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A new academic research paper in The Review of Financial Studies titled “Are U.S. CEOs Paid More? New International Evidence,” challenges the commonly held view that the compensation of US CEOs is higher than their non-U.S. counterparts. Here’s the abstract:
This paper challenges the widely accepted stylized fact that chief executive officers (CEOs) in the United States are paid significantly more than their foreign counterparts. Using CEO pay data across fourteen countries with mandated pay disclosures, we show that the U.S. pay premium is economically modest and primarily reflects the performance-based pay demanded by institutional shareholders and independent boards. Indeed, we find no significant difference in either level of CEO pay or the use of equity-based pay between U.S. and non-U.S. firms exposed to international and U.S. capital, product, and labor markets.We also show that U.S. and non-U.S. CEO pay has largely converged in the 2000s.
Here are some of the interesting findings presented in Table 1 of the paper:
1. Average CEO compensation in the US of $5.5 million in 2006 was less than the average CEO compensation in Switzerland of $6.1 million in that year, and just slightly ahead of the average CEO compensation in Italy of $5.2 million.
2. Both the mean ($5.5 million) and median ($3.3 million) CEO pay in the US was roughly twice the mean ($2.8 million) and median ($1.6 million) CEO pay for non-US companies in 2006.
3. The average percentage of total CEO compensation paid as base “salary” was lowest in the US (only 28%) among the 14 countries studied, and highest in Sweden (62%); and the average for non-US countries was 46%.
4. In the US, 72% of total CEO compensation (versus 54% for non-US CEOS) are non-salary items that include bonuses (27% vs. 24% for non-US CEOs), stock and options (39% vs. 22% for non-US CEOs) and other (6% vs. 8% for non-US CEOs). ‘
In other words, the composition of CEO compensation is much different in the US than in other countries (must less weighted towards base salary, and much more weighted towards performance and outcomes), making comparisons difficult without adjusting for these differences in compensation.
Here’s how the paper concludes:
We find convergence toward U.S. pay practices by non-U.S. firms that have a higher fraction of foreign sales and shares held by foreign institutional investors and internationally diverse boards. Similarly, we find that CEO pay in non-U.S. firms is no different (compared with U.S. firms) in the non-U.S. firms that are cross-listed on a U.S. exchange, have a high presence of U.S. institutions as shareholders, have U.S. operations, or have directors who also serve on U.S. boards. Our results indicate that U.S.-style equity-based compensation is increasingly exported to non-U.S. firms that are exposed to foreign (and particularly U.S.) capital, product, and managerial labor markets. These findings suggest an increasingly important international managerial labor market for CEOs.
MP: I think the answer to the question in the paper’s title is “No.”
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