PARIS/LONDON (Reuters) - For Henri Proglio, outspoken chief executive of French utility EDF (EDF.PA), a victory for Socialist Party candidate Francois Hollande in Sunday’s presidential poll could prove particularly costly.
Proglio, who earned 1.6 million euros ($2.1 million) last year, could be one of the most prominent victims of the cap on CEO pay at state-controlled companies Hollande advocates, but many more top French executives will also have a wary eye on the forthcoming vote.
The cap is one of several measures - also including a top income tax rate of 75 percent on income above 1 million euros -Hollande says are necessary to restore fairness in France, part of his rebuke to incumbent Nicolas Sarkozy for policies allegedly favoring the rich.
Critics call the cap, which could mean the EDF CEO’s pay would slump at least two thirds to no more than about 500,000 euros - assuming no potentially controversial legal challenge - a piece of electioneering that could detract from companies’ ability to attract top talent.
That in turn could tighten a sometimes incestuous circle between the French state and corporations, since it could become much easier to lure executives from government than private sector employees already enjoying generous pay packages.
Already, as of last year, 26 percent of French CEOs had had their first jobs in government, a much higher percentage than in Germany, Britain or the United States, according to a study by executive search firm Heidrick & Struggles.
“If a country like France imposes an arbitrary (salary) cap, they are almost going back in time in terms of how executives of state-owned companies and enterprises are paid,” said Simon Wong, a partner at shareholder lobby group Governance for Owners.
“One of the key reforms of the past decade or two was to free the salary structure of these firms so they could better compete with the private sector,” Wong said.
Even some who applaud the broad goal of restraining executive pay worry that Hollande’s proposal is like swinging an axe in a situation that calls for a scalpel.
“I‘m not against rethinking CEO pay,” said Vincente Cunat, a professor at the London School of Economics. “This looks too simplistic to me and driven by the wrong incentives.”
Hollande’s vow to bar the top-paid executives in public companies from making more than 20 times the lowest-paid employee’s salary could unsettle the boardrooms of a broad swathe of companies and industries.
And the breadth of the potential impact highlights the extent to which the country’s government still wields influence over France Inc.
While a new French government would be free to slash CEO pay at companies in which it has majority stakes - like nuclear power plant builder Areva AREVA.PA and airports operator Aeroports de Paris (ADP.PA), as well as EDF - it could also strongly influence other companies where it has more than 25 percent.
That means CEOs of companies ranging from GDF Suez GSZ.PA, in which the government has a 36 percent stake, to France Telecom FTE.PA, in which it holds 27 percent, could see their paychecks slashed if the Hollande proposal becomes law.
GDF CEO Gerard Mestrallet was paid 3.3 million in 2011, including a 1.4 million base salary. France Telecom’s Stephane Richard made 1.6 million.
Officials from the Hollande campaign insist the proposal is nuanced, that the pay ceiling would vary depending on the salary of its lowest-paid employees and that their goal is less to cut CEO compensation than to make sure the rank and file get what they deserve.
“The modern left handles things in a modern way,” said a source close to Hollande’s campaign team, emphasizing that the ceiling would be calculated differently at each company.
“There is the law, and there is the management’s thinking on compensation, and that’s what needs to change in France,” the source said. “Regulation on its own isn’t enough, we need to change mentalities.”
The source pointed to Volkswagen’s (VOWG_p.DE) recent decision to grant bonuses to its rank and file factory workers of 7,500 euros each as one which effectively muffled outrage over CEO Martin Winterkorn’s 17 million euro salary in 2011.
Elsewhere in Germany, Proglio’s counterpart at utility E.ON (EONGn.DE) made 4.5 million euros last year, more than 10 times what Hollande would allow EDF to pay and a possible sign of how the French company could struggle to lure talent.
While the proposed cap has a good chance of becoming law, many economists say an essentially market-friendly Hollande team will likely make the law flexible enough so its final impact is less dramatic.
Even with reduced salary, perks can be offered to lure talent, such as chauffeured cars or even housing.
Still, the prospect of pay curbs has executive search firms warning of consequences such as the likelihood that French companies would be even less likely to attract foreign CEOs.
“If they want to find a CEO outside of government, that will be very difficult,” said Didier Vuchot, chairman of Korn/Ferry International for Europe. “They won’t be competitive ... You’ll lose the possibility of having non-French candidates.”
So despite being designed as a measure to foster equality, the proposal could further increase the dominance of a narrow upper crust - of which Hollande himself is a member - of home-grown technocrats trained in the nation’s most selective universities.
Proglio, Richard and Mestrallet are members of this narrow circle, although their days of seven-figure salaries are almost certainly at an end.
Not everyone in the business community thinks a bit of salary moderation is such a bad idea.
Sympathizers point out that even the United States, known for a hands-off stance toward the private sector, capped pay at several companies including insurer American International Group (AIG.N), albeit this was after taxpayer-funded rescues.
And Proglio, though praised by some analysts for bringing a more market-friendly approach to EDF, has also presided over a 59 percent drop in the utility’s share price. That makes his 1.56 million pay for 2011 - including a 555,708 bonus - look generous in many eyes.
“Being at the head of a publicly owned company and losing touch with reality by having a huge salary is not a good thing,” said Laurent Maruani, chairman of the marketing department at French business school HEC.
“When your salary is that high you become a sort of abstraction,” Maruani said. “You don’t have a real understanding of your customers.” ($1 = 0.7561 euros)
Additional reporting by Elizabeth Pineau and Caroline Jacobs; Editing by Geert De Clercq and David Holmes