Your boss doesn’t need a Ferrari allowance

By CHRIS BRYANT

What’s better than getting paid millions of dollars for running a multinational company? Being paid not to run it any more. That’s still much easier than it sounds.

Take Tom Enders, who stepped down as Airbus SE CEO last week. He’s leaving with a pension that could cost the company €26 million (RM120.9 million).

Ex-Daimler AG CEO Dieter Zetsche will receive an annual pension of more than €1 million in his retirement.

At Volkswagen AG (VW), longstanding executives are entitled to a pension of up to 70% of their base pay.1

Generous pension payouts were once an opaque way for compensation committees to pad compensation without drawing much scrutiny.

Now, investors and governments are — rightly, in my view — starting to challenge them.

It’s hard to defend the generous packages enjoyed by senior executives as the wages and pensions of rank-and-file workers have been squeezed. The disparity risks fuelling the growing populist backlash against free markets.

Boards should reward executives for good performance, not rent-seeking. More bosses should consider following the example of Danone SA’s CEO and forego these kind of payouts.

If they don’t, they need to brace for the inevitable backlash.

In Britain, generous pensions tied to a worker’s final salary are largely a relic of the past. In the private sector, staff can count themselves very lucky if their company contributes 10% of salary towards their retirement.

In the US almost 30% of US households aged 55 and older have no retirement savings and no pension, my colleague Nir Kaissar reminded us last week.

Yet, gold-plated pensions for increasingly well-paid executives remain commonplace. International comparisons aren’t always that meaningful due to differences in the way remuneration is structured.

But as rule of thumb, big UK companies typically contribute 25% of salary toward a senior executive’s pension, while on the continent the proportion is often higher still.2

Amid the fuss that Enders’ pension triggered and Renault’s decision not to pay a €765,000 annual pension to embattled former boss Carlos Ghosn, the French government has called for executive pensions to be capped at 30% of pay. In Germany, pressure is building for a cap there, too.

In the UK, the subject has become even more controversial. The reason is simple: The updated UK corporate governance code now requires that executive pension contribution rates are “aligned with those available to the workforce”.

With shareholder meeting season fast approaching, the Investment Association, which represents asset managers, has promised to call out companies that don’t follow the code for new hires, and to highlight companies that continue to offer existing directors a pension contribution of 25% or more.

Proxy advisor Glass Lewis is also urging remuneration committees to show more restraint.

Hoping to avoid adverse publicity, UK companies are scrambling to adjust their pay practices. After shareholder pressure, HSBC Holdings plc cut all executives’ pension allowances from 30% to 10% of salary, for example.

Not all boards have gone that far. Lloyds Banking Group plc has cut the cash that CEO Antonio Horta-Osorio receives in place of a pension from 46% of his base salary to 33% — a level that labour union Affinity complained was still sufficient “to buy a Ferrari every year”.

As pressure for reform builds, investors should be alert to companies playing smoke and mirrors, something Standard Chartered plc was accused of recently.

When the bank cut CEO Bill Winters’ pension to 20% from 40% of salary, it included a share payment in the calculation that left entitlement broadly unchanged.

The bank isn’t the only company to be generous in its calculations. Siemens AG is one of several German companies that calculate executive pensions as a percentage of salary — and target bonus.

Hence, Joe Kaeser received a €1.2 million contribution to his pension last year, equivalent to 56% of his base salary.3

In France, Peugeot SA’s plan is even more peculiar. CEO Carlos Tavares’ pension is calculated as 25% of his salary and the bonus achieved.

Due to Peugeot’s good performance last year, Tavares received almost €1 million towards his pension, or two-thirds of just his base salary.4

Of course, a pension tends to be only a small part of a CEO’s total remuneration.

Naturally, investors were more vexed about the more than £80 million (RM432 million) of long-term incentives that homebuilder Persimmon plc paid to then boss Jeff Fairburn in 2017-2018 than the 24% of base salary he received as a pension supplement (Though this was almost three times what regular employees received as a pension match).5

Yet as Fairburn showed, executives have far more opportunity to build up retirement wealth than their staff.

Most don’t need a large pension on top, but they’ll take one if it’s going.

Altering existing contractual commitments is difficult, so it will be up to individual executives to take the initiative.

So, three cheers for Danone’s Emmanuel Faber. In January, the boss of the French dairy giant voluntarily gave up his right to a €1.2 million pension annuity. With luck, others will be inspired by his restraint. But don’t count on it. — Bloomberg

1VW board members appointed after 2017 receive 40% of their fixed pay.

2Though for tax efficiency reasons executives increasingly take cash instead.

3The Siemens executive pension plan is not performance-related. It is calculated as 28% of salary and the target amount of the bonus. The bonus target amount is 100% of base pay.

4This is subject to tax of course.

5From 2020 Persimmon plans to reduce new boss Dave Jenkinson’s pension supplement so it is in line with the wider workforce.

  • This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.