Executive
Compensation:
Executive compensation packages consist normally of various
components. In order to categorize executive compensation, several distinctions
can be made. It is possible to distinguish between fixed and variable
compensation, between compensation in cash and non-cash compensation and
between deferred and immediate compensation.Fixed compensation comprises in the
first place the salary of the executive which may be regarded as the basis of
the compensation package. In addition, many companies grant their executives
certain benefits and allowances in kind, including the private use of company
cars, aircraft's, financial counselling and home security. Certain companies
also provide for are imbursement for tax liabilities produced by other components
and perquisites obtained by the CEO. The determination of fixed compensation is
usually based on a “competitive bench marking” which employs a general salary
survey and detailed analysis of specific industries or market peers (Murphy,
1999, p. 9).2 Variable compensation can be structured in a variety of ways and
may be granted on an annual or a long term basis. Annual variable compensation
is either accorded on a discretionary basis, or based on predefined performance
criteria.3 Performance criteria can be based on individual, business unit or
corporate performance and may include thresholds or ceilings limiting the
amount of payment (Lynch and Perry, 2003). Criticism in some countries, for
instance in the UK, has focused on the fact that the bonus targets remain
frequently unpublished. Further, Bruce et al. (2007) find an increasingly
complex structure of bonus targets which is linked to higher bonus pay but not
to higher shareholder return.
EXECUTIVE
COMPENSATION COMPARE IN ACROSS COUNTRIES
This section looks at executive pay in six countries where
disclosure practices permit comparisons. The six countries in question cover a
wide geographical scope. They are Australia; Germany; Hong-Kong, China; the
Netherlands; South Africa; and the United States. For each of these countries,
executive pay in the 15 largest companies is examined. The companies are
selected on the basis of the “Forbes’ “Global 2000” ranking of 2008”.4 This
helps to identify companies according to the same uniform for all the countries.
As suggested by theory (Murphy (1999)) and established by empirical research in
various countries, including in the US (Tosi et al 1998), Australia (Merhebi et
al (2006)), Portugal (Fernandez 2008) France (Dardour 2008) and Germany (albeit
with mixed results according to Haid and Yurtoglu (2006); Rang 2006), executive
pay increases with company size. This implies that the level of executive pay
in the 15 largest companies is likely to be higher than average executive pay
for the economy as a whole. The purpose of the data provided here is not to
furnish an all-embracing account of compensation practices but rather to
provide a snapshot of developments in the countries concerned in order to show
structural similarities, differences and common trends.5 Because of the
above-mentioned methodological difficulties concerning the calculation of
share-based remuneration, the comparisons are confined to pay components which
do not depend directly on share values (i.e. salary and perquisites, bonuses
and deferred compensation). On average, CEOs earn between $ 1.4 million and
nearly $ 10.3 million per year (plus stock options), that is between 71 and 183
times the wage of the average worker Executive pay in 2007 for the 15 largest
companies in the six selected countries is shown in Table 1. The best paid
executives are in the United States. In that country, average CEO pay exceeds $
10 million per year, that is about 183 times the wage of the average American
worker. Executives in Hong-Kong, China and South Africa are paid much less than
their US counterparts. However, even there, CEO pay represents between 54 and
148 times the wage of the average worker in the two countries.
Tab. 1:
Average Compensation
by employee category, 2007
CEO Average Executive
USD Ratio of compensation per employee USD Ratio of
compensation per employee Australia 6,001,060 135.3 2,415,012 54.5 Germany
6,796,643 147.8 3,767,554 81.9 Hong Kong (China) 2,723,425 160.2 1,075,757 63.3
Netherlands 3,578,286 71.4 2,171,016 43.3 South Africa 1,370,824 104.4 934,378
71.1 United States 10,309,701 182.6 6,297,870 111.5
It is important to note that these data provide an
underestimate of the total remuneration of executives. Indeed shared-based
compensation is not taken into account. A rough estimate based on available
information suggests that the represent between 25 percent (in Germany) and 60
percent (in the United States). This rough appreciation illustrates that the
total amount of executive compensation would be considerably higher if share-based
compensation were taken into consideration. To a significant extent, executive
pay depends, in principle, on individual and firm performance. In Australia,
German, Hong-Kong, China and the United States, the variable component exceeds
the fixed component. But even in the other two countries (the Netherlands and
South Africa) the variable component is significant.
Ongoing
policy debates on Executive Compensation
In many countries
proposals have been put forward with a view to mitigate the problems regarding
executive compensation which have been illustrated by this study. Given the
strong differences across countries regarding executive compensation, the
proposals are highly country specific. A number of proposals deal with the
institutional framework in which executive compensation is determined. Some of
those proposals argue for an enhanced role of the shareholder meeting, usually
referred to as “Say on Pay”. The focus of the debate in the United States is
current on a non-binding vote of share-holders on executive compensation
matters. While not providing shareholders with a veto on compensation packages,
shareholders would have an institutionalized platform to express their
disagreement with the remuneration policy of their company (Gopalan, 2007).24
Similarly, a recent proposal of the Austrian trade unions argues for the
strengthening of information rights of the shareholders on executive
compensation matters (Arbeitnehmerkammer Wien, 2008). Other proposals favour an
enhancement of the committee in charge of determination of compensation. For
instance, German trade unions argue for a stronger role of the German
supervisory board and in particular for a more intensive participation of the
employee representatives in the compensation determination process (German
Trade Union Federation 2008). Certain proposals also deal with the amount and
the criteria employed to fix executive compensation. Proposals from German and
Austrian trade unions suggest that, when determining executive compensation,
not only personal performance and firm performance but also other criteria such
as social and environmental sustainability should be taken into account (German
Trade Union Federation 2008 and Arbeitnehmerkammer Wien, 2008). A third group
of proposals deals with a more rigid taxation of executive compensation. It is
suggested that companies should no longer be able to deduct executive
compensation as a business expense. According to these proposals, this would
set a negative incentive for excessively high executive compensation by
increasing the compensation costs of the company. Proposals along those lines
have been put forward, among other, in the US and in Austria (Anderson et al.
2007 and Arbeitnehmerkammer Wien, 2008).
