Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Saturday, June 17, 2006

Transatlantic Pay Gap Shrinking

Today's New York Times reports on the shrinking pay gap between U.S. and European companies. Asian CEOs, however, are still paid less than their U.S. and European counterparts.

Why is the gap narrowing? Among the possibilities are:

1. Comparisons are more frequently international. When Pearl Meyer, Mercer, Hewitt and similar consultants do pay comparisons and characterize executives' pay as 25th, 50th or 75th percentile, they may be looking around the globe for comparators. Due to U.S. disclosure rules, it's fairly easy to see how much executives here make. The proxy statement disclosure about pay, perquisites and stock ownership is quite extensive. Companies also file employment agreements with executive officers as exhibits to their 10-Ks, making it very easy for competitors to know exactly what the compensation arrangement is with a particular executive.
2. U.S. laws are now a bit more strict when it comes to executive pay. Congress passed Internal Revenue Code section 162(m) several years ago, prohibiting deductibility of executive compensation that exceeds $1 million unless several hoops are jumped through by the company's compensation committee and shareholders. In addition, companies are now more focused on governance with respect to executive pay after high-profile scandals and the Disney and NYSE litigation.
3. European companies with U.S. operations are compensating the head of the U.S. operations in line with U.S. standards. This pressures the company to reward its headquarters executives commensurately, as well.

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