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Europe moves towards Swiss-style executive pay curbs

European Commissioner for Internal Market and Services Michel Barnier answers reporters' questions during an interview with Reuters at the E
European Commissioner for Internal Market and Services Michel Barnier answers reporters' questions during an interview with Reuters at the E

By John O'Donnell and Sinead Cruise

BRUSSELS/LONDON (Reuters) - European officials, emboldened by a victory over banker bonuses, will propose legislation this year giving shareholders voting rights to challenge executive pay at public companies.

Corporate largesse is under attack across Europe with Switzerland last week voting to impose some of the world's strictest controls on executive remuneration amid public anger at Wall Street-style excess in the country's boardrooms.

The European Commission, which writes the first draft of EU law, is working on a proposal for similar rules that would be applicable across all 27 countries of the European Union.

"I am in favor of making shareholders more responsible on pay. I am currently working on EU legislation that would give shareholders a mandatory say on remuneration," Michel Barnier, the commissioner for regulation, told Reuters on Wednesday.

A spokesman for the Commission said Barnier's proposal would be made before the end of the year. It is targeted at shareholder rather than actual pay limits, which would be contrary to existing law.

European lawmakers pushed through the world's toughest limits on banker bonuses last month, meaning that star traders and high-flying rainmakers at European lenders will face a basic bonus cap at the same level as their base salary, likely from next year.

They would be in a position to toughen the Barnier proposal if the felt it did not go far enough.

Sharon Bowles, one of the EU lawmakers who negotiated the cap on banker bonuses, said many in the European Parliament also want to see more modest executive pay across all sectors.

"We would like to see that there is more restraint in executive pay in general," she said. "While we cannot have wholesale interference in people's pay, it is right to empower shareholders as the Swiss have done."

Political leaders in France and Germany have also voiced support for compensation rules modeled on those of Switzerland with French Prime Minister Jean-Marc Ayrault saying Paris should "take inspiration" from the vote in its neighbor.

Germany's Chancellor Angela Merkel has signaled she would rather rules on executive pay were worked out on a European Union-wide level but she may yet be pushed into action to avoid appearing soft on the corporate wealthy in the run up to federal elections in September.

The main opposition party, the Social Democratic Party, has said current rules which give German shareholders an advisory "say on pay" need to be hardened up, while the junior coalition party, the Free Democratic Party, has vowed to come up with proposals before the elections.

SHAREHOLDER SPRING

Ironically, Britain, which was the only member state to oppose a cap on bank bonuses, is set to introduce the toughest rules on executive pay in the EU this October when legislation that gives shareholders a binding vote on pay and so-called golden parachutes - exit payments - passes through parliament.

Some investors argue binding votes are impractical and risk excessive meddling in the management of companies by shareholders who may not have the resources to understand fully each firm they invest in.

Others say they are simply unnecessary.

"There is often too much focus on pay at the expense of talking to companies more broadly about their strategy," said Jennifer Walmsley, who deals with companies on issues such as executive pay at Hermes Equity Ownership Services, a part of Hermes Fund Managers.

"A binding vote on pay is probably unnecessary in countries, such as the UK or the Netherlands, where investors already have the power to challenge pay decisions."

Last year, investors, fed up with falling share prices and poor returns, rebelled against large pay awards at a number of UK companies, in what became known as the "shareholder Spring".

Andrew Moss, the chief executive of insurer Aviva and Sly Bailey, head of newspaper group Trinity Mirror , were high profile casualties. Martin Sorrell, head of advertising agency WPP , saw his 6.8 million pound award blocked.

But Europe's largest shareholder advisory firm, PIRC, whose clients run more than 1.5 trillion pounds in assets, said real muscle was still needed.

"In the shareholder spring, we only saw about half a dozen companies on the UK's main market defeated on pay issues so there is still a long way to go in our view. If you want to actually stop companies from doing this, rather than just fire off warning shots, then you need to have real power," said Tom Powdrill, a spokesman for the London-based firm.

Germany has advisory "say on pay" votes in response to anger over inequality and corporate excess and similar regulation is currently winding its way through the French parliament.

French shareholders can already vote - in an advisory role - on stock options, golden parachutes or other such special rewards but a proposal to institute a broader ‘say on pay' policy covering all forms of executive compensation and caps on CEO pay may be voted on later this year.

The United States introduced non-binding "say on pay" votes in 2011 but corporate rewards can still be huge. H.J Heinz said this week its chief executive would get about $56 million if he loses his job following the firm's acquisition by Berkshire Hathaway and 3G Capital.

(Additional reporting by Christian Plumb in Paris and Carmel Crimmins in Dublin. Writing by Carmel Crimmins. Editing by Jeremy Gaunt.)

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