- After two years of decreasing CEO compensation in Europe’s biggest corporations, compensation levels are back on the rise – Yet again Volkswagen’s CEO is the highest paid CEO of Europe
- Over proportional rise in base salaries casts a shadow on pay-for-performance
- Swiss companies continue to dominate the Chairmen of Board of Directors compensation ranking
- hkp/// analysis "Executive and Non-Executive Director Compensation in Europe 2014"
Zurich, July 1, 2015. After two years of declining Top Management compensation at leading listed European companies, compensation levels are back on the rise in 2014. Compared to the previous year, the average total direct compensation of Chief Executive Officers (CEOs) increased by 4%, from 5.6 million to 5.8 million Euros. Base salaries increased over proportionally by 8.9%, which may somewhat be related to banking regulations that demand less variable pay.
Since 2011, CEOs in the health care and consumer goods industries have been among the highest paid managers of Europe. In 2014, the highest average CEO compensations are within the consumer goods industry. As in the previous year, remuneration levels in the financial industry continue to catch up. Across all industries, German (VW, 14.86 million Euro), Swiss, and British companies pay the highest CEO remunerations.
The trend of decreasing compensation levels for Chairmen of Board of Directors is reaffirmed in 2014. In comparison to the previous year, average Chairmen remuneration decreased by 12%, resulting in an average Chairman compensation of 0.82 million Euro in 2014. Switzerland takes the lead in a European comparison of Chairmen compensation. The highest Chairman remuneration amounts to 5.93 million Euro (Nestlé).
These findings are part of the analysis “Executive and Non-Executive Director Compensation in Europe 2014” conducted by the international consulting firm hkp/// group. The analysis is based on board compensation information as published in the current financial reports of the companies listed in the STOXX Europe 50 ® and EURO STOXX 50 ® indices.
“It is pleasing to find increases in compensation in combination with recovered company performance. This underpins the important principle pay-for-performance. The significant increases in base salary, however, do not fit the picture. It is important to analyze whether this results solely out of misinterpreted banking regulations. Further, it is notable that the concept of sustainability has established. The majority of performance-based compensation is not based on annual results anymore, but rather on the long-term success of a company”, explained hkp/// group Managing Partner Michael H. Kramarsch.
CEO compensation: VW yet again at the top, banks continue to compensate at average levels
According to the hkp/// analysis, the average European CEO now earns around EUR 5.8 million Euro (excluding pensions and fringe benefits). The CEO of Volkswagen comes in highest with 14.86 million Euro, followed by the co-CEOs of Richemont with 11.57 and 10.03 million Euro, and the CEO of Novartis with 9.84 million Euro. In contrast, the lowest CEO compensation levels can be found at ING Groep und Glencore (1.27 and 1.09 million Euro respectively). On average, the highest compensations are paid in Switzerland, Spain, and Germany.
The financial industry continues to catch up
Company size, industry, and location are the major determinants of CEO compensation. Further, international competition plays an important role. Amongst others, this is one of the key reasons of the significantly higher remuneration levels in the health care and consumer goods industry, in comparison to other industries.
After several years of declining compensation levels, especially CEO remuneration in the financial industry (banks and insurances) is catching up again. However, a shift in the compensation structure is striking. The high portion of base salaries and low portion of short-term variable compensation levels are a result of regulatory interventions: In banks, variable pay may not exceed the amount of base salary and with shareholder approval, variable pay may at most be double that of base salary. This explains why the financial industry has the highest portion of base salary in comparison to the other industries. Further, banking regulations prescribe that the largest portion of variable compensation should be multi-year compensation.
In Switzerland and the UK, multi-year variable compensation almost makes up two-thirds of the CEO’s direct compensation (58% and 62% respectively). By comparison, in German companies listed in the STOXX, the multi-year variable compensation accounts for 50% of the total direct compensation – which is slightly below the mean of the sample. In absolute figures, the highest base salary and short-term variable remuneration is paid in Spain. Switzerland and the UK show the lowest portion of short-term variable pay.
hkp/// group Senior Partner Martin Pfändler comments: “The importance of multi-year variable remuneration has changed significantly in recent years. Multi-year variable compensation and thus the focus on a company’s long-term success strongly influences the positioning in the compensation ranking.” The hkp/// compensation expert points out that granted long-term variable remuneration does not necessarily equate the paid out compensation. Instead, it is part of the very nature of such components that their payout level is at risk for the next three to four years. “For example, if a company’s performance declines, so will the value of the long-term compensation decrease. In extreme cases, such grants can be completely out of the money and are worth nothing”, says Martin Pfändler.
Chairmen Compensation: Switzerland take the lead in a European comparison
The four highest compensation levels paid to Supervisory Boards’ Chairmen are dominated by Swiss companies: Nestlé, UBS, Novartis, and Credit Suisse. These four companies pay their Chairmen many times more than other STOXX companies do (5.93, 4.96, 3.13, 2.88 million Euro respectively). Number five in the ranking, Unicredit (Italy), pays its Chairman approximately EUR 1.56 million – considerably less.
The high level of remuneration of Chairman of Swiss companies can be traced back to the legally defined role and responsibilities of the Chairman. Furthermore, in Switzerland the position is set out as a full-time position, whereas in the rest of Europe it is set out as a part-time position with less power. Average remuneration of Chairman in STOXX companies amounted to approximately 0.82 million Euro in 2014. Looking at the previous year, this represents a decrease of 12%.
hkp/// Senior Partner Martin Pfändler explains: “Switzerland allows for a very company-specific definition of the Chairman’s role, with significant difference to other European corporations. The executive power is in the hand of the board, led by the Chairman who is able to delegate the executive role to a CEO. That is the reason why we partly see Chairman as co-CEOs in Switzerland. The balance of power within a corporation can profit from a CEO and Chairman meeting as equals. In some cases both roles are managed by the identic person.”
About the study
The hkp/// study "Executive and Non-Executive Director Compensation in Europe 2014" investigates the compensation of top executives at companies in the STOXX® Europe 50 and Euro STOXX 50® indices from 9 different countries (77 companies in total). The data is taken from the companies' annual reports for the business year closed December 31, 2014 or earlier.
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