Cover Story : The View From Europe

While executive compensation and golden handshakes are smaller in Europe than in the US, they have been making headlines in Germany. In December the German Supreme Court, or Bundesgerichtshof, ordered a retrial of Deutsche Bank CEO Josef Ackermann and five co-defendants for approving a total of about $68 million of payments following the Mannesmann-Vodafone takeover battle in 2000. Deutsche Bank, Germanys biggest bank, extended Ackermanns contract on February 1, 2006, through the end of the banks annual shareholders meeting in 2010. Ackermann, one of Germanys highest-paid executives, has boosted the banks profit, in part by slashing thousands of jobs.

While German companies are not required to publish details of executive compensation, a few disclose pay packages voluntarily under the Cromme Code, which was drawn up in 2002. The United Kingdom, which allows shareholders to make non-binding votes on remuneration policies at annual meetings, has the highest executive pay levels in Europe.

Investors are essentially powerless to rein in billowing parachute agreements, says Delves of Chicagos Delves Group. The main power investors have is to decide not to buy the companys stock, he says. In order for the birth of real corporate democracy, there will have to be vastly more profound changes than simply disclosing executive compensation, he says. The real underlying problem in executive pay is that shareholders cant replace a bad management team, according to Delves.

It is not uncommon for CEOs to sit on compensation committees as directors of other companies, setting the pay of other CEOs. Executive pay consultants say the practice is helpful because these CEOs understand the requirements of the job. A study last year by professors at the Wharton School of the University of Pennsylvania, Stanford University and Canadas Simon Fraser University found, however, that CEOs with strong links to directors received substantially higher pay, often hundreds of thousands of dollars more. Meanwhile, it remains very difficult for shareholders to remove directors who approve outsized benefit and compensation packages, or to gain access to the proxy to nominate board candidates in time for the annual meeting.

As the 2006 proxy season unfolds, US shareholder resolutions seeking a majority vote on the election of directors will be one of the most hotly contested issues, says Hauder of Buck Consultants. Between 120 and 150 such resolutions will be filed this year, he says. Under the majority-vote system, an incumbent director who doesnt receive the required majority for re-election will be required to resign. US computer maker Dell and chipmaker Intel both announced in January that their boards adopted a majority-vote standard for the election of directors in uncontested elections. Office Depot, Aetna and Honeywell adopted the majority-vote standard last year.

These companies could be in the vanguard of a growing movement to make directors more accountable to shareholders. Whether that increased accountability will lead to lower pay remains to be seen.

Gordon Platt