The Executive Compensation Controversy - Fondazione Rodolfo ...

THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSIS• receive most of their compensation in the form of base salaries;• receive three-fourths of their compensation in salaries and bonuses, but bonuses do notappear to vary with shareholder return, accounting performance, or sales growth;• receive less than 12% of their pay in the form of stock or options;• hold relatively little stock relative to their cash compensation or firm value.Overall, we find evidence of strong pay-performance sensitivities in the UK, althoughthey still lag considerably behind their counterparts in the US. We also find some evidencethat bonuses vary with performance for German CEOs. But, for the rest of Europe, we findno evidence that executives on average have incentives aligned with the interest of companyshareholders.3.3. The Transatlantic Pay DivideTable 3.2 compared average and median pay for CEOs in the USA and the tenEuropean countries without adjusting for company size or other factors that might effectcompetitive levels of pay across the two continents. In this Section, we will dissect the USA“Pay Premium” more carefully, analyzing time-trends and seeing how much of the observedpremium can be explained by economic factors.As a starting point, Figure 3.1 depicts the level and composition of total compensationfor the USA and ten European countries after controlling for size and industry. In particular,the figure shows the compensation for a CEO in a manufacturing firm with €1 billion inrevenues, estimated from the coefficients of a regression of ln(CEO Total Pay) on ln(LaggedSales), five industry dummy variables, and dummy variables for each country. The paycomposition percentages in the figure are constructed by first calculating the compositionpercentages for each CEO, and then averaging across all CEOs in each country. Countries inFigure 3.1 are sorted in descending order in terms of total estimated pay. The CEO of a USAmanufacturing firm with €1 billion in prior-year sales is predicted to earn total compensationof €2.2 million annually in 2008, nearly 40% more than the next highest countries (UK andIreland with expected pay levels of €1.6 million and €1.4 million, respectively), and morethan double the predicted compensation for continental Europe. Estimated total pay levels forGermany, the Netherlands, Italy, Switzerland, Sweden, and Belgium are in a statistical deadheataround €1 million, followed by France with €700,000 and Spain with a relative paltry€400,000.-75-