Restraining the disproportionate growth of CEO salaries has long been on the agenda of the American left, but it’s recently been taken up by several European governments — a somewhat unexpected priority for a continent known in the U.S. more for short workweeks and long lunches than for pay inequality.
This month, the European Union capped bonuses for investment bankers at
Switzerland approved a referendum that makes company shareholders responsible for setting the chief executive’s salary.
The Dutch government is drafting a law that would limit golden parachutes to a maximum of 75,000 euros. France and Spain are also both raising taxes on severance packages.
And several German political leaders recently announced that they would raise the executive pay issue in the country’s parliament.
“Exorbitance cannot be allowed in a free and socially minded society,” German Chancellor Angela Merkel sa in a recent interview with a local newspaper, adding that she understands “when people shake their heads over salaries that tip the scale and want them to stop.”
Der Spiegel recently published a long, impassioned article in support of stronger executive-pay legislation, in which the magazine detailed the plight of blue-collar German workers:
The poverty and wealth report released by the German government last week suggests that this gap has reached disconcerting proportions in Germany. Many can no longer support themselves with the money they earn in a full-time job. Almost one in four workers earn less than 9.15 euros an hour, which translates to about 19,000 euros a year. This is less than one-seven hundredth of what the CEO of VW makes.
Der Spiegel‘s argument here might strike some Americans as a first-world problem. Sure, 19,000 euros a year — or roughly $25,000 — doesn’t exactly mean you’re rolling in dough, but it still beats the $15,000 that U.S. minimum-wage workers make.
Still, chief executives of Germany’s biggest companies took home 14 percent more in direct pay in 2011 than the previous year, and in some cases CEO salaries there rose by double-digit percentage points even when company earnings were flat.
Compared to American standards, that’s not unusual. The U.S., along with other G20 countries,enacted a law in 2009 to tie executive pay to company performance, but it hasn’t exactly solved the problem of outrageous CEO-to-worker salary ratios. Here’s a look at the growth in salaries for America’s C-suite, compared with those of their employees, over the past few decades at 350 top U.S. companies, via the left-leaningEconomic Policy Institute:
There’s a similar trend going on in corporate headquarters all over the world. In the U.K., a 2011 commission found that “the 30 year trend of increasing top pay that has left the earnings gap between the very richest and the rest of society wider than at any point since Queen Victoria was on the throne.”The Guardian reported:
The report cites the example of Barclays, where top pay is now 75 times that of the average worker. In 1979 it was 14.5. Over that period, the lead executive’s pay in Barclays has risen by 4,899.4% – from £87,323 to a £4,365,636.
Here’s the chart, via the High Pay Commission:
A 2003 study by a professional services firm called Towers Perrin, which later became Towers Watson, captured the growth in CEO salaries in a handful of countries just in the previous 15-year period. Here’s how it breaks down, according to data analyzed by the Economic Policy Institute:
Another paper from the OECD found similar increases in executive pay between 2004 and 2007, a period when the organization said overall wage growth was only about 2 to 3 percent:
American CEOs do earn more than their foreign counterparts, and the disparity between U.S. executive pay and that of average American workers is much greater than the gap between those two groups in most other countries. But the runaway growth in CEO salaries has been so dramatic in recent years — even in the notoriously worker-friendly E.U. — that it isn’t all that surprising that European policymakers are acting to halt it.
“Average employee wages have increased by 6.1 percent since 2000, while the salaries of senior executives at companies traded on Germany’s DAX stock exchange index have risen by almost 55 percent during that time period,” Der Spiegel notes.
Research on the CEO-to-average-Joe pay gap across countries is hard to come by, both because of differences in reporting among countries and differences in the structure of the firms themselves. The most recent data that’s frequently cited comes from a 2006 paper by Towers Perrin. Here’s how the salaries for average U.S. and European workers and executives stacked up in 2006, according to their study. The numbers are somewhat outdated, but they give you a sense of the big picture, with the U.S. ratio still nearly twice that of the other countries:
That might make the U.S. look like the land of caviar-munching fat cats, but the truth is, many European countries aren’t far behind. A 2012 paper, aptly titled, “Are U.S. CEOs Paid More? New International Evidence,” found that American executives don’t necessarily earn that much more than their European counterparts — it’s just that CEOs everywhere earn astronomical amounts, no matter where they are:
Overall, American chief executives made 26 percent more than their foreign counterparts, according to the 2012 report, if you control for the size of firm, its sales and the type of board and ownership it has.
These days, large companies everywhere are likely to pay their executives rates that would be considered competitive in any country, thanks to the increasing globalization of the workforce and the entry of more and more firms into international markets.
“Non-U.S. firms implement U.S.-style compensation packages to attract global managerial talent, customers and investors. Foreign firms attempting to attract executives in competition with equivalent U.S. firms will need to offer packages that are competitive with US levels, including …high overall levels of expected total compensation,” the authors of the 2012 study wrote.
And that’s part of the reason why it’s hard to regulate these golden parachutes, golden handshakes, and even golden paychecks — a company might technically be German, but its leadership and customers consider themselves “global.” Which might be why, in attempting to rein in their 1 percent, European governments are acting in unison with one another, for once.