The Executive Compensation Controversy - Fondazione Rodolfo ...

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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISTable 3.4Summary Statistics for 2008 CEO Total Compensation, by Company SizeTotal PayAverage Composition of Total PayGroupSampleFirmsAverage(€000s)Median(€000s)BaseSalaryAllBonusesOptionGrantStockPayOtherPayEUROPE 1,074 1,986 1,178 50% 20% 3% 16% 11%By Firm Sales (millions)Less than €350 289 889 677 56% 15% 3% 15% 11%€350 to €1,000 252 1,226 974 53% 21% 2% 15% 9%€1,000 to €4,000 275 2,007 1,387 48% 23% 3% 16% 11%Above €4,000 258 3,933 2,660 42% 22% 6% 19% 12%UNITED STATES)1,504 4,098 2,615 28% 20% 20% 27% 6%By Firm Sales (millionsLess than €350 245 1,448 1,010 40% 18% 17% 19% 6%€350 to €1,000 407 2,213 1,668 33% 18% 17% 26% 5%€1,000 to €4,000 476 4,020 3,106 25% 21% 21% 27% 5%Above €4,000 376 7,964 6,225 17% 21% 24% 32% 6%Note: European data from Boardex and US data from ExecuComp exclude firms with less than €100m in revenues.Total compensation defined as the sum of salaries, bonuses, benefits, and grant-date values for stock options,restricted stock, and performance shares. US dollar-denominated data are converted to Euros using the 2008 yearendexchange rate (€1 = $1.3919). The average (and median) results for all firms in Europe and in the USA arereported in Table 3.2.Table 3.4 provides summary statistics for the level and composition of fiscal 2008 CEOpay by company size and continent. As reported in the top panel, the average and medianlevels of total compensation increase monotonically with firm size: the median pay forcompanies with 2008 revenues in excess of €4 billion is €2.7 million, far larger than the€677,000 median pay for companies with revenues below €350 million. The bottom panelshows that American CEOs earn substantially more than their European counterparts, forevery size and industry group. The USA premium is especially pronounced for large firms(where the median US CEO earns 340% more). The right-hand portion of Table 3.4 describesthe average composition of CEO pay in the two continents. The divergence in equity-basedpay between European and USA pay practices is, again, especially pronounced forcompanies with revenues exceeding €4 billion. Within this group, salaries account for 42%of pay for European CEOs, but account for only one-sixth of pay for USA CEOs. Similarly,equity-based pay accounts for 56% of pay for CEOs in large US firms, but only account for25% of pay in the largest European firms.-67-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISTable 3.5Summary Statistics for Components of 2008 CEO Pay, by Company SizeBaseSalaryAnnual BonusReceivedValue ofOption GrantValue ofSharesGroupMedian(€000s)% withBonusMedian(for >€0)% withGrantsMedian(for >€0)% withGrantsMedian(for >€0)EUROPEBy Firm Sales (millions)Less than €350 349 62% 173 14% 22 44% 283.4€350 to €1,000 448 72% 286 16% 11 45% 396.6€1,000 to €4,000 593 71% 453 12% 224 44% 543.9Above €4,000 960 69% 857 20% 797 50% 1,156.3UNITED STATESBy Firm Sales (millions)Less than €350 336 74% 267 47% 424 48% 497.0€350 to €1,000 459 73% 409 51% 576 63% 715.7€1,000 to €4,000 607 82% 703 62% 1,073 70% 1,214.9Above €4,000 787 76% 1,460 68% 2,096 73% 2,812.8Note: Median data for bonuses, options, and stock represent the median value of award/grant (in €000s) for thesubsample of CEOs actually receiving awards/grants during the 2008 fiscal year. US dollar-denominated dataare converted to Euros using the 2008 year-end exchange rate (€1 = $1.3919).Table 3.5 compares base salaries and the prevalence of contingent-pay practices in thetwo continents. Median base salaries for CEOs are fairly similar on both sides of the Atlantic,and the percentage of CEOs receiving bonuses in 2008 was only slightly higher in the USA.However, conditional on receiving a bonus, USA bonuses are much higher: the medianbonus paid in the US of €603,000 is 60% higher than the median bonus paid in Europe.American CEOs are more likely to receive option grants than their European counterparts(58% in the USA versus only 15% in Europe). In addition, they are likely to receive muchlarger grants: the median option grant in the US (for CEOs receiving options) of €950,000 isten times the median grant value for European CEOs (who receive only €95,000). Finally,Table 3.5 shows that 45% of European CEOs receive restricted stock or performance shares,while 65% of US CEOs receive similar grants. The value of the grant (for those receivinggrants) is much higher in the USA (€1,215,000 vs €490,000).3.2.3. Pay-Performance RelationsIn Section 2.3.1, we noted that the relation between CEO wealth and shareholderwealth for USA executives primarily reflects their holdings of stock and options. Table 3.6presents estimates of “CEO Wealth” (defined as the year-end value of stock and optionholdings) for European and USA executives, based on ExecuComp-based calculations for-68-
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1. INTRODUCTION 12. A PRIMER ON EXE
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