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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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September 24, 2007 12:01 AM ET
Bloomberg
OVER THERE Deutsche Bank's Josef Ackerman (left), Bayer's Werner Wenning and Novartis' Daniel Vasella are among the highest-paid execs in Europe, but their pay packages pale in comparison with those of U.S. CEOs.
In 2006, the average CEO of an S&P 500 company received $14.78 million in total compensation—a 9.4% increase over 2005, according to the Corporate Library. Not bad. By contrast, the 20 highest-paid European executives made one-third as much as the 20 highest-paid U.S. executives, according to a recent report by the Institute for Policy Studies and United for a Fair Economy. Last year, the 20 highest-paid U.S. corporate CEOs made, on average, $36.4 million, compared with the $12.4 million European CEOs made. Furthermore, the Europeans led larger firms. On average, the 20 European firms with the highest-paid executives on the continent had sales of $65.5 billion, compared with $46.5 billion for the 20 U.S. firms. The report, Executive Excess 2007, concluded that if U.S. CEOs really needed excessive compensation to do their jobs, European executives would be just as excessively compensated. While the Executive Excess report looked at only the top 20 highest-paid executives, experts say the pay gap runs across the board. According to Hay Group data, on average, U.S. executives are paid approximately 50% more than Europeans doing the same jobs, said David Wise, a consultant with Hay Group’s New York metropolitan executive corporate practice. The differences are not just in overall pay levels, but in how that pay is structured. The mix depends on whether the executive is the CEO or another executive, said Mr. Wise, but in the U.S., a much greater proportion of overall compensation tends to be in long-term incentives rather than in base salary or annual bonuses. According to the Hay database for top executive compensation, in the U.S., executive long-term incentives are approximately 150% greater than in Europe. “U.S. packages provide significant upside through long-term incentives,” he said. European executives, by contrast, receive more of their compensation as base pay. According to the Hay Group, European CEOs have base salaries that are roughly 20% greater than those of their U.S. counterparts. Overall, said Mr. Wise, the compensation mix in European packages is 33% base, 33% bonus and 33% long-term incentives. In the U.S., the mix is typically 20% base, 25% bonus and 55% long-term incentives. Another significant difference is that the risk profile of the equity compensation portfolio is much greater for European executives. “Not only are U.S. executives getting greater value in their long-term incentives,” Mr. Wise explained, “but there is also a greater chance that they’ll pocket that value than European executives.” In the U.S., he said, equity grants generally have no additional performance conditions other than time vesting. In Europe, however, equity grants generally have additional performance conditions. For example, options may only vest if the firm exceeds the median of a peer group in total shareholder return. The long-term incentive portfolio is also more diversified in the U.S. than in Europe, further lessening risk. Mr. Wise explained that in the U.S., firms typically grant more than one equity vehicle, for example, stock options and time-vested restricted stock. In Europe, he said, firms typically grant only one vehicle. “More vehicles spread the risk by providing diversification,” he said. There are a number of reasons to explain the differences in pay levels. Most prominently, said Richard V. Smith, a senior vice president and principal with Sibson Consulting in New York, European shareholders get to vote on executives pay levels. “Europeans,” he said, “are more advanced in giving shareholders a say on what kind of pay packages executives get.” In the U.S., shareholders do not have that right, although some companies, such as Verizon, have agreed to allow shareholders to vote on executive pay. Over time, the U.S. will move closer to the European model, Mr. Wise predicted. Shareholders are demanding greater accountability on executive pay than ever before, he said. Furthermore, shareholders no longer accept the argument that pay awards are justified because other companies are providing them. FW
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