The so-called passive or diversified shareholders, little involved in the control, pay the highest compensation levels, other things being equal. Shareholders whose investment horizon is relatively short pay bonus ratios that are higher and more sensitive to annual performance. The assessment of remuneration policies must take into account the type of control carried by the shareholders.
The executives’ compensation has increased substantially since the 1980s in the United States. In other industrialized countries, and particularly in France, the evolution over a long period is difficult to establish because of the lack of transparency on the subject before the 2000s. However, changes in revenues of the 1% richest, including executives of large companies, show that their rise has also accelerated since the late 1990s1. The purpose of the paper presented here2 is to better understand what determines large listed French companies’ executives’ compensation and, in particular, to assess the effect of major shareholders’ control’s nature and strategy on compensation policy.
The 2001 NRE law, improved by the 2005 Breton law, imposed to disclose executives’ compensation in French listed companies. Based on information published in annual reports, we have built a database on compensations and ownership structure for the SBF 120 companies between 2005 and 2012.
A singular typology of control
In order to differentiate the ownership structure, we propose a typology based on two main criteria: (i) the degree of involvement in the control of the company and (ii) the investment horizon of controlling shareholders. The controlling shareholder is defined as the main shareholder of a company, provided he/she holds over 10% of the capital and is represented on the board of directors (or supervisory board). The objective is to assess whether these criteria are relevant to highlight separate compensation practices, both for the compensation level (fixed salary and total compensation3) and for the compensation structure (bonus ratio and equity-based compensation).
The typology comprises eight categories. The first four, presented in the table below, concern a patrimonial type of shareholding. In the event that the CEO is not a member of the controlling family (hired CEO), the typology distinguishes between active and passive family shareholders according to an original criterion of experience in the company management. A shareholder family of which no current member on the board has operational experience in the company management is assumed passive and exercising low effective control on the CEO’s activity (low degree of involvement). The diversified nature of the shareholder (the family conglomerate, attached to the passive family, or investment firms) also contributes to assume that the degree of effective control is moderate. The investment time horizon is supposed long for patrimonial or State ownership. The horizon of control is also assumed relatively long when the control is exercised by another company in the same sector, anxious to implement an operational strategic policy (synergies ...)4. The horizon shortens however when the strategy is more financial and seeks a yield or capital’s
gain at medium term (investment firm) or short term (diffuse ownership).
Nature of control and compensation policy
The econometric study of the shareholding impact on compensation policy leads to establish several conclusions. First, the shareholding structures considered passive and/or diversified (passive family, investment firm) and diffuse ownership offer their executives, other things being equal, the higher compensation levels. In contrast, the controlling shareholders whose involvement in the control is strategic (public sector, parent company) or experienced (active family) offer their executives significantly lower compensation levels.
The compensation structure also differs from one control category to another. Shareholders whose strategy is seen as financial and with short-term investment horizon (investment firm, diffuse ownership) define compensation packages with a higher bonus ratio, unlike shareholders whose participation is strategic (State) or patrimonial (families) with a long-term investment horizon. The bonus sensitivity to annual performance criteria (ROA, Tobin’s ratio…) is stronger for the former than for the latter.
Finally, regarding equity-based pay, their share in total compensation differs little from one type of ownership to another, but their sensitivity to annual performance is more pronounced for the diffuse ownership.
The differences in compensation between shareholder groups are found to be significant in terms of statistics but also of monetary value. Take a median CEO in our panel who receives a total compensation of 1.93 million euros. According to econometric estimates, this same CEO will receive approximately 50% and 20% less if his controlling shareholder is, respectively, the State or a parent company, and about 20%, 25% and 90% more if his ownership is, respectively, an investment firm, a diffused one or a passive family.
The evaluation of listed companies’ compensation policy must take into account the type of control exercised by the major shareholders. When control is high, the level of pay is substantially lower in line with lower operational responsibility of the CEO and the lesser delegation of control. These low relative levels should therefore not give the opportunity to the executive officer to negotiate upwards his compensation on the only argument of comparing to peers.
Finally, high ratios of variable remuneration sensitive to performance are not always a sign of good governance because they can be associated with short term shareholding strategies.
Conversely, apparently less incentivizing compensation structures can be associated with committed shareholders and long horizon, that have the capacity to effectively monitor the implementation of performance targets, bypassing incentive tools. The observer can then focus on evaluating the financial and non-financial targets’ quality and take a more critical look at standardized and annual performance criteria that carry the risk of giving short-termist and strictly financial incentives to the CEO.
Lionel Almeida is a lecturer at the CNAM and teaches corporate finance.
He graduated from ESCP Europe and served several years in the auditing and consulting sector, before starting a doctoral thesis in Economics at the University Paris Nanterre.
He is interested in the economics of inequality
and high income, corporate governance and especially in executive compensation policies and the ownership structure of large listed companies.
1. See the papers of Camille Landais (2007) and Olivier Godechot (2011).
2. Almeida L., The level and structure of CEO compensation: Does ownership matter?, Revue d’Économie Politique, 2014/4.
3. Total compensation is the sum of cash remuneration (fixed salary and bonus) and remuneration in securities (stock options, free shares or performance shares).
4. A financial company that controls another financial company is included in this category. Unlike a widespread idea, at comparable size and shareholder’s structure, financial and nonfinancial companies have a similar behavior in terms of remuneration policy for their manager in our panel.