| BUSINESSWEEK ONLINE : APRIL 19, 1999 ISSUE | ||||||||
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| COVER STORY
Eager Europeans Press Their Noses to the Glass (int'l edition) France's Alcatel learned a hard lesson last month in how costly it can be to keep up with U.S. pay levels. It laid out $350 million for Assured Access Technology Inc. in Milpitas, Calif., which provides plumbing for the Internet. Included in the price: $60 million to keep the 55 engineers at Assured Access from bolting at the prospect of working for a low-paying French employer. The Alcatel experience shows how pressure is mounting on European companies to boost pay. Globalizing companies such as DaimlerChrysler (DCX) and Deutsche Bank (DBK) are unable to compete in the U.S. or to hire top international executives without offering U.S.-style pay. But it's not just about grabbing talent abroad: Once companies do so, they find their homegrown employees clamoring for more as well. Meanwhile, a new focus on shareholder interests is starting to break down barriers to stock options and incentive pay packages. Companies ranging from Daimler to Dutch insurer Aegon are pioneering the use of incentives tied to the company share price. To be sure, salaries in Europe remain below those in the U.S. In fact, European CEOs still earn on average less than half as much as their U.S. counterparts, according to consultant Towers Perrin, which studied companies with annual sales of $250 million to $500 million. But just being an American allows a manager to command much more than the locals. In Britain, companies pay chief executives who have come from the U.S. salaries that are 30% more than their British counterparts, according to consultants Monks Partnership. Bonuses for U.S. executives working in Britain are also more generous--twice as much as those offered Britons. Companies recognize that if they want a top U.S. manager, they must pay a premium. Marjorie Scardino, the U.S.-born chief executive of British publisher Pearson Group, earned $1.6 million last year, including a bonus of $872,000. Barclays guaranteed Michael O'Neill, its American CEO, $24 million over three years. And the CEO of SmithKline Beecham PLC, Jan Leschly--a Dane who spent most of his career in the U.S.--just won a $140 million package, the highest ever in Britain. Shareholders remained conspicuously silent, which shows how perceptions are changing. OUTCRY. Elsewhere in egalitarian Europe, though, big pay remains controversial. When Finnish papers reported last spring that Chairman Jorma Ollila of Nokia Corp. had accumulated some $15 million in stock under his company's incentive pay program, it caused an outcry. His response: Nokia needed a stock-option program to attract top talent. ''It's no easy job recruiting people to live in Helsinki,'' he says. Now, Ollila's options are worth $50 million, and Nokia (NOK.A) is extending its options plan to 3,500 employees. If the pressures are most acute in high tech, however, the old arguments against superhigh pay are everywhere giving way. It used to be enough to give European executives a predictable paycheck, plenty of vacation time, and a car. Now, headhunters say, they want options. ''Managers are demanding it,'' says Franz-Josef Nuss, an executive search specialist at Munich's Roland Berger & Partner. The main reason is globalization. When Daimler Benz took over Chrysler Corp. last year, CEO Jurgen E. Schrempp had to confront the fact that Chrysler CEO Robert Eaton, who earned over $11 million in 1997, including exercised options, appears to have made more than the rest of Daimler's management board members put together. Worse, Daimler had to pay out $395 million, primarily in stock, to Chrysler's top 30 executives to cash out their options. Since cutting the pay of Chrysler managers wasn't possible, Daimler was forced to boost pay for its own execs. Deutsche Bank faces similar pressures. Burned by defections from its U.S. operations last year, it agreed to pay $187 million to retain five of the top execs at Bankers Trust Co. after its takeover of the U.S. bank is done. Not bad, considering that Deutsche CEO Rolf Breuer is estimated to make no more than about $1.5 million a year. Meanwhile, restructuring by tradition-bound industrial giants is also driving pay upward. Siemens, for example, plans to spin off its $3.7 billion semiconductor unit into a separate company early next year. Ulrich Schumacher, the Siemens board member who will be the new unit's CEO, says one great advantage of the spin-off is that he'll be able to compete for top talent by offering stock options. ''We plan to offer performance-based compensation as soon as we can,'' he says. But corporate titans are not the only ones leading the way. Small companies are also making up for mediocre base salaries with generous stock options. Some of the best-paid executives in Germany aren't at giant companies on the benchmark dax 30 index but are at startups listed on Frankfurt's high-flying Neuer Markt. Headhunters say that soaring stock prices have made executives of some Neuer Markt companies richer than their counterparts at behemoths such as Siemens. The Neuer Markt Index has doubled in the past year. One example is 1&1, a Net-access and -marketing company in Montabaur, west of Frankfurt. Every employee owns stock and can check the share price at any time with a click of the mouse on company computers. Since an initial public offering on Mar. 23, 1998, 1&1 shares have risen 180%, to $126. ANGRY REDS. Still, it will be years--if ever--before Europeans make as much as Americans. That's because a combination of government restrictions, prohibitive taxes, and political opposition continues to hamper the use of options. In France, for example, a government attempt at quiet liberalization of the rules for stock options last year ran afoul of angry communists and other members of Premier Lionel Jospin's coalition. The Netherlands imposed capital-gains taxes on stock options last year after Prime Minister Wim Kok, a former labor leader, blasted ''exhibitionist'' stock bonuses paid to executives such as Kees Storm, CEO of insurer Aegon. Even in Britain, the value of stock options may not amount to more than four times an executive's base pay. ''Every country has different rules on stock options,'' says Malcolm Hurlston of the European Center for Employee Ownership, which is about to publish a report on stock options. ''There are tons of complications.'' In Germany, at least, legal barriers are slowly coming down. The government last year clarified its rules on stock option plans to make it easier for companies to offer them. Now, all the companies on the dax 30 have either linked the pay of top managers to share performance or are planning to do so soon, according to a study by Egon Zehnder International, Europe's biggest executive-search firm. ''You want managers to look in the newspaper every morning and calculate their benefit easily,'' says Magnus Graf Lambsdorff, a Zehnder consultant. In short, nothing focuses a manager's mind quite like a stock option. That's a lesson European companies are starting to learn. By Jack Ewing in Frankfurt, Stephen Baker in Paris, and William Echikson in Brussels, with Kerry Capell in London To read a letter to the editor about this story, click here. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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