That American CEOs are more highly compensated than their peers around the world is hardly news—although exactly how much more might be. The pay premium for being a U.S. CEO is 100 percent or more when looking at median total direct compensation, according to FW Cook’s 2018 Global Top 250 Compensation Survey, which analyzed pay data for the chief executive and chief financial officer roles at the world’s 250 largest listed companies.
That significant pay gap is entirely due to performance-based pay, largely in the form of long-term incentives (LTI). In fact, American CEOs’ base pay is actually lower than that of CEOs in Europe and Australia. “The median base pay in the U.S. is $1.4 million compared to $1.74 million in Europe and Australia,” says David Cole, managing director at the executive compensation consulting firm FW Cook, which teamed up with its global partners FIT Remuneration Consultants in London and Pretium Partners in Hong Kong to conduct the trio’s inaugural international compensation survey. “The bonus packages are a bit higher in the U.S.—the median target bonus opportunity is 175 percent of base pay in the U.S. compared with 100 percent in Europe and Australia—but it’s the longterm incentives that really stand out.
Asia lags on every component of compensation, with a median base pay of just $257,000, median bonus target of 87 percent and almost nonexistent longterm incentive pay. However, this is largely due to regulations and state ownership of some of the largest companies in Asia. “Approximately 60 percent of the large market cap companies in Asia are Chinese state-owned enterprises, where pay levels are regulated by the Chinese government,” explains May Poon, managing partner at Pretium Partners. “That leads to significantly lower pay levels among those companies.”
In other cases, large Asian companies are family-owned enterprises where top executives who have large stakes in the company stand to profit in ways other than compensation from its success. For example, executives might receive dividends from the company, which are taxfree in some locations, such as Hong Kong, rather than taxable base or incentive pay.
While the majority of public companies in all regions strive to align pay with performance, to what degree and how they go about that varies widely both between and within regions. Compensation is significantly more weighted toward long-term incentives in America, whereas pay is relatively evenly allocated between base salary, annual bonus and long-term incentives in Europe and Australia. Pay is more weighted toward base salary in Asia, where long term incentive pay is far less common and more likely to be tied to an event such as an IPO or merger than based on a financial metric.
CEO/CFO Pay Ratio
The gap between CEO pay and that of CFOs represents another significant difference in global pay practices. The discrepancy is largest in the U.S., where CEOs tend to earn three times as much as their CFOs. In Europe and Australia that gap narrows, with CFOs earning about half as much as CEOs. It’s even smaller in Asia, where CFOs earn about 82 percent as much as their CEOs. Those figures are generally seen as more due to the prevalence of higher pay among American CEOs than higher compensation for the CFO position in other regions. However, the narrower gap in some countries may also reflect greater prominence given to the CFO role, notes John Lee, managing partner of FIT.
“In the UK and sometimes in continental Europe, CFOs serve on the main board of directors, whereas in the U.S. that almost never happens,” he adds. “Also, CFOs are typically the third or fourth highest-paid executives in the U.S. rather than the second most highly paid.” For example, in the U.S., a COO or division president might out-earn the company’s CFO.
Talent Troubles
These global pay discrepancies raise potentially thorny talent issues for large multinational companies. For example, a U.S. company might have extensive operations in Europe or Asia, where base compensation is generally higher. Yet, setting pay for overseas executives on par with local practices when they’ll also be receiving U.S.-level incentive pay will bring their total compensation well above market. “The mix of pay—what portion is salary, what portion is bonus and what portion is long term incentive—flows from where your headquarters and primary stock exchange listing are, but if you’re a large global business listed in Europe you may be competing for talent with equivalent U.S.-based companies,” says Cole.
For global companies, that scenario demands careful scrutiny, notes Lee. “The danger is that in order to hire people out of the European and UK markets— you may need to offer higher fixed pay than you’re accustomed to, and pension arrangements tend to be more generous as well,” says Lee. “But in the U.S., your target ranges for earning incentive pay are wider and that pay is more generous so should you also adjust your performance pay levels because you’re now paying more on salary?”
Governance concerns can also be an actor in global pay practices. “A company may find itself benchmarked as a European company from a corporate governance and proxy advisory perspective in terms of how compensation standards that vary by jurisdiction are applied,” Cole explains. “Yet, they are competing for talent in a U.S. pay market.”
Ultimately, as more companies consolidate and expand, the need to weigh and address these issues will become more prevalent in our increasingly global marketplace, he adds. “Every company’s situation is unique so there are always a lot of variables, as well as the perspectives of management, the board and other stakeholders to consider. The important thing is to go through the process and make a considered, conscious decision that balances the various business and human resources objectives.”
