11th January 2012
The first question is relatively easy to answer. On the Motley Fool, blogger czander points to an historic Towers Perrin (now Towers Watson) survey suggesting significant differences between CEO pay in different countries:
"In Germany the ratio between the CEO and lowest paid worker is 12 times; France 15 times; Britain, 22 times. In America it rises to between 400 and 500 times. The country that comes closest to the American ratio is Venezuela's CEO's at 50 times the average pay. Japan prides itself at having the smallest disparity in salary between executives and their employees."
This conclusion has been supported by other surveys. For example, a compensation study by the DSW investors' association found: "CEOs in Germany earned on average 4.5 million euros in 2010, higher than in France (just over 3 million euros) but below Switzerland, where 5.3 million euro is the average. Germany falls far behind countries like the United States, which has the highest rates of executive compensation. American top bosses earn on average 12 million euros."
A number of explanations have been offered for the discrepancy between executive pay in different countries. These are among the most useful: First there are structural reasons: "One of the key factors sustaining powerful CEO's in the U.S. is the practice of CEO duality which assigns the CEO a dual role as Chairman of the Board. This practice is used in 80 percent of large, public firms in the U.S., and it dilutes the ability of the Board of Directors to exercise its responsibility as an oversight function."
But the article also highlights cultural reasons: "Cultural norms invariably influence CEO pay decisions. Research has found clear, significant relationships between CEO compensation practices and national culture. Japan is a collectivistic society. There is an emphasis on teamwork and group effort. CEO's in Japan can be expected to consult more frequently with their peer group of executives and make more consensus-based decisions. In addition, Japan can be expected to be less tolerant of high CEO pay since high pay dispersion and low income equality would produce social tension. There is a high emphasis placed on internal equity and low use of variable pay."
The problem for investors is that, rather than an equalisation of executive pay globally, company management seems, increasingly, to be rewarding itself according to US norms. Convergence theory suggests that executive pay may become the same worldwide as a result of globalisation, but there is no reason why it necessarily would it would universally move higher to compete with the US.
One of the key arguments against imposing any cap on executive pay is that it would cause UK executives to move abroad. The theory goes that talent is mobile and will shift elsewhere (mostly to the US) if executives are not allowed to remunerate themselves according to the global market. Yet, Germany already has a cap on executive pay, brought in in 2009 – and yet has seen no apparent ‘brain drain' abroad.
The problem of executive pay is increasing in emerging markets – Firstpost did a quick comparison of the 20 top earners among CEOs in India with the Top 20 in the Forbes list of highest-paid CEOs in the US and found that our topdogs have nothing to complain about…. Taken together, the average purchasing power-based adjusted salary of the Top 20 Indian CEOs, at $9 million, is less than 25 percent shy of the US Top 20 average of $ 11.4 million."
Executive pay differs from country to country, but it is moving higher towards the norms of the US. At the moment, cultural differences have acted as a brake for many companies, but this may not last. The argument that talent will move abroad if curbs are imposed has yet to be proven. Cridland is only partially right.
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