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French state company CEOs braced for big pay cuts
June 1, 2012 / 10:53 AM / 5 years ago

French state company CEOs braced for big pay cuts

* Government to detail measure to cap pay in mid June

* Unclear if plan targets executives other than CEOs

* Measure seen as symbolic, execution complex

By Caroline Jacobs and Dominique Vidalon

PARIS, June 1 (Reuters) - The heads of French state-owned companies, such as Aeroports de Paris and utility EDF , may not like the new government’s plan to cap their pay but, with lifestyles to maintain, most will likely accept the new deal.

EDF’s Henri Proglio, the poster child for well-paid chief executives of state-owned firms, has signalled he will accept President Fancois Hollande’s plan to limit salaries to a maximum 20 times that of the lowest-paid employees.

Others, analysts say, will likely follow the example of Proglio, whose pay would fall about 70 percent to around 510,000 euros ($631,000). The reference rate for maximum salaries will be based on a spread of the lowest salaries, not the absolute lowest - France has a minimum annual wage of 16,380 euros.

“It is basically a change in the contract. If a CEO refuses, he will not be renewed. They have no choice,” said Laurent Maruani, chairman of the marketing department at French business school HEC.

Exactly how the government plans to implement Hollande’s campaign promise will be announced by mid-June, a month after the president and his 34 ministers took office and immediately cut their salaries 30 percent.

Hollande has made restoring equality to France a priority, part of his rebuke to former centre-right President Nicolas Sarkozy’s policies that allegedly favoured the rich.

He also wants a 75 percent tax rate for income above 1 million euros ($1.24 million).

Many questions remain, such as whether the cap on salaries will apply to CEOs only or be extended to other executives who could end up earning more than their boss.

“They must first determine who is targeted, what criteria they will use to calculate the remuneration. Will they take into account the fixed and variable parts of the pay? What about stock options? I expect an intricate construction,” said Stephane Beal, associate partner at law firm Fidal.

Prime minister Jean-Marc Ayrault shocked corporate France earlier this week when he said the limits would apply to existing contracts and not just new hires, as had been suggested during the election campaign.

Luc Oursel, CEO of Areva, the world’s biggest maker of nuclear reactors, told Les Echos newspaper in an interview this week there would be possible headaches if the measure were to apply to all employees in state-owned companies.

“One must keep in mind that it is a complex issue. Some business leaders have a corporate mandate that the board of directors can change, while others have a private labour law contract that binds the two parties and cannot be unilaterally changed - or else they run the risk of creating complex conflicts,” Oursel said, referring to possible legal action.

PATRIOTISM CALL

Proglio would at least keep his high profile job at the world’s No.1 operator of nuclear plants, and be able to say he was doing his bit at a time of belt-tightening around Europe.

Ayrault said in an interview this week: “I believe in the patriotism of leaders, who can understand that the crisis calls for the political and economical elite to set an example”.

For now, it seems the government will limit the measure to companies it controls or owns, enabling it to impose the pay cuts by decree as it did for its own salary cuts when it took office.

“It is a symbolic measure to mark the government’s intention to fight against an uneven distribution of incomes and it also sends a message that public companies must be managed differently from private ones,” said Henri Sterdyniak, head of the French economic observatory OFCE’s economics department.

While headhunters say the cuts could make it hard to recruit top talent for state companies further down the line, advocates say salaries will still be sufficiently high to attract strong candidates, many of whom would end up in lower-paid government jobs if they did not go to the private sector.

“It is a very bad idea, purely symbolic,” said Xavier Gabaix, Professor of Finance at the Stern School of Business Finance in New York. “There will be departures to the private sector. It will increase cocooning in the public sector.”

France, through its holding agency APE, owns a majority stake in companies like Aeroports de Paris, Areva and EDF.

It has minority stakes in utility GDF Suez, carmaker Renault and France Telecom w here i t will be more difficult but not impossible to wield influence as it did with Franco-Dutch carrier Air France-KLM and aerospace and defence group Safran.

On Thursday, France used its 30 percent stake in Safran to derail a plan to award the CEO a golden parachute and a retirement benefit. It also used its 16 percent in loss-making Air France to vote against an already awarded 400,000 euro pay-off to former CEO Pierre-Henri Gourgeon. ($1 = 0.8088 euro) (Editing by Dan Lalor)

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