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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISTable 3.8Regressions showing the time trend in the USA Pay Premium after adjusting for size andindustry, 2003-2008Dependent Variable:Ln(CEO Total <strong>Compensation</strong>)Independent Variables 2003 2004 2005 2006 2007 2008Intercept 3.960 4.257 4.262 4.208 4.5895 4.5498USA (Dummy).7846(4.4).8209(4.1).8519(4.0).6227(3.4)0.5608(2.5)0.7037(4.4)Ln(Lag Sales).3951(9.6).3730(12.8).3824(15.1).4036(12.6)0.3630(11.6)0.3537(15.4)Consumer Goods.0167(0.3)-.0479(-1.5).0122(0.3)-.1016(-2.8)-0.1648(-3.9)-0.1520(-2.7)Hi-Tech Industry.3187(3.0).2146(2.2).2204(4.8).0908(1.8)-0.0367(-0.9)0.0483(1.0)Financial Services.3404(9.0).2307(6.0).3358(9.3).2737(4.7)0.0582(1.3)-0.0779(-1.8)Health Services.5193(6.8).4434(3.7).3865(4.2).3223(5.6)0.2368(2.7)0.2675(2.8)Other Industry.0857(1.8).0411(0.8).1651(2.5).0905(1.9)-0.0829(-1.4)-0.1258(-2.3)Implied USA Pay Premium 119% 127% 134% 86% 75% 102%Sample Size 2615 2696 2824 2944 2838 2578R 2 .4082 .3616 .3644 .3528 .2864 .2984Note: t-statistics in parentheses, based on standard errors clustered at the country level.Table 3.8 also suggests interesting (but not unexpected) time trends in the industryeffects. In 2003, CEOs in financial services pooled across both continents earned 40% morethan CEOs in manufacturing firms (the omitted category in the regression). <strong>The</strong> “financepremium” fell to 6% in 2007. In 2008, the year of the crash, the finance premium became adiscount, as CEOs in financial services received 7.5% less in expected compensation thantheir counterparts in manufacturing firms. We will explore compensation practices within thefinancial services industry in more detail in Section 0.In our study of 2006 CEO pay across 27 countries (Fernandes, Ferreira, Matos andMurphy (2009)), we find that at least some of the USA Pay Premium can be explained bycontrolling for firm and CEO characteristics beyond size and industry. In that spirit, Table3.9 reports results from regressions with several additional control variables: Tobin’s Q (the-77-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISratio of market value to book value, often used to proxy for growth opportunities); ForeignSales as a fraction of total sales (used as proxy for activity in the global product market);inclusion in the MSCI All-Country World Index (inclusion in the index increases globalinvestments of the company stock); Institutional Ownership (separated into “domestic” or“foreign” ownership based on the location of the institutional investor); and dummy variablesfor whether the CEO also holds the position as chairman, is in his (or her) first year as CEO,and was hired from outside the firm (instead of being promoted from within).As shown in column (1) of Table 3.9, CEO pay is significantly related to prior-yearsales (as before), and also to foreign sales and domestic institutional ownership. CEO pay isalso lower during a CEO’s first year, plausibly reflecting partial-year pay for outside hires,and partial-year CEO-pay for inside promotions (who were presumably in a lower-paidposition before their appointment). Most importantly for our purposes, including theseadditional control variables reduces the estimated 2008 USA Pay Premium from 102%(Table 3.8) to 56%.Columns (2) and (3) of Table 3.9 present separate regressions for European and USACEOs. While not informative about the USA Pay Premium per se, these regressions areinformative about whether the determinants of pay vary across the two continents. Severaldifferences emerge. First, 2008 CEO pay varies with Tobin’s Q in Europe but not in theUSA. Second, while CEO pay is significant higher for USA CEOs who also serve as boardchairmen, pay is significantly lower for European CEOs serving in a dual capacity. Inaddition, while CEOs hired from the outside command a significant premium in the USA,there is no similar premium in Europe. Also, while CEOs serving in their first year receivelower pay in Europe, there is no pay difference in the USA for CEOs serving in their firstyear.-78-
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1. INTRODUCTION 12. A PRIMER ON EXE
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