EU takes aim at CEO paychecks

April 9, 2014: 9:48 AM ET
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Europe wants to give shareholders the power to limit top executive pay by forcing companies to hold binding votes and to say how it compares with what employees make.
LONDON (CNNMoney)

Europe is planning to give shareholders the power to limit top executive pay.

The European Commission released proposals Wednesday that would require Europe's 10,000 publicly listed companies to hold binding votes, and to say how employee and executive pay compares.

"There is an insufficient link between management pay and performance and this encourages harmful short-term tendencies," the commission said in a statement.

The EU will stop short of setting a regional cap. But pay policies at each company will be subject to shareholder approval and must include "a maximum level for executive pay," it said.

Lawmakers are responding to popular pressure over growing inequality, driven in part by the widening gap between what CEOs and their employees make.

Campaigners argue that any positive effects on employee motivation from the prospect of earning the big salaries are outweighed by lower staff morale when the differentials are stretched too far.

Related: Starbucks CEO backs minimum wage raise

And even the International Monetary Fund is beginning to worry that growing income inequality could hurt economic growth.

The U.K.'s High Pay Centre published a report in January showing that workplaces with big pay gaps tended to suffer more industrial disputes, more sickness and higher staff turnover than companies with fairer pay structures.

CEOs of big British companies enjoy some of the most generous packages in Europe, making $6.5 million on average in pay, bonus and share awards, according to a recent study by the Vlerick Business School.

And a survey of British companies last year found that the total pay awarded to an executive of a FTSE 100 company was 133 times that of their average employee, up from 107 times in 2002.

The EU has already capped bonuses for bankers earning more than 500,000 euros a year ($690,000), a measure that mainly affects executives working in London. The maximum pay is now equal to annual salary or twice salary if a majority of shareholders approve.

Related: Top U.K. CEOs earn average worker wage in 2.5 days

The U.K. is challenging the bonus cap in court. Meanwhile, banks are finding ways around it by raising fixed salaries and offering allowances and other forms of compensation.

Other countries have already given investors a "say on pay."

What America's jobs pay

Dodd-Frank reforms aimed at cleaning up Wall Street made an annual vote on pay mandatory for all U.S. public companies, although unlike the EU proposal firms don't have to comply with the result.

And the Securities and Exchange Commission has considered a plan to require U.S. companies to say how top executives' salaries compare with the people who work for them.

Switzerland is giving shareholders more control over executive pay after a popular initiative won clear backing from voters a year ago.

But another initiative to cap senior executive pay at 12 times that of the lowest paid worker was defeated in November after the government and business leaders warned it could force some firms abroad and others to shed jobs.

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