As it does every spring, with the publication of the reference documents of listed companies, the remuneration of big bosses provokes outraged reactions. This year, it is the remuneration of executives in the automotive industry that is monopolising attention. While Carlos Ghosn, as CEO of Renault, received 7.25 million euros in 2015 (including 4.18 million in stock options), Carlos Tavares, Chairman of the Managing Board of PSA Peugeot Citroën, received 5.24 million euros (including 2 million in "performance shares").
Ahe CGT denounced the "completely indecent" remuneration, the CFDT considered that Carlos Tavares' remuneration was "not legitimate", while Michel Sapin, Minister of Economy and Finance, declared that it was "harmful". The two representatives of the State on the supervisory board of PSA also voted against this amount. For his part, Pierre Gattaz, President of the Medef, stressed: "When there is success, it does not shock me that success is rewarded".
Compensation inflation: good management?
The question of whether success should be rewarded financially, although this has been widely debated in psychology since the work founders of Edward Deciis not what's at stake here. What's shocking is the level of this reward. How can that be explained? Is it a relevant management practice?
First of all, it should be pointed out that Carlos Tavares' remuneration is significantly lower than that of his alter egos. As we have seen, the CEO of Renault earns 38 % more than him (not counting what he earns as Nissan boss). Similarly, the executives of other Western car manufacturers all have higher salaries than Carlos Tavares: 6.2 million euros for the boss of BMW, 6.5 million euros for Audi, 8.4 million euros for Mercedes, 10.9 million dollars for Fiat Chrysler, 16 million dollars for GM and 18.5 million dollars for Ford. In total, therefore, it is the remuneration of the big bosses in general, and not that of Carlos Tavares in particular, that is in question.
On average, according to the AFL-CIO unionIn 2015, the head of one of the 500 largest American companies earned 373 times the salary of his least qualified employees. This means that he earns more in a single day than his employees earn in a whole year. In France, the gap is smaller, but it is still between 1 and 100 between the amount of the minimum wage and the average salary. of CAC 40 CEOs. While the absolute level of this gap may legitimately be shocking, it is its evolution over the last few decades that is the most surprising phenomenon.
Indeed, the gap was only 1 to 20 in the United States in 1965. In fact, this was the maximum pay gap recommended at the beginning of the XXe century the famous banker J.P. Morgan, little known for his egalitarian activism. The gap then rose to 1 to 30 in 1978, to 1 to 60 in 1990, to 1 to 300 in 2000 and then to 1 to 373 in 2015. The gap between the remuneration of employers and that of the least qualified employees has thus multiplied by about 20 in 50 years. What can explain such inflation? It is certainly not a proportional increase in the talent and responsibilities of the big bosses: whatever indicator is chosen, there is nothing to indicate that the performance of managers (and the companies they run) has increased 20-fold since the 1960s.
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Inbreeding of Boards of Directors
In fact, the explosion in executive compensation in listed companies can be explained by a combination of two perverse effects. The first of these effects is the consanguinity of boards of directors and supervisory boards, known in France under the sweet name of "barbichette", in reference to the rhyme "je te tiens, tu me tiens par la barbichette", which becomes: "you are a member of my board, you vote my remuneration, I am a member of your board, I vote your remuneration".
To legitimize executive compensation, some argue that there is a "market" for talent, and that compensation, however exuberant, would correspond to the "market price" of skills. However, if such a market exists for the executives of large groups, it is certainly not a free market and price is certainly not an objective measure of value. Indeed, the boards of directors of listed groups are often composed of individuals who are themselves executives, and who often sit on several other boards.
There is therefore a more or less obvious form of complicity between executives and those who evaluate their actions and decide on their compensation. Moreover, this situation is not specific to French capitalism (even if collusion between alumni of the same grandes écoles and the same major corporations tends to reinforce it), since it is found, for example, in the United States. In this respect, the theyrule.netThe report, while worthy of updating, is particularly instructive.
The level of remuneration of the big bosses can thus be explained by the fact that they attribute it to themselves, through their directors, with whom they share the same interests and the same networks. However, while this phenomenon may help to understand the amount of remuneration, it does not explain their multiplication by 20 in 50 years. Indeed, the endogamy of power is as old as the world, and there is no indication that it is worse today than it was yesterday.
The perverse effect of the publication of remuneration
To explain the explosion in executive compensation, a second perverse effect must therefore be invoked, which is much more formidable because it is largely counter-intuitive. Starting in the 1990s, regulations gradually imposed a disclosure of executive compensation levels in listed companies. In the United States, this took the form of a new rule enacted by the Securities and Exchange Commission (SEC) in 1992. In France, it is the NRE law of 15 May 2001, revised by the Financial Security law of 1 May 2001.er August 2003 which has set this framework. In both cases, the objective was the same: to better inform shareholders about executive compensation, with the underlying assumption that if such compensation became public, it would remain contained. Paradoxically, however, the exact opposite has happened: it is the publication of compensation that has caused its inflation.
Indeed, as soon as compensation is public, it becomes a measure of the value of executives and therefore an issue. As long as it was secret, it did not allow for comparisons between individuals and therefore remained a purely private matter. Now that it has become public, it has become the benchmark of their talent. When a listed company appoints a new leader and decides to pay him less than his predecessor, everyone knows it, and it will be inferred that he is not as capable as the one he replaces. Similarly, if the head of a company is paid less than the average in his industry, everyone knows it, and we will deduce that he is not among the most talented.
To take the example of the automotive industry, the fact that Carlos Ghosn earns 38 % more than Carlos Tavares can be interpreted as a hierarchy of their value. This concern for comparison is all the more keenly felt between individuals who have been selected on their ability to succeed in extremely elitist competitions. The competitive spirit between Polytechnicien Carlos Ghosn and Centralien Carlos Tavares remains acute: the top of the class is no longer the one who gets the highest marks or passes the best competition, but the one who earns the highest salary.
It is because remuneration is public that all executives seek to earn more than the average and all boards of directors are constantly paying them more. Indeed, a director who publicly doubts the competence of the executive would cause the share price to plummet. Conversely, in order to positively influence shareholder value, a board of directors has an interest in giving all the most obvious, measurable and visible signs of the extreme confidence it has in the exceptional talent of the executive: this is what it does when it decides to increase it. As a result, once public, executive compensation is instrumentalized. It becomes both a measuring tool and a mechanism of influence.
The phenomenon of instrumentalization of the average is known in the United States as the "Lake Wobegon effect", named after the fictitious town of Lake Wobegonwhere, as the legend goes, "all the women are strong, all the men are beautiful and all the children are above average". While it is impossible for everyone to be better than the average, the fact that everyone seeks to be better than the average is not an excuse. causes its inflation.
Moreover, it can be noted that this effect is not specific to managers of large companies. It can also explain the increase in the remuneration of film stars and top sportsmen: when Leonardo DiCaprio learns that Johnny Depp earns more than he does, he is tempted to demand higher salaries. Similarly, if Fernando Alonso finds that he earns less than Lewis Hamilton, he is likely to renegotiate his contract.
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A simple solution for a recent anomaly
What can we take away from all this? Historically speaking, the explosion in the remuneration of the bosses of large companies is an anomaly, and it is a recent one (Thomas Piketty condemns a "new" pay system in the United States). "meritocratic extremism"). From a managerial point of view, the current levels of remuneration are not justified, because for a long time companies have been very well run without their bosses being so handsomely paid. Moreover, such pay differentials create a deep sense of inequity, at the risk of general demotivation, which is far more detrimental to corporate performance than a very hypothetical erosion of managerial talent. As Warren Buffet mischievously puts it:
When an executive with a reputation for excellence meets an industry with a reputation for difficulty, it is usually the industry that retains its reputation.
Therefore, if we want to put an end to the historical anomaly of the explosion in the salaries of big bosses (or of film stars and sports champions), the conclusion is clear: these salaries must be made secret. As soon as they are secret, remuneration will cease to be a measure of the value of individuals, and therefore cease to be a stake. Of course, there is nothing to say that by becoming confidential, remuneration will fall back to more reasonable levels (for this to happen, it would have to be imposed by law or required by shareholders), but at the very least, it will have less reason to increase.
One major obstacle remains: it is hard to see how public opinion, outraged by the current levels of these salaries, could accept the decision to hide them. I invite our most educational readers to solve this thorny problem.
Frédéric FréryProfessor of strategy, ESCP Europe