Moderator: Prof. Ernst Maug, University of Mannheim, Business School
Speakers: Prof. Alexandra Niessen-Ruenzi , University of Mannheim, Business School;
Mr. Michael de Fabiani, Board member and Chairman of Appointments, Remuneration and Governance Committee, Vallourec
Prof. Niessen-Ruenzi started this session by providing an overview about the topic of compensation and CEO effectiveness. She answered the questions of how compensation has developed during the last years and if CEO compensation is related to competition for talent or to rent extraction discussing the reasons for high CEO compensation from an academic perspective. Evidence from the literature showed that it is not the level of pay what public cares about, but the strong increase of CEO compensation. Furthermore, the strong increase in CEO compensation relative to the average worker’s remuneration or even relative to the S&P 500 provides evidence that this is not justifiable.
She further mentioned that there exist two conflicting views: the economic view which sees executive pay as a remedy of the agency problem and the managerial power approach which sees executive pay as part of the agency problem (e.g. managers use their power to get paid a high compensation). So, on one hand – when looking at the optimal contracting issue – the literature shows that there is a strong relationship between firm size and CEO pay as the best paid CEOs manage the largest firms. However, Prof. Niessen-Ruenzi wanted to keep in mind that firm size through different companies rose over time and thus could explain part of the increase in CEO compensation levels. On the other hand – when taking into account managerial power – it is obvious that CEOs have power over the pay setting process due to economic incentives, social factors, etc. In a very interesting study about the corporate jet use, she provided an example for perks which were used for CEOs’ personal interests.
When answering the question if shareholders and the public care about CEO compensation, she referred to the introduction of say-on-pay provisions and public outrage. She came to the conclusion that shareholders don’t seem to care and that even if the public seems to be particularly angry about bonus payments, public outrage does not seem to be a mechanism which could lead to significant changes. Studies show that management decreased the criticized part of the pay and increased other types of payment leading to a different composition of compensation rather than to decreased level of compensation. The result is the decrease of pay-performance-sensitivity.
Prof. Niessen-Ruenzi’s conclusion was that there is no unified approach to explain CEO compensation and that legislation attempts (e.g. say-on-pay provisions) haven’t led to shifts in compensation policies, yet. This raised some questions of the audience as if there is a better fit to workers’ remuneration when workers are represented on the board or if there is one right way to determine the level of pay. As there is no empirical data available on this topic, Prof. Maug handed over these questions to Mr. de Fabiani to answer them as a practitioner.
Mr. de Fabiani gave back the last question by asking “What is the right price for a pair of shoes?” In his opinion there is no argument against high CEO compensation as long as it is explainable in a sense that the executives of a company are not ashamed for deciding a specific CEO compensation level. He further announced that the public focuses only on CEOs, but not on other well paid persons as for example football players. The reason for this fact is that there seemed to be the scandal that there is no correlation with the package paid when CEOs ran out of the company leaving it in bad shape. In his opinion, those packages have to be questioned as it clearly describes a “red face situation”.
His arguments for high CEO compensation were the attraction and retention of talent in an increasingly complex and global economy. This is especially the case when hiring workers from foreign countries. However, he noticed that a benchmark for compensation has to be established which should be adapted to the company situation and that there is a need for tools like sanctions which should be clearly linked to performance. Thus, transparency to all stakeholders became an important aspect as in many other sessions.
Referring to the question “Are you supporting compensation laws, such as putting a cap for a maximum or an average level of compensation?”, Mr. de Fabiani said that he would support this type of law if everybody’s remuneration is fixed, not only the CEO’s remuneration. Otherwise, he saw no reason fixing CEO compensation to a specific level.