Control and Executive Compensation in Large French Companies
| Author | Christiane Alcouffe,Alain Alcouffe |
| Published date | 01 March 1997 |
| DOI | http://doi.org/10.1111/1467-6478.00038 |
| Date | 01 March 1997 |
INTRODUCTION
The issue of executive pay has become a major focus for policy debate in
France, in particular following the publication in 1995 of the Viénot report
on corporate governance and the Arthuis report on share option schemes.
As yet, however, many aspects of the relationship between executive pay,
corporate control, and incentives for managerial performance remain
unclear. The relationship between top executives and their companies differs
considerably from that of other employees, with the result that theories of
pay and performance which are based on the conditions prevailing in the
labour market have only a limited relevance in their case. Instead, the nature
and contents of the employment relationship are determined by the specific
position which the executive occupies within the firm. As Alfred Marshall
noted:
the head clerk of a business has an acquaintance with men and things, the use of which
he could, in some cases, sell at a high price to rival firms. But in other cases, it is of a
kind to be of no value save to the business in which he already is; and then his departure
would perhaps injure it several times the value of his salary while he could not get half
that salary elsewhere.1
In terms of the juridical conception of the employment relationship, top
executives are understood as occupying a position of ‘autonomy’ with regard
to the firm, in contrast to the position of ‘subordination’ of other employees.
This is a consequence of the managerial discretion exercised by top
executives; it implies that it is impossible contractually to specify their precise
functions, and therefore to analyse their performance in a straightforward
way. The particular loyalty which the executive is expected to show to the
company is another important element. Admittedly, a number of employees
are in a position to acquire information on a company which would interest
its competitors, but this does apply more specifically to the top management.
© Blackwell Publishers Ltd 1997, 108 Cowley Road, Oxford OX4 1JF, UK and 238 Main Street, Cambridge, MA 02142, USA
* Laboratoire Interdisciplinaire de Recherche sur les Ressources Humaines et
l’Emploi, Université des Sciences Sociales, Place Anatole France, 31042
Toulouse Cedex, France
85
JOURNAL OF LAW AND SOCIETY
VOLUME 24, NUMBER 1, MARCH 1997
ISSN: 0263–323X, pp. 85–103
Control and Executive Compensation in Large French
Companies
ALAIN ALCOUFFE*AND CHRISTIANE ALCOUFFE*
The recent dispute which followed the departure of Ignacio Lopez from
General Motors to take control of purchasing at Volkswagen has illustrated
the difficulty of establishing the price of loyalty.2A third element is a result
of the hierarchical organization of the firm. There is a vast amount of
literature on this subject, from Fayol to Herbert Simon and Oliver Williamson,
studying the correlation between the size of companies and the number of
hierarchical tiers within them. There are two conclusions which may be
drawn from these studies which concern the subject under discussion here:
first, the number of hierarchical levels tends to increase with the size of the
company, and secondly, the link between the hierarchical system and salary
structure usually entails an increase in salary from one tier to a higher one.
As a result, executives’ compensation tends to be dependent upon the size
of the company.
DIVERGENCE OF INTERESTS BETWEEN OWNERS AND
MANAGERS
New institutional economics provides a basis for the idea of an inherent
divergence of interests between owners and managers.3If executive compen-
sation is linked to the the size of the company rather than to its profitability,
executives will have an incentive to promote the growth of the firm through
self-financing or other means, at the expense, potentially, of dividends which
would otherwise have been paid to the shareholders.
More recently, ‘tournament theory’ within economics has provided formal
models of the compensation hierarchy within firms and, in particular, of the
clear differences which exist between the top few levels. The underlying idea
is that the company has an interest in linking pay and benefits to the long-
term career prospects of managers; this is said to explain the observed link
between executive pay, firm size, and the number of grades or rungs in the
hierarchy. Increasingly, however, executive pay is linked to share options.4
These increase managerial remuneration in line with the stock-market
performance of the company, in other words, in the situation where share-
holders also directly benefit. Placing a value on this benefit is highly problem-
atic, since the exercise of share options may be deferred for a considerable
time after they are initially granted, or indeed may never be taken up. Even
in this latter case, however, it cannot be said that the share option has no
value at all. In order to make any comparisons, evaluations have to be made
which will necessarily contain an arbitrary element, even in the United States
of America where the Securities and Exchange Commission has since 1993
required that all companies publish evaluations of share-option schemes,
using the Black-Scholes formula.5
These various points illustrate the magnitude of the problem faced in
trying to assess the level of compensation required to provide executives
with sufficient incentives, and thereby eliminate a potential conflict of
86
© Blackwell Publishers Ltd 1997
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