Carpe Diem

Aren’t US CEOs overpaid vs. non-US CEOs? Maybe not.

A new academic research paper in The Review of Financial Studies titled “Are U.S. CEOs Paid More? New International Evidence,” challenges the commonly held view that the compensation of US CEOs is higher than their non-U.S. counterparts.  Here’s the abstract:

This paper challenges the widely accepted stylized fact that chief executive officers (CEOs) in the United States are paid significantly more than their foreign counterparts. Using CEO pay data across fourteen countries with mandated pay disclosures, we show that the U.S. pay premium is economically modest and primarily reflects the performance-based pay demanded by institutional shareholders and independent boards. Indeed, we find no significant difference in either level of CEO pay or the use of equity-based pay between U.S. and non-U.S. firms exposed to international and U.S. capital, product, and labor markets.We also show that U.S. and non-U.S. CEO pay has largely converged in the 2000s.

Here are some of the interesting findings presented in Table 1 of the paper:

1. Average CEO compensation in the US of $5.5 million in 2006 was less than the average CEO compensation in Switzerland of $6.1 million in that year, and just slightly ahead of the average CEO compensation in Italy of $5.2 million.

2. Both the mean ($5.5 million) and median ($3.3 million) CEO pay in the US was roughly twice the mean ($2.8 million) and median ($1.6 million) CEO pay for non-US companies in 2006.

3. The average percentage of total CEO compensation paid as base “salary” was lowest in the US (only 28%) among the 14 countries studied, and highest in Sweden (62%); and the average for non-US countries was 46%.

4. In the US, 72% of total CEO compensation (versus 54% for non-US CEOS) are non-salary items that include bonuses (27% vs. 24% for non-US CEOs), stock and options (39% vs. 22% for non-US CEOs) and other (6% vs. 8% for non-US CEOs).  ‘

In other words, the composition of CEO compensation is much different in the US than in other countries (must less weighted towards base salary, and much more weighted towards performance and outcomes), making comparisons difficult without adjusting for these differences in compensation.

Here’s how the paper concludes:

We find convergence toward U.S. pay practices by non-U.S. firms that have a higher fraction of foreign sales and shares held by foreign institutional investors and internationally diverse boards. Similarly, we find that CEO pay in non-U.S. firms is no different (compared with U.S. firms) in the non-U.S. firms that are cross-listed on a U.S. exchange, have a high presence of U.S. institutions as shareholders, have U.S. operations, or have directors who also serve on U.S. boards. Our results indicate that U.S.-style equity-based compensation is increasingly exported to non-U.S. firms that are exposed to foreign (and particularly U.S.) capital, product, and managerial labor markets. These findings suggest an increasingly important international managerial labor market for CEOs.

MP: I think the answer to the question in the paper’s title is “No.”

42 thoughts on “Aren’t US CEOs overpaid vs. non-US CEOs? Maybe not.

  1. My working experience would tell me it’s who holds the scorecard. I had a boss when I was younger, that we would bellyache and moan when he asked us to do something unpleasant. He would remind us once in a while that when our performance appraisal was due there was a block on there for ‘cooperation’ and that nobody defined just what ‘cooperation’ was. He said, “Remember who holds the pencil.”

  2. Fortunately, there are economists, including labor economists, who know the difference between an input cost and a output price, income inequality and a labor standard, e.g. a minimum wage, etc.

  3. Income inequality can be good (e.g. generally in the U.S.) or bad (e.g. generally in China). Similarly, a labor standard, e.g. a minimum wage, or an environmental standard, can be too high or too low.

  4. I used to argue online with a liberal nutjob who believed the conventional wisdom that US CEOs are paid way more than their foreign counterparts. Imagine that, a liberal with the wrong “facts.” I was too ignorant on that particular fact to argue the point. thanks for the clarification.

    However, I seem to recall that he might have been talking specifically about big-time financial services guys, heads of hedge funds, investment bankers, private equity, George Soros types, guys who just make money manipulating money. Is there any truth to the idea that American money managers make way more than their foreign counterparts?

    • jd-

      not that i am aware of.

      hedge fund compensation is very straightforward. you get paid 20% of the profits you make for investors. there is some variance (some guys charge 15, some 30) but this does not vary much internationally. you get paid by collecting a lot of assets and turning them into more assets.

      to call that “simply manipulating money” seems to demonstrate a deep lack of understanding of how business and finance work. allocating and pricing capital to move money away from bad investments and toward good ones is a vital part of maintaining a well functioning (and liquid) capitalist economy.

      you may not understand just how vital this is, but if the stock/bond/commodities markets went away you would not like the return to the dark ages it created.

      investment bankers raise money for companies and do mergers and acquisitions. again, that’s not “just manipulating money” it’s incredibly tangible.

      i think you may need to learn a bit more about this industry. your criticisms seem based on a lack of understanding.

      • You have completely misunderstood my comments. They were not criticisms. It was to differentiate between CEOs of typical corporations who manage people and production vs. what Tom Wolfe called the Masters of the Universe, financial types who couldn’t even explain to their children what they did to make a living. Your response was insulting.

          • no jd, you did not understand it.

            you seem to have learned everyhting you know about finance from bonfire of the vanities.

            if, for example, someone gets paid 20% of the profits they make, how can they be overpaid? it’s about the fairest model out there. it’s all performance based.

            investment bankers get paid when they raise capital or facilitate deals.

            i run a hedge fund. i know dozens of others that do and man, many investment bankers.

            none of us would have trouble explaining what we do.

            you are the one being insulting, though it appears to be out of ignorance, not malice.

            just because you and tommy wolf do not understand what we do, does not mean we do not.

            what, do you think capital just accumulates and allocates itself? does the world not need capital?

            why is being an investment banker any different than being a realtor or a guy who sells boats?

            at the end of the day, an i-banker is a sales guy.

            wrapping your ignorance in wounded pride does nothing to make your case.

    • I run a trading firm and my investors and I have a contract in which how I get paid is clearly outlined. If they don’t like it, they are under no obligation to invest with me. They are free to try to renegotiate a new deal with me. In other words, it’s between me (and my other partners) and them. Your little friend is not part of that equation. He doesn’t factor in at all. Neither he nor his uninformed opinion matters.

      I might work out a deal with an investor where I guarantee 100% of his capital and he will pay me 80% of everything I make for him. Does your friend think that’s fair? I don’t care. The only person who matters to me is the one putting up the capital. I make a lot of money because I’m good at what I do and there are people who think so too and they are the only ones who matter. Most of my American counterparts make a lot less – even with the same compensation structure. How much we make depends on how much money we make for our investors.

      Also, we don’t “manipulate money”. That “term” belies your friends utter ignorance on the subject of investment and trading. The guys “manipulating money” are at the Fed. Direct his attention there.

        • financial types who couldn’t even explain to their children what they did to make a living. Your response was insulting.

          You insult me by telling me that I can’t explain what I do (I can. Maybe neither you nor Tom Wolfe can understand it. That’s a different issue) and you call my answer insulting? You pontificate on issues you know nothing about and are one of your business.

          • And to think I’ve defended guys in your line of work. Fortunately, the ones I’ve met are not like you

          • Absolutely. Because we all know that good, moral people like you defend the rights of people they like. That’s what makes for a good, moral and free society. You’re no better than your libtard internet friend. Don’t kid yourself. And you you’re not much of a man either. You start sniveling faster than any girl I’ve ever met.

          • “And to think I’ve defended guys in your line of work. Fortunately, the ones I’ve met are not like you”

            wah, wah, the mean old wall street people exposed my ignorance! wah!

        • Don’t kid yourself. And you you’re not much of a man either. You start sniveling faster than any girl I’ve ever met.

          Wait a minute!

          Now I’m insulted by your dismissive treatment of snivelers. I’ll have you know I took graduate level courses in sniveling as part of my major in ax grinding.

          Take that back or I’ll show you what REAL sniveling is like.

          :)

          • LOL! Ron, if there’s anything you have absolutely no expertise in it’s sniveling! You’re also no good at stupidity. You are cursed!

          • Why, thank you, Methinks! :)

            Actually I think there has always been a suspicion of people who provide value to others without there being something physical to see.

            It’s always been easy to see farmers working hard to grow produce to sell, and we understand easily that they should be rewarded for there efforts, but it’s harder to see the value provided by the traders and merchants who bring all those various products to one location for our convenience. They don’t appear to be “making” anything.

            Even John Mackey might appear to be providing food in his stores, although he doesn’t produce any of it.

            But you and morganovich? What folks in finance do is invisible. Those who don’t know any better believe you are “reaping huge rewards” that you don’t deserve. They don’t understand, as you pointed out, that people *voluntarily* pay you to do what you do, and therefore it must have great value.

            In my opinion you guys should get more recognition and appreciation for your tireless efforts in the never ending “war on mediocre returns to investors “.

          • Thank you, Ron, but I don’t want public appreciation and especially public recognition. I am recognized and appreciated in my profession by the people in my profession that I respect most. I just want the public to leave me alone.

          • Even John Mackey might appear to be providing food in his stores…

            I guess John Mackey doesn’t only appear to, but actually DOES provide food in his stores.

            My kingdom for an edit button!

          • “Actually I think there has always been a suspicion of people who provide value to others without there being something physical to see”

            you mean like psychologists, teachers, lawyers, advice columnists, doctors, etc etc?

            it’s funny how wall st gets singled out for not making somehting tangible when neither does half of america.

          • you mean like psychologists, teachers, lawyers, advice columnists, doctors, etc etc?

            it’s funny how wall st gets singled out for not making somehting tangible when neither does half of america.

            Perhaps it’s not so surprising if you consider the influence of Christian ethics in Western societies. Wealth and the handling of money are disdained as impediments to faith. “It’s easier to pass a camel through the eye of a needle…” the story of Jesus casting the money changers out of the temple, and the term “filthy lucre” for example.

            Even psychologists, teachers, lawyers etc. are seen to be doing something useful, and often portrayed on TV as sympathetic characters.

            But hedge fund managers? Ewww! – creepy money manipulators.

            Listen, I understand the importance of the job you and Methinks do as Deputy Invisible hands, but it’s not widely known to the general public.

            Perhaps as members of the MCGA (Money Changers’ Guild of America) you and Methinks could lobby for more frequent depictions of traders and fund managers in a positive light on popular TV programs such as CSI and NCIS.

            T-shirts maybe?

  5. this study would be very interesting to extend and adjust for the size of the companies and their profitability.

    eg. if a us CEO gets X for running a $200bn co with $10bn in profit and an italian CEO gets X for running a $300bn co with no profit, i think the italian would be overpaid.

    if us companies are, by and large, more profitable than foreign counterparts, then one would expect this.

    further, on a risk adjusted basis, making $5 million with 70% performance based comp based on share-price etc is actually getting paid a great deal less than $4.5 million in cash.

    i do wonder a bit about the sample set they used. this look like they only used VERY large companies. if small companies had been included, this number would have dropped a great deal.

    • And still, that’s between the shareholders and the CEO. How much public school teachers get paid is my business because I’m the one shaken down to line their pockets. How much the CEOs of Fannie and Freddie get paid is my business because I am mugged to rob their pockets.
      How much a CEO of a private company I am not personally invested in gets paid is none of my business.

      What I think is better (and something missed by the dimwitted public) is that more American compensation comes in the form of variable compensation. When the company doesn’t do well, neither do the CEOs and other officers. There is no obligation to pay out big comps in bad years. In fact, traders with expected compensation in the seven and eight figures have base salary rates of no more than $175K. Everything else is variable and that’s typical on Wall Street.

      Unfortunately, the variable portion of the compensation is called a “bonus” and that gets the peasants with pitchforks mighty agitated.

  6. After rereading the comments above directed at me, from morganovich and especially from methinks, it’s no wonder that Wall Street has its reputation. If methinks is truly a money man like he says, his comment burnishes the stereotype of the insufferably arrogant stock trader.

    • I am a woman, for the record. If you define (and, make no mistake, you do) “insufferable arrogance” as someone who considers her private business none of your business and eating what she kills instead of insisting that legislators force someone to pay her more than she is willing to earn honestly, then I am proudly insufferably arrogant and will always be proud to be so.

      You are an insufferable busy-body who wishes to impose his changes upon others in areas he doesn’t even begin to understand. What I get paid is between me and the people who pay me. On what planet is it appropriate for you or your little internet buddy to stick your noses into my private affairs? Perhaps we should examine if you’re worth what you’re being paid instead.

        • Well, if that’s true, then I’m very sorry. What exactly was I meant to understand in the following statements (besides that you’re completely ignorant of the subject)?:

          “It was to differentiate between CEOs of typical corporations who manage people and production vs. what Tom Wolfe called the Masters of the Universe, financial types who couldn’t even explain to their children what they did to make a living.”

          “Big-time financial services guys, heads of hedge funds, investment bankers, private equity, George Soros types, guys who just make money manipulating money”

          Also, what business is it of yours how much anybody who is not paid out of the public trough makes? Why is it even an appropriate topic of conversation?

        • It is sheer arrogance to assume that you have any right to judge or interfere with private contracts entered into voluntarily by able adults.

      • Do you see no difference between what you do and what the CEO of say, Whole Foods does?

        Whatever gave you the mistaken idea that I wanted to interfere with private contracts?

        Your defensiveness on this really makes me question your cred. It’s hard to believe that a successful trader, hell, a successful anyone, would jump so ugly just because I called him a money manipulator

        • You differentiate between people who work in finance and people who work at a car manufacturer for what reason then?

          No, I don’t see a difference in principle. John Mackey commits capital on behalf of himself and his investors and runs a portfolio of assets and so do I. That you see a material difference demonstrates only your ignorance.

          You’ll have to forgive me for not caring if some random dude on the internet finds me credible. Again, the only people whose opinion I care about are those whom I know and respect and those who invest with me. What random dudes on the internet think of me personally is completely immaterial. We’re dissecting your ridiculous assertions and dumb arguments – arguments you have so far, and by your own admission, not been able to communicate adequately or substantiate.

          • Methinks,

            “What random dudes on the internet think of me personally is completely immaterial”

            Heh. I can’t speak for all random dudes on the internet, but this one thinks you kick ass!

        • BTW, if you think that I completely misunderstand you, please feel free to restate your argument and explain to me exactly where I read you wrong and what your position really is. I’m happy to be wrong about you, but you’ve written nothing in your many attempts thus far to suggest that I am.

    • actually jd, you have it backwards. you are burnishing the reputation of the loudmouthed, know nothing rube.

      you clearly have no idea what wall st does for a living and how the business works. you have taken a work of fiction as a map of reality.

      anyone fool enough to say things like “guys who just make money manipulating money” and “what Tom Wolfe called the Masters of the Universe, financial types who couldn’t even explain to their children what they did to make a living.” has proven that.

      you do not have even the basic understanding required to engage in the criticism you have.

      this is not an insult, it’s a fact.

      if you want to see where the insults started, look to your own writing about wall streeters who could not even explain what they do. it’s an insulting and absurd trope that populists tell themselves to try to feel better about not understanding .

  7. The whole point of your ugly rantings is that I somehow, somewhere have said that I thought some people made too much money and that it was my right to determine how much anyone makes. show me where I have said that.

      • You’re the one who made this an ugly thread. Show me where I am “an insufferable busy-body who wishes to impose his changes upon others in areas he doesn’t even begin to understand.” or where me and my “little internet buddy stick our noses into your private affairs?”

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