Executive compensation: what do shareholders do?

Once again this year, executive compensation has created a media buzz about some emblematic cases, because they are too decorrelated from the economic and social reality of the company.

The opportunity given to shareholders to vote for or against 2017 and 2018 compensation, with the “say on pay”, showed the limits of this exercise, given the scores obtained for said resolutions.

At Carrefour, Georges Plassat was awarded more than €13 million by 68% of the shareholders, including a non-compete bonus of €3.9 million, and an annual pension of €520,000. Even though the company is going through a deep crisis, closing many DIA stores (which Georges Plassat had validated the purchase of five years ago…), it is proposing a significant voluntary departure plan and the new CEO is tightening on costs, and therefore wages.

Phitrust has reacted, with very few shareholders, to these much-too-high compensation amounts, paid despite the failure of the development plans implemented by the CEO. How is it that the institutional and private investors not represented on the Board of Directors, who have a large majority, have not opposed the Board’s proposals? How is it that investors approve these proposals without examining them? How can we believe that, given the amounts granted, the compensation committees do not provide for any clause in the event of a lack of results, site closures, “planned” departures or dismissals, obvious signs of strategic or management errors?

It took the Medef, the Minister of the Economy, Bruno Mayor, and the media publicly protesting the results of this vote for Mr Georges Plassat to decide not to collect his non-compete compensation, which brought his 2017 salary to €9 million! Not bad for a company in deep trouble…

On the other hand, at Renault, Carlos Ghosn saw his 2017 remuneration voted by a very narrow majority (56.50%). The French government, which has 15% of the capital, announced that it would vote against it. This has probably led institutional investors to follow suit, taking into account the fact that the state is on the Board of Directors, and therefore well advised! The 2018 compensation, which has fallen, was voted at 87.89%, a sign that shareholders expected a gesture of moderation, even if the company achieved excellent financial and economic results. We note that Carlos Ghosn works for Renault, also sharing his time at Nissan and Mitsubishi… In addition, at Renault, no mention is made of a possible challenge to variable compensation related to environmental risk, as with other automobile manufacturers…

Here we are dealing with a basic principle that does not apply to any manager of large listed companies: the amounts of variable compensation are allocated according to complex criteria and are never significantly reduced, or even eliminated, in the event of economic counter-performance (Carrefour), proven environmental risk (Renault) or dismissals…

Investors, however, vote to keep these very high amounts, convinced that this is the only way to keep good leaders and directors. The fact that these compensation figures are 3 to 5 times higher than a few years ago would be the cost of the value created during this period… This may be the case for some, if they had realised the results themselves and not thanks to their less well-paid teams. But what about companies that are currently weathering storms (Carrefour), seeing their strategy questioned (Engie), or who are closing down sites (Lafarge, Technip, etc.)? The list is long and shareholder inconsistency is a serious issue: mismanagement does not result in financial consequences for these “managing directors”!

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