The Executive Compensation Controversy - Fondazione Rodolfo ...

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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISTable 3.1 Compliance with Action Plan as of June 2009AustriaCountryDisclosure ofCompensationPoliciesyescompany should either comply with the guidelines or offer compelling explanations of whythey choose not to. Table 3.1 summarizes the compliance with the EU disclosure guidelinesas of June 2009, based on information from RiskMetrics (2009) and EU Commission (2007).In practice, most large publicly listed European countries complied with therecommendations of the 2003 Action Plan by 2005 or 2006, regardless of whethercompliance for mandated by their particular jurisdiction. Among the last holdouts wasGermany; prior to passing its own mandatory rules in 2005, only 9 of the top 30 firmsvoluntarily disclosed their compensation. 80Disclosure ofCompensationfor IndividualExecutivesDetailedIndividualDisclosure ofStock OptionsCountries with 2008 CEOBoardEx Pay DataNumber ofFirms% of MktCapThe second-to-last column in Table 3.1 summarizes the number of companies in eachcountry with full CEO compensation information as collected and reported in ManagementDiagnostics Limited’s BoardEx database (our primary source of compensation data analyzedin the next section). The final column shows the aggregate market capitalization of the24 22.4%Belgium yes yes yes 47 57.1%Denmark yes yes yes 8 37.2%France yes yes yes 218 77.8%Germany yes yes 1 yes 1 125 78.5%Greece24 12.1%Ireland yes yes yes 56 98.8%Italy yes yes yes 83 85.1%Luxembourgyes2 25 18.4%Netherlands yes yes yes 84 75.7%Portugal yes yes 5 28.5%Spain yes yes 31 66.3%Sweden yes yes yes 74 69.0%United Kingdom yes yes yes 1180 91.4%Note: The table shows results for the 15 countries with EU membership as of the 2003 Action Plan, based on datafrom RiskMetrics (2009) and EU Commission (2007). Some countries have different rules for differentindividuals (e.g., executives vs. non-executive board members, or chief executives vs. other executives). Theinformation in the table reflects required disclosures for the CEO.1Under German law, individual disclosure is not mandated if 75% of the shares vote against disclosure.2Disclosures required on an aggregate basis (not for individual executives).80 “Germany: Keeping stumm over executive pay,” Economist Intelligence Unit (August 19, 2004), p. 2.-59-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSIScompanies with individual compensation available in BoardEx (which is a lower bound oncompanies disclosing individual compensation information) as a percentage of the totalmarket capitalization in the company (based on Datastream aggregates). Not surprisingly, theobservations are concentrating in countries that have adopted EU disclosurerecommendations, or (like the UK) have adopted even more stringent disclosure rules. Inparticular, the companies followed by BoardEx account for over 80% of marketcapitalization in countries with full individual disclosure (including options), but less than25% of the market capitalization for the European countries without full disclosure.In this Section, we use data emerging from the recent EU disclosure rules to conduct acomprehensive cross-country analysis of executive compensation in Europe, and contrastEuropean pay levels and practices with those in the US. We being by describing the level andcomposition of European CEO pay in 2008, focusing on the how pay varies with bothcompany size and industry. Next, we document the USA “Pay Premium,” showing that USACEOs received about double the pay of their European counterparts in 2008, even aftercontrolling for company size and industry.3.2. Executive Compensation in Europe (vs. USA)Prior research on European vs. USA differences in executive pay have been hamperedby a lack of consistent and detailed data for individual CEOs. As a result, most research priorto the 2003 EU disclosure rules (or the earlier UK rules) focused in large part on averagecash compensation for a group of executives. For example, Conyon and Schwalbach (2000)’scomparison of UK and German compensation from 1968-1994 focused on only cashcompensation for the UK (because the study predated the Greenbury (1995)recommendations on disclosing stock options) and average cash compensation for Germany(because German rules required only disclosing the total cash paid across the group of topmanagers). Similarly, Muslu (2008)’s study of the largest 158 European companies from1999-2004 (based on hand-collected annual reports) presents a mixture of individual andaggregated compensation data. More recently, Bryan, Nash and Patel (2006) relied on SECForm 20-F filings from 1994-2004 for foreign companies cross listing in the USA. However,cross-listed companies are only required to disclose compensation for individual executivesif such disclosure is required in the home country, and as a result most of their analysis wasbased on average compensation for the management group.-60-
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