16th Proxinvest report on Executive Compensation in France

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As shareholders of major French groups experienced their first year of Say on Pay, Proxinvest published for the sixteenth consecutive year its report on executive compensation. Its uniqueness lies in the valuation all the various forms of executive compensation (fixed, annual bonuses, fees, benefits in kind, stock options, free shares, cash incentive plans and other indirect forms of compensation).

The analysis of annual reports published in 2014 on compensation due for fiscal 2013 reveals a paradox: the limit of the socially acceptable pay set by Proxinvest (240 “SMIC”, the minimum annual pay, equivalent to € 4.76 million) is now exceeded by 18 executive chairs against only 13 in 2012. Despite this trend, the average total remuneration of executive chairmen of the 120 largest listed French companies slightly increased by 1.2% in 2013 and reached € 2,909,000.

Some virtuous companies and the pressure of the French State, a major shareholder of public companies, therefore had a moderating impact, offsetting the excessive compensation practices of some companies and the average executive compensation in the CAC 40 index was down 2.5% to € 3.968 million, the equivalent of 200 SMIC.

Arnaud Lagardère, General Partner of Lagardère SCA, with € 16.6 million (+296% YOY), is the most paid French CEO in 2013. This unusually important sum for a French CEO is explained by the statutory dividend of 1% of the net income Mr. Lagardère perceived from his company. This statutory dividend amounted to € 13,1M because of the large capital gain made by the disposal of EADS share by Lagardère SCA. The issue of executive compensation in Partnerships limited by shares is raised as the 1% levy of the result can be likened to a form of rent which excludes other shareholders. In addition, the company did not put the regulated agreements report to a vote, which is an infringement of the French law.

Bernard Arnault (LVMH) is in second place of the top, with € 11 million despite results that were not exceptionally bright in fiscal 2013 (+ 2% in current operating income, stable net income). Mr Arnault benefited from an annual bonus of € 2.2M, a sum unchanged from 2008 to 2013. He was awarded a performance share plan whose conditions are particularly undemanding. His family holding company, Groupe Arnault SAS, benefit from business relationship with LVMH (net balance of € 3m) and again the law seems poorly respected since Groupe Arnault SAS seems to vote on the special report on regulated agreements at the AGM.

The former CEO of Havas, David Jones, is in third place after the payment of a severance payment of € 5.4 million, although this does not seem to comply with the AFEP-MEDEF code of governance as the departure was not officially constrained. Here again, the payment of a severance pay unapproved by the General meeting also raises the issue of a non-compliance with the voting procedure on regulated agreements stated in the French Law.

Carlos Ghosn, CEO of Renault-Nissan, is fourth with € 9.7 million. He perceived a fixed remuneration of € 1,230,000, higher than the average of the CAC 40 index, and a compensation equivalent to € 7 million paid by Nissan. The nature of the compensation paid by Nissan and the criteria for calculating it, are still undisclosed despite the requirements of Article L225-102-1 of the French Commercial Code. Taking into account Nissan’s operating margin (4.7%), far below that of its Japanese competitors (Toyota 9% Honda 6.6%) and far from the 8% target announced for the end of 2016 in the Nissan Power 88 plan, the level of compensation seems particularly high.

Chris Viehbacher, former CEO of Sanofi, is fifth with a total compensation of € 8.6 million. It is, however, composed of a € 5 million grant of stock options and performance shares he should not vest because of the attendance condition associated (however the financial terms of his departure are not yet specified by Sanofi). The annual bonus of Chris Viehbacher (€ 1.7 million), illustrates the undisclosed nature of some compensation practices: French boards too often hide behind the excuse of “reasons of confidentiality”, in order not to provide the information about the underlying objectives of the variable compensation.

Beyond the strictly quantum issues also arises the question of the compensation’s alignment with the company’s performance. Proxinvest observed than half CEOs received a long-term compensation in 2013, a cause of concern for investors.

While stock options have almost disappeared in France, certain compensation arrangements are still highly controversial, as pensions cap. Because of the lack of transparency on the subject, the annual cost of pensions cap is not taken into account by Proxinvest (although Arnaud Lagardère, Bernard Arnault and Carlos Ghosn are beneficiaries of such schemes). However, as only 6 CEOs of the CAC 40 index do not have such plans, this matter is not to disregard. The AFEP-MEDEF code of corporate governance is excessively permissive on the subject of pensions cap and Proxinvest encourages companies to replace the generous defined benefit plans by defined contribution plans, more transparent and less costly for shareholders (for example, Veolia Environnement approved amendment by 99.67% of the votes of the AGA).

In 2014, because of a large amount of problems, Proxinvest opposed 70% of Say on Pays.

As of 2015, Proxinvest will recommend extending the performance measurement period of long-term plans to 5 years; Proxinvest will also verify the implementation of shares ownership policy and the introduction of clawback mechanisms.

Proxinvest expects the French regulator to enforce the Law, including section L225-100-2 of the Commercial Code, which requires compensation details and the respect of regulated agreements procedure. Without full compliance with the Law, shareholders are deprived of their responsibility to control the compensation of corporate executives.

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