Taxing Questions

10 October 2008 Rudi Plettinx

Rudi Plettinx, vice-president, EMEA, Center for Creative Leadership, examines the effects and fallout when duty calls on high tax payers.

A few CEOs in the super-pay-out league seem to be giving business a bad name. It is not only shareholders who are angry at their enormous rewards; Europe’s politicians, eager to curry favour with constituents, are getting in on the act by calling for swingeing taxation to be applied to these lucky chaps.

But most of this backlash is not only misplaced; it threatens to make Europe a no-go area for business talent. Several points need to be explained before this witch-hunt goes any further:

  • Europe’s CEOs (and other top managers) do not get paid that much. Average total compensation for European CEOs lags behind their US counterparts by about 500%, and the same applies for leading Asian earners.
  • Because they have made huge amounts, business leaders such as Porsche’s Wendelin Wiedeking, Novartis' Daniel Vasella, L’Oreal’s Lindsay Owen Jones and Numico’s Jan Bennink have been vilified by the media, politicians and shareholder pressure groups. But they are in the minority. Most CEOs do not earn astronomical salaries. They do a good job for a fair reward.
  • Faced with an ongoing war for talent, Europe cannot afford to turn these people off. Why? We need these people, because they – most of the time – bring innovation and new ideas we cannot afford to lose. There are lots of places these smart people could go – think other countries and private equity firms where there is no need to go public with how much you earn.

Some of those on the receiving end of big pay-outs have announced their intention of getting out of any involvement with public companies unless the detractors back off. Ad Scheepbouwer, CEO of KPN, who has given back €1m of his earnings, has suggested his children seek opportunities outside Europe and doubts he will work for a publicly quoted company again. Daniel Vasella of Novartis said the publicity he received has created "salary envy."

"Average total compensation for European CEOs lags behind their US counterparts by about 500%."

"Transparency has not contained executive compensation," he says. "People now ask: 'X has earned so much, why should I accept less?'" With countries including Russia, Japan and Italy facing the loss of 20% of their population in the next 25 years, pressure to recruit the top talent from other nations is on the increase.

China is forecast to need a massive 75,000 CEOs in the next ten years. Now it has about 3,000. Where do they get the rest? Europe. To compound the problem, India is facing a similar crisis. Europe’s politicians are exhibiting amazing naiveté. Calling excessive executive pay "scandalous" and a "social scourge", Europe’s finance ministers pledged in May to keep boardroom remuneration in check, either by enhancing shareholder power or fiddling with the tax laws.

What they fail to understand in the midst of their misplaced fervour is that these so-called fat cats only exercised contractual agreements put in place by the boards of directors, remuneration committees and headhunters who were so eager to hire them. Do not blame the executives who have cashed in, blame the people who negotiated the deals.

While these short-sighted politicians frown at the business leaders who give us our competitive edge, others will open their arms in welcome, with a lucrative contract ready to sign.

In a world where the Rolling Stones earn €4m for an 80 min gig, do we ask them for some of the money too? Or is it just our business leaders (the vast majority being hard-working and dedicated) who are ripe for being plucked? Our politicians won’t get no satisfaction when they add up the damage they have done.