hands-on work by consultants : no “assistants” involved
  • Entrepreneurial flair, combined with a rigorous, process-driven methodology
  • A network of 23 “owned” offices around the globe that is set to expand in the coming months
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[1] Based on a study of FTSE companies by Income Data Services in the UK [2] Global Recruiters can advise and assist in the creation of independent boards and the search and interview of candidates