The Executive Compensation Controversy - Fondazione Rodolfo ...

More documents

Recommendations

Info

THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISUSA CEOs and BoardEx calculations for European CEOs; BoardEx estimates are availablefor 70% of our sample executives. 86 Table 3.6 shows the median CEO Wealth expressed ineuros and also as a fraction of cash compensation (salary and short- and long-term bonuses)and the company’s market value of equity. Since the stock-market crash in late 2008substantially impacted CEO Wealth (especially the value of stock options), we show CEOWealth both pre-crash (2006) and mid-crash (2008). We provide results by country, forEurope taken as a whole, and for Europe without the UK.As shown in Table 3.6, the median European CEO held €1.9 million in stock andoptions at the end of 2008, down from €4.2 million two years earlier. 87 In comparison, themedian USA CEO held €7.0 million in stock and options at the end of 2008, down from€20.0 million in 2006. Expressed as a ratio of cash compensation, the median EuropeanCEO held stock and options worth about 4.1 times cash pay in 2006, and 2.2 times cash payin 2008, while the corresponding ratios for USA CEOs was 14.3 and 6.3. Finally, expressedas a percentage of the market value of outstanding equity, the median European CEO’swealth was .29% and .33% in 2006 and 2008, respectively, compared to .98% and .65% forUSA executives over the same time period.The difference between the stock and option holdings of USA and European CEOs iseven more dramatic after excluding data for UK executives, who look much more like theirUSA counterparts than they do their European counterparts. As shown in Table 3.6, themedian CEO in Continental Europe held options and stock worth only €1.2 in 2008,representing 1.3 times the median CEO’s cash compensation, and .09% of the value of thefirm’s outstanding equity. For comparison, the median UK CEO held options and stockworth only €1.9, representing 2.2 times the median CEO’s cash compensation, and .62% ofthe value of the firm’s outstanding equity.86 Year-end vaues for unrestricted and restricted stockholdings for our USA CEOs are calculated as thenumber of shares held multiplied by the year-end stock price. The year-end value of stock options for USACEOs are calulated using the Black-Scholes formula for each option held at year-end, using 70% of theremaining term as an ajustment for early exercise. BoardEx defines year-end values as “the value of total equityheld + value of LTIP held + estimated market value of options held”). We have not obtained BoardEx CEOWealth data for Ireland or Switzerland, and these countries are therefore left out of the analysis.87 The distribution of holdings is naturally skewed: the average European CEO (not reported in the Table)held €37.0 million and €21.7 million in stock and options in 2006 and 2008, respectively.-69-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISTable 3.6CEO Wealth in Company Stock and Options in 2006 and 2008, by CountryMedian CEO Wealthin Stock and Options(€mil)Median Ratio ofCEO Wealth toSalary and BonusMedian Ratio ofCEO Wealth toMarket ValueCountryFirms(2008)2006 2008 2006 2008 2006 2008Belgium 10 €0.6 €0.5 0.7 0.9 0.03% 0.05%France 141 4.0 1.3 3.8 1.5 0.09% 0.13%Germany 48 0.9 1.7 0.8 1.6 0.05% 0.11%Italy 52 4.9 1.3 3.2 1.2 0.12% 0.05%Netherlands 55 3.2 1.4 2.7 1.6 0.11% 0.15%Spain 17 1.9 0.6 3.2 0.7 0.02% 0.02%Sweden 46 0.8 0.3 1.0 0.5 0.03% 0.07%United Kingdom 382 5.7 2.3 5.2 3.0 0.56% 0.62%All Europe 751 4.2 1.9 4.1 2.2 0.29% 0.33%Europeexcluding UK369 2.6 1.2 2.4 1.3 0.07% 0.09%United States 1493 20.0 7.0 14.3 6.3 0.98% 0.65%Note: CEO Wealth is defined as the fiscal year-end value of the CEO’s stock, restricted stock, and the Black-Scholes valueof stock options. Sample includes all companies from Table 3.2 where their are sufficient data to calculate year-endportfolios. European data are from BoardEx; USA data (including Black-Scholes values) are calculated by us basedon year-end option holdings. Market Value is the year-end market value of the firm’s equity. Monetary amounts arein 2008-constand Euros. CEOs with zero holdings of stock and options are excluded. US dollar-denominated dataare converted to Euros using the 2008 year-end exchange rate (€1 = $1.3919).In Section 2.3.1, we measured pay-performance sensitivities based on each executive’syear-end holdings of stock, options, and restricted stock. We constructed “EffectiveOwnership Percentages” by weighting each option by its “Option Delta” (that is, the changein the value of the option associated with an incremental change in the stock price). ForCEOs without stock options, the ratio of CEO Wealth to Market Value in Table 3.6 will beequivalent to our measure of effective ownership. However, for executives holding options,effective ownership will be higher than the ratio Table 3.6. For example, an option that iswell in the money will provide effective ownership equal to a share of stock, and yet thevalue of the option will always be less than the value of the share of stock. Similarly, sincethe value of an option falls faster than the Option Delta as stock prices fall, an option that iswell out of the money will also provide effective ownership in excess of the value of thatoption divided by the market value of the outstanding equity. For example, for the USA-70-
Page 2:
1. INTRODUCTION 12. A PRIMER ON EXE
Page 5 and 6:
THE EXECUTIVE COMPENSATION CONTROVE
Page 7 and 8:
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22: THE EXECUTIVE COMPENSATION CONTROVE
Page 71: THE EXECUTIVE COMPENSATION CONTROVE
Page 123 and 124:
Page 125 and 126:
Page 127 and 128:
Page 129 and 130:
Page 131 and 132:
Page 133 and 134:
Page 135 and 136:
Page 137 and 138:
Page 139 and 140:
Page 141 and 142:
show all

The Executive Compensation Controversy - Fondazione Rodolfo ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?