March 11, 2020
Does an employee representative on the board mean reduced CEO pay?
Having an employee representative on the director’s board has absolutely no impact on reducing the pay level of the company’s CEO, according to research from Vlerick Business School. This research claims that contrary to the belief that employee representation on the board reduces high profit margins and greater controls the remuneration of CEOs, giving more ownership and finances to a company’s employees.
This research comes from Xavier Baeten, a professor in reward and sustainability at Vlerick Business School and director of the school’s Executive Remuneration Research Centre, alongside Vlerick researcher, Bettina De Ruyck. The study examined the pay levels, habits and incentives of CEOs in 899 major European companies. The main focus of this was on the STOXX 600 – a stock index of the 600 largest firms across European countries, including 159 UK firms.
Analysis of the data by the researchers suggests that there was absolutely no relationship between having an employee representative on the board, and the level of CEO remuneration. This type of board representation is not as common in the UK as it is in other European countries, such as Germany, France and Scandinavia, where the percentage of companies with employee representation on the board were, 78 percent, 72 percent and 60 percent retrospectively.
“Our research has already proven quite frequently that ‘modesty’ seems to be a key word in the field of executive remuneration.”
Professor Xavier Baeten said; “This finding runs counter to the belief that having an employee representative on the board would lead to more modest remuneration levels at the top, as an employee representative could be expected to keep an extra eye on pay ratios. I would not push it that far to say that employee representatives on the board do not care that much about executive remuneration, but the least we can say is that such an intervention in corporate governance does not seem to be very effective. Moreover, we have found that in Germany, a country with strong employee representation on the board, CEOs are among the highest paid in Europe.”
The analysis also claims that the more nationalities that featured on a company’s board, the higher the CEO’s remuneration tended to be. Whilst this was also the case with directors who had a broader network and other ventures they were involved in, meaning that firms should not construct their boards around as many nationalities as possible, and that they should also not hire as many directors as possible who have many other board obligations – otherwise none as ‘busy directors’.
Professor Xavier Baeten also said; “Our research has already proven quite frequently that ‘modesty’ seems to be a key word in the field of executive remuneration. In this respect, having some diversity on the board will help, but having too much diversity in terms of nationalities might negatively impact board cohesion, making the board more vulnerable to the exercise of CEO power.”
Image by Steve Buissinne