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Mar 17, 2008 - Vanderbilt University Law School. Law and Economics. Working Paper Number 08-26. International Executive Pay: Current Practices and ...

Vanderbilt University Law School Law and Economics Working Paper Number 0 8 -2 6

International Executive Pay: Current Practices and Future Trends

Randall Thomas

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International Executive Pay: Current Practices and Future Trends

Randall S. Thomas John S. Beasley II Professor of Law and Business Vanderbilt Law School

March 17, 2008

This paper draws on, and updates, earlier research jointly undertaken with Brian Cheffins. I would also like to thank David Wilson, Sofia Hassander, Maximilian Karacz, Anumeha Tanya, Changyu Liao, and Jinhua Wang for their research assistance.


Electronic copy available at:


Introduction International executive compensation practices over the past thirty years can

be classified in a dualistic manner: American pay systems versus those in the rest of the world. The U.S. remuneration approach for top executives is characterized by highly incentivized and lucrative compensation arrangements. 1 The size of these payments has made American CEO pay highly controversial. On the positive side, many commentators believe that option-filled pay packages fulfill a useful function by aligning the interests of shareholders and executives, and that the higher risk levels associated with large option holdings justify bigger amounts of pay. 2 Critics, however, claim that U.S. CEOs compensation is the product of self-serving managerial “rent extraction,” with captured boards of directors paying out ridiculous amounts to selfinterested CEOs.3 In other parts of the world, CEO pay levels have been lower, bonus payments smaller and their remuneration packets have contained fewer, if any, stock options.


For earlier articles that develop similar themes, see Brian R. Cheffins & Randall S. Thomas, Regulation and the Globalization (Americanization) of Executive Pay, in GLOBAL MARKETS, DOMESTIC INSTITUTIONS: CORPORATE LAW AND GOVERNANCE IN A NEW ERA OF CROSS-BORDER DEALS, (Curtis Milhaupt ed., Columbia University Press 2003) [hereinafter, Regulation]; Brian R. Cheffins & Randall S. Thomas, The Globalization (Americanization) of Executive Pay, 1 BERKELEY BUS. L. J. 233 (2004) [hereinafter Globalization]. 2

See, e.g., Kevin J. Murphy, Executive Compensation, in HANDBOOK OF LABOR ECONOMICS 2485, 2551-55 (Orley Ashenfelter & David Card eds., 1999). 3

LUCIAN BEBCHUK & JESSE FRIED, PAY WITHOUT PERFORMANCE (2004). This book inspired numerous critiques. See, e.g., John E. Core, Wayne R. Guay & Randall S. Thomas, Is U.S. CEO Compensation Inefficient Pay Without Performance?, 103 MICH. L. REV. 1142 (2005). For an earlier law review article on this topic, see from Lucian Bebchuk et al., Executive Compensation in America:


Electronic copy available at:


In recent years, a potential trend has arisen toward merging these two pay structures in a global pay regime. 4 However, no consensus exists if this convergence is taking place and some observers believe that the divergence between the U.S. and other countries will persist and may even widen. 5 This chapter asks if we are seeing a possible convergence trend on the executive pay front.6 After surveying American and foreign pay practices, it considers the various factors that could be leading toward, or away, from global pay integration. While it is difficult to predict how important each factor will be, the effects of market forces, as well as other variables, such as legal regulation and business culture, will be explored fully. The chapter is organized as follows. Section II gives an overview U.S. pay practices, while Section III discusses CEO arrangements in other countries. Section IV discusses market-oriented factors that could affect the convergence of executive pay practices. In the sections following that I consider how global pay practices could

Optimal Contracting or Extraction of Rents, 69 U. CHI. L. REV. 751 (2002)[hereinafter Rent Extraction]. 4

Cheffins & Thomas, Regulation, supra note 1.


See, e.g., Susan J. Stabile, My Executive Makes More than Your Executive: Rationalizing Executive Pay in a Global Economy, 14 N.Y. INT‟L L. REV. 63, 80-86 (2001). 6

There are conflicting views on this question. For a view that convergence is occurring, see David Cay Johnston, European and Asian Executives Start to Get US-Style Pay Packages, N.Y. TIMES, Sept. 3, 1998 (quoting Professor Kevin Murphy). For an opposing view, see Steven E. Gross & Per L. Wingerup, Global Pay? Maybe Not Yet, COMPENSATION & BENEFITS REV., July 1999, at 25, 3334.



be affected by legal regulation, soft law, and national culture. A brief conclusion follows. II.

U.S. Pay Practices

No one disputes that American CEOs are better paid than their foreign counterparts, both in terms of overall pay levels and in terms of the incentives in the pay arrangements. To understand why this is the case, it is first important to understand the basics of executive pay. 7 There are four primary components of international and U.S. executives‟ pay packages: base salary, annual bonus, stock options and long term incentive pay. Base salaries are a fixed amount that is paid to the executive independent of the firm‟s performance. All of the remaining elements of CEO pay depend on firm performance either directly or indirectly. The first main form of variable performance based pay is the annual bonus. Annual bonuses are typically cash payments awarded when a company has met specified yearly share price or accounting targets.8 A second form of incentive pay is the stock option.


For a more extensive discussion of the basics of executive pay, see Murphy, supra note 2; MICHAEL S. SIRKIN & LAWRENCE K. CAGNEY, EXECUTIVE COMPENSATION (2007); Martin G. Wolf, Compensation: An Overview, in THE COMPENSATION HANDBOOK: A STATE-OF THE-ART GUIDE TO COMPENSATION STRATEGY AND DESIGN, 349, 352-55 (4th ed., Lance A. Berger & Dorothy R. Berger eds., 2000) [hereinafter COMPENSATION HANDBOOK]; Paul Milgrom & John Roberts, Executive and Managerial Compensation, Chapter 13 , in Economics, Organization and Management (1992). For a compilation of the main scholarly articles from business schools on this topic, see Kevin F. Hallock & Kevin J. Murphy, The Economics of Executive Compensation (1999). 8

For an article discussing the nature of annual bonus plans, see Peter Chingos, Annual Incentive Plans for Management, in THE COMPENSATION HANDBOOK, supra note 6.



Stock option grants give managers the right to buy shares from their company at a prescribed exercise price after a vesting period that typically last several years. The last important category of incentive-based pay is long term incentive plans (LTIPs). These are generally bonus payments that are calculated on performance variables measured over a period of several years. 9 As we will see, the amounts of each form of pay, and the composition of its variable components, vary widely across countries. A. High Pay for Performance Levels American chief executives receive much of their compensation in the form of variable payments that are only made if their company meets or exceeds prescribed targets. For example, Conyon and Murphy surveyed 1997 pay arrangements in over 1600 publicly traded American corporations and found that the typical U.S. CEO received 29 percent of their overall annual compensation as base salary and 63 percent in variable pay. 10 Stock option grants were the most important type of incentive pay at 42 percent of total compensation.11 Annual bonuses comprise 17 percent of total


Instead of cash, LTIPs often award executives “restricted stock” (i.e. equity that cannot be sold for a specified number of years) or units under a performance scheme that allows them to receive financial benefits akin to owning equity without actually giving them shares (e.g. “phantom stock” or “stock appreciation rights”.) See Jeffrey S. Hyman, Long-Term Incentives, in COMPENSATION HANDBOOK, supra note 6, at 357. 10

Martin J. Conyon & Kevin J. Murphy, The Prince and the Pauper? CEO Pay in the United States and the United Kingdom, 110 ECON. J. F640, F646-47 (2000). 11

Id. at F646-47. For more recent figures, see Joann S. Lublin, The Pace of Pay Gains: A Survey Overview, WALL ST. J., April 9, 2007, at R1 (indicating that 185 U.S. executives exercised option for a median gain of $3,229,193 in 2006).



compensation.12 Finally, according to Conyon and Murphy‟s data, LTIPs composed 4 percent of the compensation of a typical American CEO of a publicly quoted company. 13 Stock options‟ importance in U.S. CEOs compensation packages is a relatively recent phenomenon.14 Over the 1990‟s, “stock options rose from five percent of shares outstanding at major U.S. companies to fifteen percent--a three hundred percent increase.”15 In 1980 CEO‟s salary and annual bonus averaged $655,000, while their stock option grants averaged $155,000 (both in 1994 dollars). Fourteen years later, CEO‟s salary and bonus averaged $1,293,000, a rise of 97 percent. However, during the same time period, stock option grant values grew by 683 percent, to an average of $1,213,000. Moreover, the overall percentage of CEOs receiving stock option awards increased from 30 percent to nearly 70 percent. This trend has continued as stock options continued to grow importance for American CEOs after 1994. However, U.S. companies “have increased their use of restricted stock and performance shares, and are likely to [continue] to do so in the future…,” because of the Financial Accounting Standards Board‟s (FASB‟s) decision to require expensing


Conyon & Murphy, supra note 9, at F646.


Conyon & Murphy, supra note 9, at F646-48.


Brian J. Hall & Jeffrey B. Liebman, Are CEOs Really Paid Like Bureaucrats?, 113 Q.J. ECON. 653, 661-63 (1998). 15

John C. Coffee, Jr., Understanding Enron: It’s About the Gatekeepers, Stupid, 57 Bus. Law. 1403, 1413 (2002). See also, Gretchen Morgenson, Bush Failed To Stress Need To Rein in Stock Options, N.Y. TIMES, July 11, 2002, at C-1; see also Gretchen Morgenson, Market Watch: Time for Accountability at the Corporate Candy Store, N.Y. TIMES, Mar. 31, 2002, § 3-1.



of stock options. 16 In fact, in 2007, “performance-based plans overtook stock options as the most popular form of long-term incentive compensation.” 17 B.

High Compensation Levels CEO pay in the U.S. is highly lucrative. According to Towers Perrin‟s most

recent comparative study of worldwide CEO compensation, using as a benchmark locally headquartered industrial companies with approximately $500 million in annual sales, U.S. CEO total annual pay was $2,164,952 in 2005. 18 Base salary made up about 27 percent of this total, while total variable pay (mostly long term incentive pay) accounted for another 62 percent. Annual data for the largest U.S. firms shows much higher values. For example, in 1997, the average total compensation for CEOs at large companies was $5.9 million.19 Other estimates for U.S. CEOs remuneration vary according to the type of pay being reported and the size of the companies that are being surveyed. For example, focusing solely on cash compensation, in 2005, large U.S. firms paid their CEOs a median cash compensation of $1,865,000.20 However, if we look at total pay, then in


TOWERS PERRIN, EQUITY INCENTIVES AROUND THE WORLD (2005), AT 3 [hereinafter, Equity Incentives]. 17

The Hay Group, The Wall Street Journal/Hay Group Compensation Study Reveals New Patterns in CEO Pay, April 14, 2008. 18

TOWERS PERRIN, MANAGING GLOBAL PAY AND BENEFITS 20 (2006) [hereinafter, Managing Pay]. 19

Conyon & Murphy, supra note 9, at F646.


CEO Compensation Survey (A Special Report) --- The Journal Report Online, WALL ST. J., Apr. 10, 2007, at R2 (citing data from Mercer Human Resource Consulting‟s 2005 study of executive pay and performance within 242 U.S. corporations, mostly with annual revenue of $5 - $10 billion).



2007, the median pay of CEOs of S&P 500 companies was $8.8 million. 21 Any way that the data are cut though, these values are much larger than those observed in the rest of the world. III.

CEO Pay in Other Countries

U.S. CEOs pay arrangements are distinctive by international standards. Outside the U.S., CEOs get less performance-oriented pay as a percentage of their total pay and overall executive compensation packages are not as large. Over time, however, there is some evidence of a shift towards American compensation patterns. A.

Lower Levels of Performance-Based Pay than in the U.S. CEOs remuneration is less highly incentivized outside the U.S. This difference

is reflected in the relatively smaller amount of variable pay in other nations. The same Towers Perrin survey on worldwide executive compensation cited above indicates that at locally headquartered companies with annual sales of $500 million, total variable pay for U.S. CEOs averages 62 percent of their total pay. 22 This figure exceeds that for all of the other 25 major countries surveyed in this study. The breakdown of variable pay into its components of annual bonuses and long term incentive pay shows that American CEOs are paid far more in stock options than


Barry B. Burr, CEO Compensation up by 12.7% in ’07; Increase Below Previous Year’s Median Hike Although S&P 500 Firms Saw Bigger Gains, PENSIONS & INVESTMENTS, Jan. 7, 2008, at 19. 22

TOWERS PERRIN, MANAGING PAY, supra note 15, at 24.



foreign CEOs, 23 although a slightly higher percentage of French companies award options. 24 The Towers Perrin data also show that long-term incentive pay is becoming more important in many other countries. While annual bonuses were part of the compensation package of chief executives in all of the countries surveyed, incentive schemes designed to operate over a longer period were not as common, although they are becoming more important since 1998. For example, in the Towers Perrin survey conducted in 2000, of the 26 jurisdictions covered, chief executives in seven of these were not beneficiaries under a long-term incentive plan. 25 The most recent Towers Perrin survey using 2005 data shows that only in India did the average CEO have no long term incentive pay plan.26 Overall, long term incentive plans are “now prevalent in most countries.”27 At a more detailed level, a quick comparison of the U.S. to two developed and two developing economies illustrates these points.

First, consider Sweden and

Germany, two highly developed European countries. The Towers Perrin data show that total average CEO pay package in 2005 at comparable Swedish firms was $948,990, or about 44 percent of the American CEO. The pay structure at Swedish corporations is still heavily skewed toward salary, bonus and company contributions


Id. at 26.





TOWERS PERRIN, MANAGING PAY, supra note 15, at 26.





to government social programs or voluntary company sponsored plans. 28 Long term incentive pay, including stock options, stock grants and other long term pay, comprises 8.4 percent of total pay. 29 Total variable pay, covering bonuses and long term incentive pay, is only 18 percent of CEO pay. 30 German CEOs at similar sized firms earned $1,181,292 in 2005, according to Towers Perrin.31 Stock options and long term incentive pay comprised only 18.5 percent of total pay at these firms. 32 However, discretionary bonuses were quite important at German firms, comprising 33 percent of overall CEO remuneration. 33 Prior to May 1 st 1998, German corporations were not permitted to issue stock options unless they were based on convertible bonds. 34 However, even those convertible bonds options were often challenged by shareholders in German courts. 35 Therefore only a few of the largest German companies granted those options before May 1998.36


TOWERS PERRIN, MANAGING PAY, supra note 15, at 20.


Id. at 20, 24, 26.


Id. at 24.


Id. at 20.


Id. at 26.


Id. at 24.

34 stock_options/germany.pdf , p. 4 35 stock_options/germany.pdf, P. 4 36 stock_options/germany.pdf, P. 4



After May 1998, stock option plans became more common, especially at large companies quoted on the 30 largest German firms that comprise the DAX.37 Two very important emerging economies are China and India. CEO pay levels and composition in these nations are quite different from their developed country counterparts. According to Towers Perrin, in 2005 a typical Chinese CEO located in Shanghai received $211,255 in total compensation.38

Their pay is

composed of 37 percent salary, and 56 percent total variable pay, almost all of which is in the form of long term incentives. 39 Stock options are a far less important source of income for Chinese executives,40 largely because they were prohibited in China until 2003, when for the first time the Chinese Securities Regulatory Commission (CSRC) permitted two firms to create stock option plans. 41

37 stock_options/germany.pdf, P. 4 38

TOWERS PERRIN, MANAGING PAY, supra note 15, at 24.


Recent research suggests that top management remuneration in China is much lower than indicated by Towers Perrin‟s data. This research finds that the median compensation for the three highest paid executive directors at Chinese companies is ¥106,667, which is roughly $13,333 at the prevailing exchange rates. Michael Firth, T.Y. Leung, & Oliver Rui, Top Management Pay in China, Working Paper (2007), at 14 [hereinafter Top Management Pay]. One probable explanation for this dramatic discrepancy is that Firth et al. took account only of salary and bonus, while the Towers Perrin data include salary, variable pay (including bonus and longterm incentives), benefits and perquisites. A second possible explanation for the differences is that Firth, et al., used a much broader sample of firms and average firm size may have been smaller than for the Towers Perrin sample. 40

Firth, et. al., Top Management Pay, supra note 34, at 8.


Takao Kato & Cheryl Long, Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzen Stock Exchanges, IZA Discussion Paper No. 1767 (2005) [hereinafter Stock Exchanges]. The CSRC is “modelled on the SEC in the U.S. and the Securities and Futures Commission (SFC) in Hong Kong.” Michael Firth, Peter



Hong Kong, while distinct from the remainder of China for many historical reasons, is a second potential comparison point for Chinese executive compensation. The comparable Towers Perrin 2005 figures for CEO total remuneration for CEOs of Hong Kong based Chinese firms are $651,339 with 28 percent in variable pay and 7.5 percent in long term incentives.42 A subsequent study by Towers Perrin found that more than 70 percent of Red Chip firms (firms from the People‟s Republic of China that are incorporated and listed in Hong Kong) and other Hong Kong-listed companies had stock option plans in 2004. 43 Moreover, there is an upward trend in the use of stock options with 77 percent of Red Chip firms granting stock options in 2007.44 Indian CEO pay is more like that of Chinese CEO‟s in Shanghai: the Towers Perrin study states that 2005 average total pay is $290,854, which was 45 percent base pay, 33 percent perquisites and only 14 percent variable pay. Riding high on a booming stock market in recent years, Indian companies have adopted equity based compensation to retain top talent. In a recent survey of Indian companies, 64 percent offered long-term incentives, out of which 68 percent say stock options are their preferred form for such pay. 45 Despite these plans‟ popularity, India still lags far

M.Y. Fung, & Oliver M. Rui, Corporate Performance and CEO Compensation in China, 12 J. Corp. Fin. 693, 695-696 (2006) [hereinafter Corporate Performance]. 42

TOWERS PERRIN, MANAGING PAY, supra note 15, at 24.


Towers Perrin, Executive Compensation Levels in Asia Continue to Rise 2, 200706/ChinaUpdate_0607En.pdf (June 2007). 44

Watson Wyatt, CEO Pay Opportunity Increases Along with Market Capitalization, (July 19, 2007). 45

Hewitt Associates, 11th Annual Salary Increase Survey (2006-2007).



behind the U.S. and many of its developed country counterparts in the use of equity linked incentives. 46 B.

Lower CEO Pay Outside the U.S. Historically, at least since the early 1960s, American chief executives have

been paid more than their counterparts elsewhere. 47 Overall, foreign CEOs get less of their total pay in the form of variable compensation. However, they also get significantly less total pay than their American counterparts. According to the Towers Perrin study on world-wide executive pay, total annual remuneration for a U.S. chief executive in 2005 was $2,164,952.48 The next closest country was Switzerland, where CEOs earned $1,390,899, or less than 65 percent of U.S. CEOs. Only four other countries exceed 50 percent of American CEOs total pay (France, Germany, Italy, and the U.K.). For all 20 of the other countries surveyed, the U.S. values were more than double the average pay for CEOs.49 The pay disparity between the U.S. and other countries may be larger than the Towers Perrin data suggests. For example, Conyon and Murphy compared U.K. and U.S. CEOs remuneration in 1997, finding that American median total compensation


Hewitt Associates India , India Reports Average Salary Increase of 14.4% in 2006, Global Talk, July 2007[posted on] 47

John M. Abowd & David S. Kaplan, Executive Compensation: Six Questions That Need Answering, 13 J. Econ. Persp. 145, 146, Table 1 (setting out data for 1984 and 1996) [hereinafter Six Questions]; Arch Paton, Executive Compensation Here and Abroad, HARV. BUS. REV., Sept.-Oct. 1962, at 144, 152; Detlev Vagts, Challenges to Executive Compensation: For the Markets or the Courts?, 8 J. CORP. L. 231, 252 (1983). 48

TOWERS PERRIN, MANAGING PAY, supra note 15, at 20.


TOWERS PERRIN, MANAGING PAY, supra note 15, at 20.



of $2.4 million was 260 percent more than the median British pay. 50 The gap was even greater for average compensation, with the U.S. figure of $5.9 million being 500 percent more than the comparable U.K. figure. However, more recent data from a study by Conyon, Core and Guay show that the pay gap between U.S. and U.K. CEOs had significantly narrowed by 2003 with the smaller differential resulting from rapid increases in U.K. pay and incentives versus relatively flat U.S. CEO pay over that time period.51 Another way of examining the problem is to look at CEO compensation at the very largest firms across countries. In this regard, consider the data in Table 1 which reports executive compensation levels for 30 of the largest publicly listed German firms, the DAX 30, in 2006.

Table 1: CEOs Compensation in the DAX companies (2006) 52

Company Deutsche Bank Linde Daimler Metro RWE Merck Allianz 50

CEO Ackermann Reitzle Zetsche Cordes Roels Kley Diekmann

Basic Salary 12,46353 7,795 5,929 5,481 5,145 5,127 4,979

Stock Options 4,976 1,929 3,630 679 3,960 no info 2,017

Total 17,439 9.724 9,559 6,160 9,105 5,127 6,996

Conyon & Murphy, supra note 9, at F646.


Martin J. Conyon, John E. Core and Wayne R. Guay, How High is US CEO Pay?: A Comparison with UK CEO Pay, Working Paper (2006). 52 53

All amounts are in thousands of U.S. dollars, as of Dec. 2006.



Eon BMW Commerzbank Munich RE Adidas BASF SAP Siemens Thyssen Krupp Volkswagen Hypo Real Estate Deutsche Post Henkel Bayer Fresenius Deutsche Telekom Continental MAN Postbank TUI Deutsche Boerse Lufthansa Infineon

Bernotat Reithofer Mueller v. Bomhard Hainer Hambrecht Kagermann Kleinfeld Schulz Pischetsrieder

4,830 4,778 4,720 4,652 4,545 4,522 4,489 4,287 4,223 4,138

1,680 no info 231 879 0 945 7,430 495 374 0

6,510 4,778 4,951 5,531 4,545 5,467 11,919 4,782 4,607 4,138

Funke Zumwinkel Lehner Wenning Lipps

4,068 3,910 3,722 3,494 3,449

no info 1,684 338 354 2,344

4,068 5,594 4,060 3,848 5,793

Ricke Wennemer Samuellson Schimmelmann Frenzel Francioni Mayrhuber Ziebart

3,431 3,398 2,903 2,801 2,629 2,475 2,364 2,292

no info 1,250 1,430 no info 7 1,323 767 767

3,431 4,648 4,333 2,801 2,636 3,798 3,131 3,059

DAX Average



These values are for the largest publicly-traded German firms, and therefore are not comparable with the Towers Perrin data because they are not adjusted for firm size. The column labelled “Basic Salary” includes base salary, bonus and perquisites. The median value for Basic Salary is $4,287,000 and for total compensation is $4,782,000. The difference between these two values is the value of stock options and long term incentive plans, which is $495,000. Overall, these are far larger numbers than the values reported in the Towers Perrin study for 2005, although that study focuses on smaller firms. If we look at comparable values for the largest 350 American firms for 2006, we see that median base salary was $1,045,084, median bonus pay was $1,553,200,



and median total compensation was $6,548,805.54 The American figures are higher but not by as much as might be expected. The big difference in pay composition is in the size of the stock option component of U.S. pay: U.S. firms paid roughly $3,950,000, whereas the German firms paid only $495,000. This accounts for most of the pay differential. Are there other factors that make CEO pay in the U.S. so much higher than elsewhere? Base salary differentials play only a small role. The Towers Perrin 2005 data on international pay report that the annual salary of a U.S. CEO was well over $500,000.55 While this was the highest figure among the 26 countries covered, CEOs in the U.K. and Switzerland both had base pay that exceeded $500,000 annually (although lower than the American level), and chief executives in only six of the countries surveyed were paid less than $250,000 in base pay. Another potential candidate to help explain the pay gap is perquisites. On closer examination though, they seem to be a minor factor. Perks make up a relatively small part of U.S. CEOs pay in the Towers Perrin data. Furthermore, at least as of 1996, U.S. firms ranked fifth out of twelve industrialized nations in the total value of fringe benefits offered by U.S. corporations to CEOs. 56


Joann S. Lublin, CEO Compensation Survey (A Special Report) --- The Pace of Pay Gains: A Survey Overview, WALL ST. J., April 9, 2007, at R2 (citing data from Mercer Human Resource Consulting‟s 2006 analysis of proxy statements of 350 largest U.S. corporations). 55

TOWERS PERRIN, MANAGING PAY, supra note 15, at 20.


Abowd & Kaplan, supra note 42, at 146, Table 1.



Furthermore, American CEOs do not seem to sacrifice job security as part of a trade-off for higher pay. Although some commentators have suggested that chief executives outside the U.S. do not face the same external scrutiny as their American counterparts,57 the evidence is to the contrary. At least in the 1980s, CEOs in Japan and Germany were, if anything, more likely to be dismissed than American chief executives if a company suffered a major share price decline or a drop in earnings. 58 Moreover, an international study conducted in 2000 showed that CEO turnover is equally high across industries and regions world-wide. 59 C.

Evidence of Compensation Convergence To summarize, what distinguishes America‟s executive compensation

arrangements from those elsewhere is long term incentive based pay. As noted above though, incentive-oriented pay seems to be becoming more popular outside the U.S. For instance, annual bonuses, an important component of incentive based variable pay, are becoming a more important element of total CEO compensation. The Towers Perrin survey of global pay and benefits for 2005 indicates that, out of the 26


Paul G. Wilhelm, Application of Distributive Justice Theory to the CEO Pay Problem: Recommendations for Reform, 12 J. BUS. ETHICS 469, 474 (1993). 58

Steven N. Kaplan, Corporate Governance and Corporate Performance: A Comparison of Germany, Japan and the US, 9 J. APPLIED CORP. FIN. 86, 88-89 (1997). 59

Samantha Marshall, The Disposable CEO, ASIAN WALL ST. J., July 14,

2000, at 1.



jurisdictions covered, in 18 the annual bonus/salary ratio was higher for CEOs than it was in 1998.60 The same pattern is evident with long-term incentive compensation. According to the Towers Perrin data, in 1998 there were ten jurisdictions where chief executives did not participate in a long-term incentive scheme. By 2005, there was only one.61 Moreover, in those countries where long-term incentive plans were in place in 1998 and 2005, for CEOs the long-term incentive scheme/base salary ratio increased in almost all instances. A 2001 report by Towers Perrin on the usage of stock options confirms that long term incentive-oriented pay is becoming increasingly commonplace outside the U.S. The study examined the practices of large, local companies headquartered in 22 different countries, and found that such compensation was prevalent in only a handful of jurisdictions in 1997. 62 However, the report projected that by 2003 it would be standard practice to have a long-term incentive scheme in place for their CEOs in the countries surveyed. 63 The Towers Perrin stock option report further indicated that stock option plans are the most popular type of performance-oriented compensation. In nearly all of the companies surveyed that offered long-term incentive pay plans,


TOWERS PERRIN, MANAGING PAY, supra note 15, at 20.


Id. at 26.


TOWERS PERRIN, STOCK OPTIONS, supra note 24, at 4.





stock options were used much more widely than LTIPs.64 In fact, the 2005 version of this study shows that incentive-oriented pay is now prevalent in most countries. 65 Traditionally, stock options were an American pay practice that was not followed elsewhere.66 In the U.K., for example, stock option plans were largely unknown until the mid-1980s, when large numbers of companies began to adopt them. 67 Around the same time, stock options began to gain ground in some Continental European countries68 but they remained of negligible importance in Germany and Italy. 69 Moreover, according to survey evidence, long-term incentive compensation of any sort was virtually unknown in Belgium, the Netherlands, Sweden and Spain. 70 Practices are changing in Europe though. By the late 1990s, growing numbers of European executives were receiving part of their pay in stock options or LTIPs. 71


Id. at 5.




Shirley Fung, How Should We Pay Them?, ACROSS THE BOARD, June 1999, at 36, 37-38; Luisa Kroll, Catching Up, FORBES, May 19, 1997, at 162. 67

Helen Kay, Have We Killed the Share Option?, DIRECTOR, Oct. 1995, at 64, 66; Laura Mazur, Europay, ACROSS THE BOARD, Jan. 1995, at 40. 68

See, e.g., Alain Alcouffe & Christiane Alcouffe, Control and Executive Compensation in Large French Companies, 24 J.L. & SOC‟Y 85, 96 (1997). 69

Stefan Prigge, A Survey of German Corporate Governance, in COMPARATIVE CORPORATE GOVERNANCE: THE STATE OF THE ART AND EMERGING RESEARCH 943, 967 (Klaus J. Hopt et al. eds., 1998); Andrea Melis, Corporate Governance in Italy, 8 CORP. GOVERNANCE: INT‟L REV. 347, 353 (2000). 70

Abowd & Kaplan, supra note 42, at 146. For more detail on Spain see Charlotte Villiers et al., Controlling Directors’ Pay in English Law and Spanish Law, 2 MAASTRICHT J. EUR. & COMP. L.377, 391-92 (1995). 71

Cheffins & Thomas, Globalization, supra note 1, at __



Has this shift impacted executive pay? There is a clear trend in Sweden toward higher executive salaries. Remuneration to executives in companies listed on the Stockholm Stock Exchange increased by seventy percent during the period between 1997 and 2002.72 Similarly, the number of long term incentive programs for executives has increased substantially over the last 15 years. In 1994, there were around 50 programs in place among the companies listed on the Stock Exchange, whereas the corresponding number for 2004 was 700.73 Elsewhere, similar trends can be observed. In Japan, stock option plans were virtually unknown traditionally. 74 Today, a growing number of Japanese companies have created stock option schemes for senior employees. 75 Similarly, while in Australia stock option plans were uncommon in the early 1990s,76 performance-based compensation is now widely accepted there. 77 Canada shows the same trend toward more widespread use of stock options since the early 1990s. 78


Statens Offentliga Utredningar [SOU] 2004:47 Näringslivet och förtroendet [government report series] (Swed.). Appendix 5, at 99. 73

Id. at 104.


W. CARL KESTER, JAPANESE TAKEOVERS: THE GLOBAL CONTEST FOR CORPORATE CONTROL 78 (1991); Steven Brull, Sony Links Executive Pay to Stocks, INT‟L HERALD TRIB., Aug. 11, 1995, at 11; Michael Berger, A Look at Salaries in Japan, S.F. CHRON., May 9, 1988, at B8. 75

Nicholas Benes, Japan’s Coming Shareholder Revolution, ASIAN WALL ST. J., Feb. 14, 2001, at 6; Yasmin Ghahremani, In the Company of Millionaires, ASIAWEEK, Mar. 17, 2000, available at 2000 WL 8936312. 76

Jane Hutchinson, Turning the Spotlight on the Boss’s Pay, AGE, Apr.

8, 1992, at 19. 77

Jennifer Hill, Regulatory Rooms in Australian Corporate Law, 25 BROOK. J. OF INT‟L L. 555, 601 (1999); S. Karene Witcher, Salaries Surge as



However, stock options and similar incentive schemes remain a much more important component of CEO pay in the U.S. than they are in other nations. One indicator of this is that the ratio of long-term incentive compensation to salary remains considerably higher in the U.S. than elsewhere. Some raw numbers illustrate the point: Conyon and Murphy found that for CEOs that received this form of compensation in 1997, the median option grant in the U.S. was nearly 20 times that awarded to British chief executives. 79 The conditions attached to stock options vary tremendously between the U.S. and other countries as well. 80 In the United States, stock options generally do not have performance conditions attached to them. 81 If the company‟s stock price increases, then executives benefit, even if the amount of the increase is less than that for the stock market as a whole or the firm‟s competitors.82 Companies in most other

Concerns Seek Offshore Talent, Specifically in America, ASIAN WALL ST. J., July 28, 1998, at 6. 78

CEO Compensation is Not Soaring, GLOBE & MAIL, Apr. 26, 1999, at A10; Corporate Elite Takes Home a 43% Pay Rise, NAT‟L POST, May 22, 2001, at C1. 79

Conyon & Murphy, supra note 9, at F648.


Towers Perrin, Global Benefit and Compensation Issues (July 2005), 2005/200507/Update_Equity_Inc_July.pdf 81

TOWERS PERRIN, EQUITY INCENTIVES, supra note 16, at 7 (reporting that stock options in the US are typically granted at market price and free of performance criteria). 82

Michael Dorff, The Group Dynamics Theory of Executive Compensation, 28 Cardozo L. Rev. 2025, 2027 (2007); Bruno Frey & Margit Osterloh, Yes, Managers Should be Paid Like Bureaucrats, at 6, available at: “experience in recent years has shown that, by linking salaries to stock options, performance pay led to an explosion of compensation



countries commonly issue stock options that are subject to performance conditions, so that the company must meet specified “benchmarks” (e.g. exceeding designated earnings per share targets) for the option to have economic value. 83 Such performance conditions are the norm in Australia, Germany, Italy, the Netherlands, South Africa and the U.K. and they are “expected to continue to grow.”84 Increased use of performance-related pay will result in higher executive pay generally because executives demand additional compensation for assuming the greater risk of having their pay tied directly to shareholder return. These risks include a lack of diversification for the executive, as well as the risk of marked fluctuations in the company‟s stock price. Furthermore, CEOs may worry about having their personal net worth tied to stock prices that are subject to many other factors besides the skill and effort of a company‟s top people. Nevertheless, performance based pay does have the benefit of linking managerial compensation more closely with shareholder returns and therefore focusing managers on raising those returns. Talented executives will usually accept the risks associated with having their compensation linked closely with shareholder return if the potential rewards are large enough. 85 So it seems logical to conclude that

due to windfall profits.”); Alfred Rappaport, New Thinking on How to Link Executive Pay with Performance, HARV. BUS. REV., Mar.-Apr. 1999, at 91, 93. 83

Towers Perrin, Global Benefit and Compensation Issues, supra note 74 (US firms lag behind U.K., NL, AUS in "performance conditions"). 84



Cheffins & Thomas, Globalization, supra note 1, at ___.



international shifts toward the use of more pay for performance may well push pay packages toward the American model. IV.

Market-Oriented Drivers of Executive Pay

Although companies outside the United States pay their CEOs quite differently than American firms, there is some evidence that companies around the world are shifting towards the U.S. pay paradigm. 86 Are market forces of various types the impetus for such a change? In this section, I look at how influential these market dynamics are likely to be in the future. A. Evolving Share Ownership Patterns One factor that may influence executive compensation arrangements is a company‟s ownership structure. In a publicly traded corporation with highly dispersed share ownership, managerial agency costs can be reducing by aligning managers‟ incentives with those of shareholders through the use of stock options and long term incentive pay whose value fluctuates with the company‟s stock price. 87 This results in pay packages that contain substantial equity based incentives for managers to maximize share price. The United States and the U.K. are good examples of dispersed ownership systems.

Managerial agency costs are an important problem, but shareholder


See Brett Clegg, Drawing Lines on Bonuses and Options, AUSTL. FIN. REV., Nov. 1, 1999, at 28; Ira T. Kay & Steven E. Rushbrook, The US Executive Pay Model: Smart Business or Senseless Greed?, 10 WORLDATWORK J. 8, 8(2001). 87

Brian R. Cheffins & Randall S. Thomas, Should Shareholders Have a Greater Say Over Executive Pay?: Learning From the US Experience, 1 J. CORP. L. STUD. 286, 308, 312 (2001) [hereinafter Say on Pay].



monitoring has historically been weak.

U.S. and U.K. firms therefore rely on

incentive pay systems to more closely align the interests of managers and shareholders.88 For this reason, investors in the U.S. and the U.K. have, at least until very recently, strongly advocated the use of pay for performance in executive compensation.89 For executives though, substituting stock options for other forms of compensation increases the riskiness of their pay package. Executives discount the value of stock option awards to reflect this risk,90 so companies must offer more options and greater upside potential to compensate for the higher risks of no returns if the options fail to pay off.

As a result, American and U.K. firms‟ shareholders have

generally been content to see executive pay rise substantially so long as the increase has been incentive-oriented.91 In other major industrial countries, however, concentrated share ownership is the norm.

In jurisdictions falling into this concentrated category, many large

companies do not have shares traded on the stock market and those which do


Brian R. Cheffins, Current Trends in Corporate Governance: Going From London to Milan via Toronto, 10 DUKE J. COMP. & INT‟L L. 5, 14-15, 17 (1999). 89

Brian R. Cheffins & Randall S. Thomas, Say on Pay, supra note 81, at

308. 90

See, e.g., BRIAN HALL & KEVIN J. MURPHY, Stock Options for Undiversified Executives, 33 J. ACCOUNTING AND ECONOMICS 3, 4-5 (2002); Lisa K. Muelbroek, The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options, FIN. MGMT., Summer 2001, at 5. 91

Cheffins & Thomas, Say on Pay, supra note 81, at 294, 312 (noting that British shareholders might be more prepared to take a stand against high pay arrangements than American investors).



frequently have a dominant shareholder. 92 Thus, in continental Europe and Asia, where firm control is more highly concentrated, a control shareholder or control group has the power and the means to discipline disloyal or ineffective managers. 93 Shareholder monitoring acts as an alternative method of aligning shareholder and manager interests.94 Furthermore, control shareholders will be adverse to share-based incentive schemes since managers could be transformed into major shareholders and thereby dilute the ownership rights of the controlling group.95 Share ownership can also affect executive compensation because executives at firms with control shareholders have good reasons to be sceptical of stock based, incentive pay systems. At privately held firms, the stock market will not function as a method for valuing these securities. Even with publicly traded companies, many of these firms have small “free float” of stock because of their concentrated ownership structure, thereby leaving their stock prices strongly influenced by “noise” unrelated to prospective future earnings, and weakening the ties between managerial effort and executive‟s payoffs. 96


Erik Berglöf, A Note on the Typology of Financial Systems, in COMPARATIVE CORPORATE GOVERNANCE: ESSAYS AND MATERIALS 152, 157-64 (K.J. Hopt & E. Wymeersch eds., 1997); Hans J. Blommestein, The New Financial Landscape and its Impact on Corporate Governance, in CORPORATE GOVERNANCE, FINANCIAL MARKETS AND GLOBAL CONVERGENCE 41, 56-59 (Morten Balling et al. eds., 1998). 93

Brian R. Cheffins, Minority Shareholders and Corporate Governance, 20 COMPANY LAW. 41, ___(2001) [hereinafter Cheffins, Minority]. 94


Thomas Bates et al., Promotion Incentives and Executive Compensation in Family Firms, (Unpublished working paper, 2000), at 17. 96

Abowd & Kaplan, supra note 42, at 156; Melis, supra note 63, at 353.



For all of these reasons, pay for performance levels and more specifically the use of stock options should be less common in concentrated ownership economies than in dispersed ownership countries. Some empirical evidence from Canada, India and Italy supports these hypotheses.97 However, in many historically concentrated ownership countries, there is significant evidence that shareholder ownership is becoming increasingly dispersed. I next review evidence which suggests that traditional ownership structures are becoming less concentrated. 1. Sweden

Corporate control in Sweden has historically been highly concentrated with a typical ownership structure limited to one or two family owners.98 Both public and private companies have concentrated ownership. 99 In 1998, the largest shareholder in Swedish listed companies on average controlled 38 percent of the voting rights.


However, share ownership in Sweden has become more dispersed in recent years because of increased foreign investment and the new Swedish pension model that has


Giorgio Brunello et al., Executive Compensation and Firm Performance in Italy, 19 INT‟L J. INDUST. ORG. 133, 141, 155 (2001); Kannan Ramaswamy et al., A Study of the Determinants of CEO Compensation in India, 40 MGMT. INT‟L REV. 167, 182-183 (2000); Yun W. Park et al., Controlling Shareholder and Executive Incentive Structure: Canadian Evidence, 17 CAN. J. ADMIN. SCI. 245, 246 (2000). 98

Magnus Henrekson & Ulf Jakobsson, The Swedish Model of Corporate Ownership and Control in Transition, in WHO WILL OWN EUROPE? THE INTERNATIONALISATION OF ASSET OWNERSHIP IN EUROPE (Harry Huizinga, Lars Jonung ed., Cambridge University Press, 2005), available at 99

Id. at 35.


Id. at 27. In 34 percent of the firms the controlling owner had more than 50 percent of the votes and as many as 82 percent of the firms had a well-defined



created large state and corporatist pension funds that have invested in Swedish firms.101 2. Germany

Share ownership patterns in Germany have shifted drastically over the last decade. Historically, “Deutschland AG”, the biggest German companies were controlled by a network consisting of domestic investors, banks, insurance companies and families who owned those companies. 102 In addition, many important German companies, the Deutsche Post and Deutsche Telekom, were state-owned enterprises.103 However, today things are quite different: 53 percent of the shares on the DAX, the stock index for the 30 largest German companies, are in foreign hands.104 For example, as of 2005, the majority of stock of Adidas, BASF, Commerzbank, Continental, Deutsche Bank, Deutsche Börse, Schering and Siemens was controlled by foreign investors.105 As Table ___ illustrates, stock ownership has become more widely dispersed at major German corporations. owner with more than 25 percent of the votes (which in practice implied operational control of the firm). 101

Id. at 1.



Streeck & Höpner, supra note 96, at 118.

The DAX measures the performance of the Prime Standard‟s 30 largest German companies in terms of order book volume and market capitalization. These data are available at×pan= 1d&wpbpl=&wp=DE0008469008&foldertype=_Index&wplist=DE0008469008&mo dule=InOverview_Index 104


Rigobert Kaiser, Helleres Stimmungsbild, Ausländische Beobachter bewerten die deutsche Konjunktur optimistischer als einheimische, Süddeutsche



Controlling for other factors, concentrated ownership by banks is associated with lower levels of CEO compensation at German companies, although family ownership increases compensation. 106

Pay for performance sensitivities are also

very low and concentrated ownership reduces them still further.107

3. China

The Chinese government has transformed its economy from a centrallyplanned economy to a market-oriented economy since 1979. 108 The government

Zeitung, Dec. 28, 2005, at [addendum]V2/10. 106

Alfred Haid & B. Burcin Yurtoglu, Ownership Structure and Executive Compensation in Germany 15, Working Paper (2006), available at, at 19. 107



U.S. Department of State, Background Notes: China, (October 2007); For an overview on Chinese enterprise reform, see Firth, et al., Corporate Performance, supra note 36, 695-696; Qian Sun & Wilson H. S. Tong, China Share Issue Privatization: the Extent of Its Success, 70 J. Fin. Econ. 183, 186-188 (2003); Takao Kato & Cheryl Long,



established the Shanghai Stock Exchange and Shenzhen Stock Exchange in 1990 and 1991 respectively, partly in order to provide a stage for SOEs to raise funds. 109 Rapid economic growth occurred after the Chinese Communist Party‟s Fourteenth Congress in 1992, at which the Party endorsed the idea of “building a market economy with Chinese characteristics.”110 One year later, the Chinese Company Law was promulgated, which articulated guidelines for State Owned Enterprise (SOE) reform and regulated corporate governance for modern corporations in China. 111 As part of the economic reform, the government encouraged the privatization of SOEs, and since then more than 80 percent of SOEs have been restructured into corporate entities under the Company Law.112 However, this privatization process was only partial since the state retained large equity positions in nearly all SOEs.113 For example, in 2003, more than 80 percent of the listed firms in China had a state agency, or an SOE, as their largest shareholder, leaving most listed firms effectively controlled by the government.114 Similarly, in 2001, the Chinese government held approximately 60 percent of all

Executive Compensation, Firm Performance, and State Ownership in China: Evidence from New Panel Data, William Davidson Institute Working Paper Number 690 (2004), at 4-7[hereinafter Panel Data]. 109

Kato & Long, Stock Exchanges, supra note 36, at 6.


U.S. Department of State, Background Notes: China, (October 2007); Kato & Long, Stock Exchanges, supra note 36, at ___. 111

Kato & Long, Stock Exchanges, supra note 36, at 6.


CFA, China Corporate Governance Survey, 3 (2007); Kato & Long, Stock Exchanges, supra note 36, at 8. 113

Firth, et al., supra note 36, at 694.



shares in listed firms. 115 “As a result, the persistent dominance of state ownership of company shares remains in many listed firms in the midst of the remarkable growth of the stock market and the government still looms large in the ownership as well as the control of most listed firms in China.”116 There is a negative relationship between pay-performance sensitivity and state ownership,117 perhaps because their controlling shareholders care less about maximizing firm profitability than other political concerns. Privately controlled firms are quite different. While the number of privately owned, listed companies has increased gradually, these firms are generally controlled by a single shareholder 118 with the largest shareholder and the second largest


Kato & Long, Panel Data, supra note 102, at 2.


CFA, supra note 106, at 3. At the end of 2000, the value of shares owned by the government was “equivalent to 17% of the GDP. Assets owned by the Chinese government were valued at [RMB] 9.88 trillion (US$1.19 trillion) at the end of 2000.” Sun & Tong, supra note 102, at 185. 116

Kato & Long, Panel Data, supra note 102, at 1. The State acts as the controlling shareholder in these firms. Firth, et al., Corporate Performance, supra note 36, at 694. (“The dominant shareholder can exercise substantial control over a firm by way of board representation as well as through voting rights. In many cases it is the State, local, city, or regional government that has the controlling share stake. In other cases, the controlling shareholder is a SOE (from which the listed firm was „carved out‟). 117

Kato & Long, Stock Exchanges, supra note 36. “[S]tate ownership, [either direct or indirect], of China‟s listed firms is weakening pay-performance link for top managers and thus possibly making China‟s list firms less effective in solving the agency problem.” Kato & Long, Panel Data, supra note 102, at 20. 118

Firth, et al., Top Management Pay, supra note 34, at 5. CFA, supra note 106, at 4 (“SOEs constitute close to 90 percent of the 1,400 listed companies in China.”).



shareholder owning respectively 32 percent and 12 percent shares listed firms. 119 Pay for performance is much more common at these firms. 120 4.


From the time of its independence in 1947 until the 1990‟s, the Indian government controlled most of its economy and most large firms were SOEs. 121 For many years, this meant that the Indian government was the only significant shareholder for much of the economy until a series of reforms led to a reduction in its stake. “The Indian corporate sector today is dominated by „family owned‟ businesses where either a majority or a controlling stake in the shareholding of a firm is owned by a particular family…”122 In these firms, founding families play a dominant role in management.123 A recent study of the Indian S&P CNX Nifty (the “Nifty”), an important index of Indian public companies traded on the National Stock Exchange of India, shows that while there has been some movement toward dispersion of stock ownership, largely because of increased levels of foreign investment by institutional investors, most large firms continue to have either a family group or the state as a control


Gongmeng Chen, Michael Firth, and Liping Xu, Types of Large Shareholders, Corporate Governance, and Firm Performance, ___ J. Banking and Finance (2008), at 5 Table 1. 120

Firth, et al., Corporate Performance, supra note 36, at 698.


George S. Geis, Can Independent Blockholdings Really Play Much of a Role in Indian Corporate Governance?, 3 CORP. GOV. LAW REV. 283 (2007), at 13. 122

Aditya Parthasarathy, Krishnakumar Menon & Debashish Bhattacherjee, Executive Compensation, Firm Performance and Corporate Governance: An Empirical Analysis 16, Indian Institute of Management, Calcutta, Jan. 2006,(working paper available at



shareholder.124 Out of the fifty firms in the Nifty, eighty percent have at least thirty percent of their stock held by a family group or the Indian government, while independent shareholders hold high percentages of the stock in only nine firms. 125

5. Impact of Changes to Ownership Structures on Executive Compensation

If concentrated corporate ownership structures are becoming more dispersed over time, executive pay levels and performance-based compensation may both increase in the future. This is particularly likely if the cause of increased dispersion is growing levels of foreign portfolio investment by U.S. and U.K. institutional investors.126 These investors may therefore have greater leverage in countries where share ownership has traditionally been highly concentrated. Continental European, Asian and Latin American companies that want to raise funds on international capital markets may need to raise performance based pay levels to appeal to these


K. Kakani & P. Ray, CEO Remuneration - the Burning Issue, Hindu Businessline, Aug. 13, 2002. 124

Geis, supra note 115, at 23.


Geis, supra note 115, at 23.


William W. Bratton & Joseph A. McCahery, Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross Reference, 38 COLUM. J. TRANSNAT‟L. L. 213, 234 (1999); Mary O‟Sullivan, Corporate Governance and Globalization, 570 ANNALS AM. ACAD. POL. & SOCIAL SCI.153, 167 (2000).



institutional investors,127 as American and British institutions shareholders have generally promoted pay for performance compensation packages. 128 Sweden is a good example. Over the past twenty years there has been a marked increase in foreign ownership of Swedish firms, more than in other developed industrial countries.129 This influx began in the mid-1980s, after the removal of substantive restricitions on foreign ownership of Swedish companies.130 The rate of increase was quite dramatic: until the early 1990s, foreign investors owned less than 10 percent of corporate stock in firms quoted on Swedish exchanges, whereas by June 2007 foreign ownership of Swedish shares rose to 37.9 percent of all shares.131 American investors were the largest single group, and account for about 11 percent, or about $676 billion, of the total equity of companies in the Swedish market.132 Academics studying Swedish stock ownership patterns predict that the old


Sara Calian, On the Buy Side: Investor-Friendly Firms Sought, WALL ST. J. (Europe), June 26, 2001, at 11; The End of Tycoons, ECONOMIST, Apr. 29, 2000, at 93; Thomas Kamm, Europe’s Move into the Free Market Spurs a Massive Corporate Workout, WALL ST. J., Dec. 30, 1999, at A1. 128

Cheffins & Thomas, Say On Pay, supra note 81, at 308, 311-12.


Henrekson & Jakobsson, supra note 92, at 1.


Ulf Jacobsson, Globaliseringen av svenskt näringsliv, March 2007, at 4 (report done for the Confederation of Swedish Enterprise by a professor at the International Business School of Jönköping). 131

SCB (Statistiska centralbyrån/Statistics Sweden - the central government authority for official statistics), Aktieägarstatistik – Aktieägande i bolag noterade på svensk marknadsplats, juni 2007, at 5, available at (including as part of the foreign ownership category, Swedish owners who buy through foreign asset managers as well as foreign branches and subsidiaries of Swedish companies). 132




concentrated family ownership model for Swedish firms will probably be replaced by more dispersed ownership by foreign owners and state or corporate pension funds.133 How will this development affect executive remuneration? One study on the effects of internationalization on CEO compensation in Nordic firms finds that strong owners, or owners with significant control, reduce the level of CEO compensation in Swedish and Norwegian firms, stating that “large owners are better monitors of CEO pay than firms with more dispersed ownership.”134 The converse, however, is also true: moving towards a more dispersed ownership in public corporations will possibly lead to increased remuneration. It would be a mistake to draw too strong an inference though. While investment patterns are making a growing number of companies outside the U.S. and the U.K. more sensitive to the Anglo-American investors‟ perspective, any shift in attitudes may just be superficial. 135 In other words, the preferences of American and English institutional investors may have only a marginal influence on executive pay practices for the foreseeable future. Furthermore, the ownership shifts in Continental Europe may not continue in the direction of increased dispersion. While it is becoming more common for


Henrekson & Jakobsson, supra note 92, at 34.


Lars Oxelheim & Trond Randøy, "The Anglo-American Financial Influence on CEO Compensation in non-Anglo-American Firms", 36 J. International Bus. Studies 470,___(2005). 135

The Chaebol Spurn Change, ECONOMIST, July 22, 2000, at 83; Craig Karmin, Corporate Governance Issues Hamper Emerging Markets, WALL ST. J., Nov. 8, 2000, at C1.



European companies to join the stock market,136 there is still a strong preference by firms to retain strongly concentrated ownership structures when they sell shares to the public.137 Thus, it could be the case that controlling shareholders will continue to play a dominant role on the Continent. This would presumably hinder any shift towards greater pay for performance and resultant higher executive pay levels. B.

Cross-Border Hiring A second important force that may affect international executive pay systems

is growing internationalization of the labor market for executives. Some commentators have suggested that the market for CEOs is becoming global, and that an increasing number of foreign CEOs run firms headquartered in other countries. 138 For example, Adobe, the San Jose based software maker, recently hired Shantanu


Christoph van der Elst, The Equity Markets, Ownership Structures and Control: Towards an International Harmonisation, in CAPITAL MARKETS AND COMPANY LAW 3, 6-7, 9-11, (E. Wymeersch & K. Hopt eds., Oxford University Press 2003). 137

MARC GOERGEN, CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE: A STUDY OF GERMAN AND U.K. INITIAL PUBLIC OFFERINGS 51-56. 78-83 (1998) at 51-56, 78-83 (U.K. and Germany); Wayne H. Mikkelson, Ownership and Operating Performance of Companies that Go Public, 44 J. FIN. ECON. 281, 28689 (1997) (U.S.); Marco Pagano, Why Do Companies Go Public? An Empirical Analysis, 53 J. FIN. 27, 56-60 (1998) (Italy). 138

For instance, in an interview with the Vietnam Economic Times, Nguyen Thi Van Anh, regional director of Executive Search and Selection of Navigos Group, noted that “the recruitment of foreign workers can be a temporary solution to handle the current lack of candidates for executive positions.” Vietnam Training and Foreign Consultants Needed to Meet Demand for CEOs, Thai News Service, Source: The Financial Times, Mar. 11, 2008. See also, Denis B.K. Lyons & Stuart Spencer, International CEOs on the Rise, CHIEF EXEC., Feb. 2000, at 51, available at ABI Inform, ISSN 0160-4724.



Narayen, an Indian national, as its CEO-designate.139 Other prominent hires include in 2001, Nissan‟s promotion to CEO of Carlos Ghosn, a Brazilian of Lebanese descent,140and in 2004, Korea Exchange Bank‟s hiring of Richard Wacker, former Vice President of G.E., as its CEO. 141 One possibility is that foreign companies may be concerned that American firms will offer their top executives larger compensation packages if they will migrate to become CEOs in the U.S. This would put pressure on these firms to change their managerial compensation systems to conform more closely to those in the U.S. One possible example is former Siemens AG CEO Klaus Kleinfeld, who left that company in 2007 to become COO (and soon CEO) at Alcoa.142 He received a huge signing bonus and an option-laden compensation package at the time of his move. This may cause German firms to adjust their executives‟ pay to avoid any other defections. The door could swing the other direction as well, so that cross-border hiring of Americans to serve as CEOs of foreign firms could spark the reconfiguration of executive pay. If the American executive talent pool is deeper than elsewhere, companies headquartered outside the U.S. may try to lure away American


Indian to take charge as Adobe CEO, The Times of India, November

14, 2007. 140

Ghosn: Nissan Must be Efficient, Effective, Automotive News Europe, Dec. 17, 2001, at 20. 141

Denis Herbstein & Song Jung-A, Wacker to be CEO at Korea Exchange, FIN. TIMES (Japan Edition 1), Feb. 11, 2004, at 19. 142,2828,500616,00.html



executives.143 Top managers in the U.S. are unlikely to leave for another country unless they are offered a comparable compensation package to what they could get in the U.S. This means that any foreign company seeking to recruit an American executive might need to change its approach to CEO pay. China provides some interesting lessons on this point. Few Chinese corporations have hired American CEOs, although in 2005 Lenovo Group Ltd., the largest Chinese computer company, hired an American CEO, William J. Amelio. 144 Interestingly, Amelio‟s total compensation in 2007 was $6,711,000,145 which was 11.7 percent higher than the total compensation for the Chinese Chairman of Lenovo, Yuanqing Yang, 146 notwithstanding the fact that in China a chairman is generally paid more than a CEO of the same firm. 147 More generally, it appears that foreign executives working in China are paid two or three times more than their Chinese counterparts.148 China‟s


Luiza Chwialkowska, How to Land an American Boss, NAT‟L POST, Sept. 6, 1999, at A3; John Plender, Cult of the US Manager, FIN. TIMES, Apr. 14, 1999, at 19. 144

China Daily, Lenovo: Welcome US Probe If Needed, (March 26, 2006) 145

Business Week, Lenovo Group Ltd. Executive Profile ( 958&symbol=0992.HK (January 31, 2008) 146

Business Week, Lenovo Group Ltd. Executive Profile (Yuanqing

Yang), ersonId=410128&symbol=0992.HK (January 31, 2008) 147

Michael Firth, Peter M. Y. Fung & Oliver M. Rui, Firm Performance, Governance Structure, and Top Management Turnover in a Transitional Economy, 43 J. Management Studies 1289, 1295 (2006) [hereinafter Transitional Economy]. 148

Chinese Government, Ministry: More Foreigners working in China, (April 4, 2006)



experience suggests that pay scales there will not adjust to international levels quickly, if at all, because of the presence of foreign executives. Will the emergence of a global market for executive talent have a significant impact on current practices? Some evidence suggests it will be important. Growing competition for managerial talent has forced a growing number of companies to recruit internationally, 149 and they are increasingly willing to look for the best managerial talent irrespective of the individual‟s country of origin. 150 On the supply side, large numbers of foreign executives exist who speak English fluently, have honed their business skills in countries outside their own and are willing to move abroad to further their careers.151 For example, over 50 percent of the German DAX executives have worked abroad.152

This confluence of more truly international

talented executives combined with more companies willing to select them suggests that internationalization will push pay levels toward the American model. One example of the effects of these movements on executive pay is Wolfgang Reitzle. Until 1999, Reitzle was an officer and director of BMW AG. 153 Reitzle left BMW in 1999, after not being appointed as the new CEO, and went to Ford, where he worked from 1999 to 2002 as the CEO of Ford‟ Premier Automotive group (comprising all the luxury brands of the Ford Group, i.e. Jaguar, Aston Martin, Volvo,


Gross & Wingerup, supra note 6, at 26.


Lyons & Spencer, supra note 133, at 52.

151 152

Lyons & Spencer, supra note 133, at ??.,4563,62171,0,0,100,0,de.htm.


Jutta Hoffritz, Ungleichheit in deutschen Chefetagen, ZEIT [issue #27 of year 2000], at 22, available at



Land Rover, Lincoln, Mercury). By 2002, he earned slightly more than Ford‟s Vice Chairman Carl Reichard.154 In 2002, he left Ford with a large severance package,155 turned down a similar job at GM,156 and became the CEO at Linde AG, where he was the second highest paid CEO in Germany. 157 Clearly, Reitzle‟s ability to move between the U.S. and German labor markets helped to propel his compensation levels upward. Even surging cross-border executive hiring may not lead to a strong convergence trend in the area of executive pay in the foreseeable future though. Foreign companies are unlikely to recruit an American CEO unless they speak the native tongue fluently. 158 In one extreme example, Goldman Sachs could not appoint Richard Ong to be the CEO of its Beijing joint venture, because his Chinese language skills were not good enough to pass the mandatory test created by the China Securities Regulatory Commission (CSRC) for senior manager at securities firms in China. 159


155 156

157 pdf 158

In some countries, the reluctance to hire may extend beyond language to a bias against foreigners per se. See, e.g., Jo Johnson, A Gift for Much More than Cosmetic Change, FIN. TIMES, June 27, 2001, at 15; Joann S. Lublin, American Advantage: It Often Doesn’t Pay to Work for a Foreign Company’s US Unit, WALL ST. J., Apr. 17, 1991, at R4; Real Gem, FIN. TIMES, Dec. 5, 2000, at 27. 159

Cathy Chan, Chinese-Language Requirements Trips up Goldman Executive, (July



Firms may also shy away from hiring an American because paying them on the American scale could create discord among incumbent executives. While the U.K. may be a popular destination for American CEOs,160 only companies in dire need hire directly from the U.S. since it is viewed as risky. 161 In Sweden, relatively few foreign nationals are CEO‟s of Swedish companies. In 1998, it was rare to find a foreign-born CEO heading up a publicly traded firm in Norway and Sweden. 162 Today, there are a few, including Stuart Graham (American), President and CEO of Skanska (Sweden‟s 6th largest company) and David Brennan (American), CEO of AstraZeneca (Sweden‟s 2nd largest company). 163 Conversely, very few Swedes run foreign companies.164 On the other side of the ocean, American firms recruiting foreign-born managers face a number of barriers, including tough immigration regulations. 165 Moreover, the U.K. experience suggests that very few top executives are actually in a

13, 2007). This requirement applies to “chief executives, deputy chief executives and the heads of supervisory boards at locally incorporated securities firms.” 160

Lyons & Spencer, supra note 133, at 52; see also Keep on Purring, ECONOMIST, July 24, 1999, at 25 (saying the 14 of the 31 best-paid executives in Britain were from the US.). 161

Plender, supra note 137 (noting that it is more conventional to hire Americans who have risen through the ranks). 162

Less than 10 non-Scandinavians were CEOs of listed Norwegian and Swedish companies. Oxelheim & Randøy, supra note 132, at 4. 163

AstraZeneca was formed in 1999 through the merger of Astra AB of Sweden and Zeneca Group PLC of the U.K.. Ingela Björck, Sweden’s Brain Gain, Science Magazine, Jan. 16, 2004, available at 0/sweden_s_brain_gain/(parent)/158. 164


Jan Hack Katz, Competition Breeds Efficiency? Then Open the Executive Suite to the Free Market, L.A. TIMES, May 16, 1997, at B9.



position to move, 166 although the potential for such moves has been the justification for significant increases in executive pay at some firms. 167 Some Canadian commentators have claimed that CEOs at internationally competitive companies might be able to move to the U.S.168 However, few Canadian CEOs have sought opportunities in the U.S. and many lack the credentials to work for larger firms outside the domestic market.169 C.

Transnational Mergers and Acquisitions Cross border mergers and acquisitions are another force that could foster a

shift in executive compensation practices. Cross-border activity has been booming in recent years170 for a variety of reasons including heightened competitive pressures, improvements in technology and communications, and the growth of global markets for goods and services. 171 The size of these transactions should not be


Look Out, There’s a Monster Coming to Your Annual Meeting, TELEGRAPH, July 25, 2000, at 27; Random Numbers, ECONOMIST, June 3, 1995, at 62; Simon Targett, Heat May be Turned Up, FIN. TIMES, Nov. 17, 2000, at FT Director 7. 167

Peter Martin, More than Their Job’s Worth, FIN. TIMES, May 15, 1993, at 8; Thin Excuses for Fat Cats, INDEP. SUN., Mar. 6, 1994, at 20; John Waples, Boardroom Bonanza, SUN. TIMES, July 16, 2000, § 3, at 9. 168

David Berman, A Bad Place to be Boss, CAN. BUS., July 1997, at 17; Katherine Gay, Canadian CEOs’ Pay Makes it Hard to Attract Top Talent, FIN. POST., Apr. 20, 1996, at 32; Janet McFarland, Managing Compensation, GLOBE & MAIL, Nov. 5, 1996, at B17. 169

Bruce Gates, Well-Paid Canadian Executives Facing a ‘Taxing’ Problem, FIN. POST, May 6, 1991, at 24. 170

See, e.g., Bernard S. Black, The First International Merger Wave (and the Fifth and Last US Wave), 54 U. MIAMI L. REV. 799 (2000). 171

Abdel M. Agami, Cross-Border Mergers Among Multinational Businesses, MULTINAT‟L BUS. REV., Spring 2001, at 77. Other reasons offered for the



underestimated. American firms have made a number of major foreign acquisitions in recent years. For instance, in August 2006, the American firm Rite Aid bought the Brooks and Eckerd drugstore chains for $3.4 billion, 172 and in May 2007, the American firm Mylan Laboratories Inc. bought the generic drug division of the DAX listed Merck KGaA for $6.6 billion.173 But foreign firms have been just as active, or even more in the U.S. Some examples of recent American acquisitions by foreign firms include BASF AG‟s 2006 $5 billion acquisition of the Engelhard Corporation,174 Siemens AG 2007 acquisition of Texas-based UGS for $3. 5 billion,175 Hitachi and GE‟s 2007 merger of their nuclear power business, 176 Royal Bank of Scotland‟s 2004 acquisition of Charter One

increase include the liberalization of international trade and capital flows. David Allen, Global Mergers, MGMT. ACCOUNTING, April 1999, at 50. 172

Rite Aid to Buy Eckerd, Brooks Drugstore Chains, WALL ST. J., Aug. 25, 2006, at A8. 173

Anuj Gangahar, Chrysler Sale Provides Spark to the Auto Sector, FIN. TIMES, May 15, 2007, at 44. 174

Der Riese Siegt, ZEIT, May 30, 2006, at; BASF Investor Relations: Engelhard Aktien,*Lq. 175

Siemens Presse: Siemens übernimmt UGS Corp., 2007011320_1431035.pdf. 176

Hiroyuki Kachi & Ayai Tomisawa, Earnings Digest: Hitachi, Amid Red Ink, to Fuse Nuclear Operations With GE's, WALL ST. J., May 17, 2007, at C6.



Financial for $10.5 billion,177 and BNP Paribas‟ 2004 acquisition of Community First Bankshares for $1.2 billion. 178 Given the magnitude of the deals completed, this wave of international consolidation could impact executive compensation packages because when merging companies‟ managerial pay arrangements differ, they may move to adopt a single pay system. Thus, for example, if an American firm acquires a foreign firm in a crossborder acquisition, this can create pressure at the combined firm to move toward American pay practices. The executives of the acquired company are likely to be less well paid than their American counterparts. If separate pay systems are retained after the merger, the top executives at the acquired firm would likely be dissatisfied, perhaps leading to harmful defections. 179 To preserve internal harmony, and insure that good people are retained, the new firm will likely move toward American-style compensation packages. If this is correct, and U.S. firms continue to make significant acquisitions, the cross border acquisitions by American companies should create momentum toward U.S.-style executive compensation. Conversely, foreign firms making acquisitions in the U.S. face the problem that American targets previously offered U.S. style remuneration packages to its executives. Therefore, one by-product of a merger could be huge internal pay inequities between the home-country executives and the American-based executives,


David Wells & David Wighton, Taking a Lead in a Foreign Wave of American Bank Purchases, FIN. TIMES, May 5, 2004, at 24. 178

BNP Buys Community First, FIN. TIMES, Mar. 16, 2004, at 1.


Robert A. Romanchek, Executive Compensation in a Global Merger, ACA J., First Q. 1999, at 6.



with resulting pressure on the parent company to resolve the problem by increasing home-country executive pay. While theoretically the acquirer could slash pay for its U.S.-based managers, this would likely disrupt the retention of key incumbent talent and harm efforts to recruit new people. 180 In one well-known instance, the 1998 merger between Daimler-Benz AG, a German automobile manufacturer, and Chrysler Corporation, an American competitor, the compensation of Chrysler‟s No. 2 executive exceeded that of the top 10 Daimler-Benz executives combined. 181 This inequity led the newly merged Daimler-Chrysler to develop a pay system in order to recruit and retain talented managers to run its American operations. 182 D. The Growth of Multinational Enterprise Another important force affecting international executive compensation practices is the enormous expansion in the number and size of companies that operate on a multinational basis. 183 One manifestation of this growth is that foreign direct investment by firms around the world reached record highs this decade. 184 In terms of executive pay, the key dynamic is that multinational businesses often find it important


Murphy, supra note 2, at 2497; J.E. Richard, Global Executive Compensation: A Look at the Future, COMPENSATION & BENEFITS REV., May-June 2000, at 35. 181

Brian R. Cheffins, The Metamorphosis of ‘Germany Inc.’: The Case of Executive Pay, 49 AM J. COMP. L. 497, 509 (2001) [hereinafter Cheffins, Metamorphosis](comparing salary, bonus and stock option awards). 182

Fung, supra note 60, at 37.


Douglas M. Branson, Teaching Comparative Governance: The Significance of ‘Soft Law’ and International Institutions, 34 GA. L. REV. 669, 669, 672-75 (2000). 184



to use a universal standard for managerial pay arrangements. Such a standard allows them to develop incentive-based compensation on a company-wide basis. 185 When multinational corporations make executive compensation decisions on a worldwide level, “more uniform executive pay structures are the result.” 186 For multinationals headquartered in the United States, a universal policy should result in an American type of executive pay. Host-country nationals employed by American companies will undoubtedly benefit because their pay will generally be raised to U.S. levels. 187 There may also be a secondary impact on the market for managerial talent in the host countries if the U.S.-based multinationals hire local executives to fill top posts. Presumably this will force domestic companies to raise their pay levels to ensure their top managers stay put or to recruit new managers. 188 Some multinational firms prefer not to use uniform executive compensation systems internationally, and instead take into account local compensation norms, national tax considerations and other conditions.189 A recent survey by Towers Perrin “found that nearly 40% of U.S. multinationals no longer grant the same number of options to all employees at an equivalent organizational level worldwide, but instead differentiate awards according


Marc Baranski, Think Globally, Pay Locally: Finding the Right Mix, COMPENSATION & BENEFITS REV., July-Aug. 1999, at 15, 20-21; Fung, supra note 60, at 38. 186

Richard, supra note 174, at 35.


HELEN DERESKY, INTERNATIONAL MANAGEMENT: MANAGING ACROSS BORDERS AND CULTURES 366-67 (3d ed., 2000). Still, when US multinationals use Americans for top management positions in foreign subsidiaries, the top executives can often be segregated in terms of their pay: Fung, supra note 60, at 41. 188

Murphy, supra note 2, at 2497.





to geography,” which typically leads to lower option awards to non-U.S. employees.190 This change reflects the impact of the FASB‟s decision to require expensing of stock options and will reduce pressure on non-U.S. companies to increase option awards. 191 These types of changes lead to top managers being paid differently within the same firm depending on where they work. However, multinationals headquartered outside the United States with substantial American operations may not have this option because while they will need to offer competitive pay in the U.S. in order to recruit or retain their American managers, doing so may well lead to the parent company‟s top executives earning less than their U.S. subordinates. 192 Home country executives may lobby for U.S. assignments to get higher pay, then demand similar compensation at home as a condition of returning there. In the face of such pressures, multinational firms may feel compelled to shift to a universal pay policy and thereby contribute to the globalization of executive pay. One interesting study examined 90 Norwegian and 97 Swedish companies listed on their countries‟ respective stock exchanges between 1996 and 1998, looking at the effect of internationalization on CEO pay, finding a positive relationship between CEO compensation and foreign exchange listing, Anglo-American board


Id. at 3.


Id. at 3.


Berman, supra note 162; Johnston, supra note 6; Joann S. Lublin, American Advantage: It Often Doesn’t Pay to Work for a Foreign Company’s US Unit, WALL ST. J., Apr. 17, 1991, at R4 (focusing on the jealousies that high US pay can generate).



membership and export and foreign sales intensity. 193

The authors claim that

companies exposed to foreign ownership and foreign management have greater risks for CEOs, which in turn lead to a higher risk premium for the CEO.194 Furthermore, the supply of competent CEOs in a large international business is very limited since they require additional skills, such as overseas experience, the necessary language skills and an understanding of cultural differences. In these ways, then, growth in multinational enterprises can bring about dramatic changes in CEO pay. E.

Conclusion It is hard to know how strong these forces for executive pay convergence are.

The apparent movement towards more dispersed share ownership in many countries could lead to stronger pay for performance (and therefore higher pay) at many foreign firms, but the current trend may not last. Similarly, cross-border transactions can promote American style managerial pay, but economic fluctuations and political uncertainties could reduce the current high level of activity. Moreover, these market forces may not have as decisive an influence in the area of executive compensation as it may seem. Other factors, such as immigration laws, may limit their impact. Legal rules, both direct and indirect, can affect companies‟ executive pay arrangements. Soft law, such as guidelines and rules promulgated by private organizations, and business/national culture in the countries in which companies operate, can also be very important. The next four sections consider the effect of these forces.


Oxelheim & Randøy, supra note 128, at 3.




Corporate Law and the Globalization of Executive Pay

A. Direct Regulation Corporate law rules can influence executive pay levels and composition. Direct regulations can state how executive pay arrangements must be structured, as they did in India under the Companies Act of 1956.195 By law, total managerial compensation could not exceed 11 percent of a company‟s net annual profits, 196 and the pay for directors acting in a managerial capacity could not be raised without government approval. 197 Moreover, government pay increase guidelines included a ceiling on annual pay based upon the President of India‟s salary. 198 As India moved away from a socialist, state-dominated economy, these laws were liberalized in the early 1990s.199 As a result, India moved toward having more similar compensation practices to those found in other countries.

194 195

Id. at 3. Indian Companies Act, No. 1 of 1956.


Indian Companies Act of 1956 §§ 198, 309. On the origins of the provision and for background, see A. RAMAIYA, GUIDE TO THE COMPANIES ACT (ACT I OF 1956 AMENDED UP TO DATE), li, lii, 15, 22, 337-40, 503-8 (6th ed., 1971) [hereinafter RAMAIYA, 6th ed.]. 197

Indian Companies Act of 1956 § 310. [supra 189] For background on this provision, see RAMAIYA, 6th ed., supra note 163, at lii, 22, 508-10. 198

On the guidelines, see RAMAIYA, 6th ed., supra note 163, at 510-12. On the link to the President‟s salary, see Ramaswamy et al., supra note 92, at 182. 199

Ramaswamy et al., supra note 92, at 182. Essentially, unless a company is unprofitable, it is free to work out a suitable remuneration package for its managerial personnel within the limit of a designated percentage of net profits. A. RAMAIYA, GUIDE TO THE COMPANIES ACT, 1738-44, 2435-50, 2732-61 (15th ed., 2001) [hereinafter RAMAIYA, 15th ed.].



Generally, corporate law does not directly regulate executive compensation, 200 although a few countries have some minor regulations. For example, Argentina and the Philippines prohibit companies from paying directors more than a designated percentage of annual earnings. 201 Australia202 and Germany203 have requirements that that executive pay must be “reasonable.” In Brazil, the corporation‟s administrators


Eddy Wymeersch, Current Company Law Reform Initiatives in the OECD Countries: Challenges and Opportunities (2001) (unpublished manuscript at 26, on file with authors) (discussing Europe); see also Canada Business Corporations Act, RSC 1985, c. C-44, s. 125 (on the subject of Canada); R.C. BETHUIN & S.M. LUIZ, BETHUIN‟S BASIC COMPANY LAW, 193-94, 211 (3d ed., 2000) (discussing South Africa); Ichiro Kawamoto et al., Japan, in INTERNATIONAL ENCYCLOPAEDIA OF LAWS: CORPORATIONS AND PARTNERSHIPS 175-76 (R. Blanpain & K. Geens, eds., 1998) [hereinafter INTERNATIONAL ENCYCLOPEDIA] (discussing Japan); WALTER WOON, COMPANY LAW 251-54 (2d ed., 1997) (discussing Singapore). 201

In Argentina the amount is 25 percent of earnings (5 percent if no dividend is distributed) and in the Philippines it is 10 percent of net income before tax. See INTERNATIONAL HANDBOOK OF GOVERNANCE 1, 4, 168 (1996) [hereinafter INTERNATIONAL HANDBOOK]; Paul van Nieuwenhove, Argentina, in INTERNATIONAL ENCYCLOPEDIA, supra note 167, at 86. 202

A public company is prohibited from providing remuneration to managers that is not “reasonable” unless the arrangement has been approved by the shareholders: s. 211 of the Corporations Act 2001, No. 50 of 2001. 203

In Germany, most firms that distribute shares to the public do business as a stock corporation or “Aktiengesellschaft” (“AG”) and an AG„s management board will be staffed by senior full-time executives. The total remuneration of these executive has to be adequate to the “job of the executive” and the “position of the corporation”. German Stock Corporations Act of 1965, AktG § 87 (1). To determine whether a specific remuneration is adequate to the job of the executive, the following aspects have to be considered: the character of the task related to the job, the degree of difficulty, the significance for the company and the amount of responsibility which comes along. Wolfgang Hefermehl, Annotations to the AktG, Vol. III, § 87 para 7 (Beck, Munich, 2004); Joachim Meyer-Landrut, in C.H. Barz, Annotations to the AktG, Vol 1-/2, § 87 para 3 (Berlin, de Gruyter, 1973), M. Peltzer, Commemorative publication for Lutter, 2000, 571, 574 (Schmidt, Cologne, 2000)



(essentially its directors and executive officers) must be paid only the amount required by their experience, reputation, duties and the market value of their services. 204 With the exception of the now defunct Indian regulations, these types of restrictions have done little to constrain pay levels. Australia is a good example: since 1992, when it introduced its “reasonable” compensation requirement, executive pay levels have risen substantially. 205 The same can be said of Germany, with its rule that compensation levels reasonably correspond to the services provided. 206 B.

Breach of duty and related causes of action A second potential constraint on executive pay levels is judicial intervention.

In many countries, courts may review a company‟s directors‟ decisions setting executive pay, 207 if there are grounds to suspect that those directors have breached their duties of care, loyalty or good faith owed to the company. 208 Derivative suits


Eduardo S. Neto & Jorge E.P. Levy, Brazil, in INTERNATIONAL ENCYCLOPEDIA, supra note 193, at 62-63. 205

Henry Bosch, Looking in the CEO’s Pay Packet Has a Cost, SHARES MAG., Oct. 1998, at 61. The statutory provision was first introduced by s. 27 of the Corporate Law Reform Act 1992, Act No. 210 of 1992. 206

Walter Oppenhoff & Thomas O. Verhoeven, The Stock Corporation, in BUSINESS TRANSACTIONS IN GERMANY §24.03[1][c][ii][B] (Dennis Campbell ed., 1999). For background on why the relevant provision does not have a major practical impact, see Cheffins, Metamorphosis, supra note 175, at 30-32. 207

Randall S. Thomas & Kenneth J. Martin, Litigating Challenges to Executive Compensation: An Exercise in Futility?, 79 WASH. U. L. Q. 569, 599-600, 602-3 (2001)[hereinafter, Litigating Challenges]. 208

On the law on these duties in various countries, see DIRECTORS‟ RESPONSIBILITIES IN EUROPE (S.J. Berwin & Co. eds., 1997); BETTY M. HO, PUBLIC COMPANIES AND THEIR EQUITY SECURITIES ch. 10 (1998) (Hong Kong); INTERNATIONAL HANDBOOK, supra note 168, at 69-70 (Japan); WOON, supra note



have been used in numerous instances in the U.S. to challenge managerial compensation arrangements.209 While such actions succeed most frequently in challenging pay at privately held corporations, they provide a sporadic check on managerial remuneration even at public companies.210 Overall, however, litigation seems unlikely to have a meaningful effect on international executive pay trends. In some countries, such as China, the concept of the derivative suit is so new that it cannot be determined if it will become an effective remedy for shareholders.211 Even in the U.S., derivative suits have had little influence over increases in managerial pay, 212 perhaps because judges are unwilling to act as

193, ch. 8 (Singapore and Malaysia); Neto & Levy, supra note 197, at 65-67 (Brazil); European Private Equity and Venture Capital Association Special Paper at 8, 16, 2527, 34-35, 41-42, 49-51, 57, 67, 74 (on file with authors) (European countries). 209

For empirical evidence on such litigation, see Thomas & Martin, Litigating Challenges, supra note 200, at 573-93. 210

Id. at 586-87.


The derivative cause of action for shareholders was only recognized in 2006, in the new third amendment of the PRC Company Law. Specifically, Article 152 of the new PRC Company Law (third amendment) provides that “shareholders separately or jointly holding one percent or more of the shares [for more than 180 days consecutively]… may request directors or supervisors to commence litigation. If the directors or supervisors do not take action, or if the failure to lodge a lawsuit immediately will cause unrecoverable damages to the interest of the company, the shareholders may commence a lawsuit themselves … in the names of the shareholders rather than that of the corporation.” Weiguo He & Steven Robinson, China Corporate Laws Get Major Overhaul, The Lawyers Weekly, Feb. 16, 2007. 212

Id. at 601-2, 605.



corporate paymasters.213 Undoubtedly, judges in other countries will be influenced by this type of concern as well. 214 Even an activist judge would not be enough in most jurisdictions though, as plaintiffs in most countries face significant procedural barriers to pursue these actions. For example, in many civil law countries, shareholders cannot bring derivative suits,215 or face being dismissed for lack of standing it they do not own a very substantial percentage of a company‟s stock (often five or ten percent). 216 In Sweden, for example, a shareholder must own ten percent of the outstanding shares in order to bring a derivative suit against members of the board.217 In most common law countries, there are few narrowly focused exceptions to the principle that only the company can pursue directors for breaching their duties to the firm, 218 and these are little help to disgruntled minority shareholders. 219 Even in jurisdictions with


Id. at 601-2.


BRIAN R. CHEFFINS, COMPANY LAW: THEORY, STRUCTURE AND OPERATION 674 (1997)(U.K.) [hereinafter, Company Law]; Zoher Adenwala, Directors’ Generous Remuneration: To Be or Not to Be Paid, 3 BOND L. REV. 25 at 30 (1991) (Australia); Cheffins, Metamorphosis, supra note 175, at 31-32 (Germany). 215

Matthias W. Stecher et al., General Report, in Matthias W. Stecher, ed., PROTECTION OF MINORITY SHAREHOLDERS 1, 9-10 (Matthias W. Schecher ed., 1997). 216

Id; Neto & Levy, supra note 197, at 65.


Aktiebolagslagen [ABL] [Companies Act], 29:7 (Swed.).


On England, see Foss v. Harbottle (1843) 2 Hare 461; Edwards v. Halliwell [1950] 2 All ER 1064 (CA). Jurisdictions where the same basic rules apply include Ireland (Stecher, supra note 208, at 9), Hong Kong (HO, supra note 201, at 629-40); Malaysia and Singapore (WOON, supra note 193, at 327, 343). 219

CHEFFINS, COMPANY LAW, supra note 207, at 315-16, 665-66.



statutorily liberalized standing rules (e.g. Canada, South Africa and Australia), 220 all recoveries go the company rather than the shareholder so filing suit is more trouble than it is worth.221 Perhaps in recognition of these limitations, a number of common law jurisdictions have enacted statutes that create judicial remedies for shareholders who have been unfairly prejudiced by a company‟s actions. 222 These provisions permit a minority shareholder to file suit free from the procedural constraints attached to derivative actions and to seek a personal recovery. 223 Nevertheless, courts have been reluctant to permit such challenges to excessive compensation except at privately held firms. 224 In short, litigation seems unlikely to have much impact on executive pay at the publicly-traded companies that dominate the international economy.


BETHUIN & LUIZ, supra note 193, at 155-56; Brian R. Cheffins, Reforming the Derivative Action: The Canadian Experience and British Prospects, 1 COMPANY FIN. INSOLV. L. REV. 227, 234-35 (1997) [hereinafter Cheffins, Reforming]; Peter Prince, Australia’s Statutory Derivative Action: Using the New Zealand Experience, 18 CO. SEC. L.J. 493, 493-97 (2000). 221

Cheffins, Reforming, supra note 213, at 256-58. Cf. Mark D. West, Why Shareholders Sue: The Evidence from Japan, 30 J. LEGAL STUD. 351, 364 (2001) (noting that Japanese shareholders have weak incentives to bring derivative litigation but explaining the launching of proceedings of this type by reference to attorney motives). 222

See, e.g., U.K. Companies Act, c. 6, s. 459; DENIS H. PETERSON, SHAREHOLDER REMEDIES IN CANADA § 18.15 (1989) (outlining Canadian statutory provisions); Corporations Act of 2001, s. 232 (Australia); HO, supra note 201, at 65758 (outlining the position in Hong Kong); WOON, supra note 193, at 158-60 (discussing Singapore and Malaysia). 223

Cheffins, Reforming, supra note 213, at 242.


Thomas & Martin, Litigating Challenges, supra note 200; J.H. FARRAR & B.M. HANNIGAN, FARRAR‟S COMPANY LAW 450-51 (4th ed., 1998). Cf. KEVIN P. MCGUINNESS, THE LAW AND PRACTICE OF CANADIAN BUSINESS CORPORATIONS 966-



It is worth noting that in Germany, at least, criminal charges may be brought against CEOs in limited circumstances for taking excessive severance pay packages. In a recent case arising out of the hostile acquisition of Mannesmann, a German firm, by Vodafone, a British company, the supervisory board of Mannesmann approved golden parachutes for senior Mannesmann executives of €57 million. 225 German prosecutors filed criminal charges against the former CEO of Mannesmann Klaus Esser,226 seeking up to three years in prison for Esser and other members of the supervisory board. After an initial defeat in the trial court, the plaintiffs appealed. On appeal, Germany‟s highest appellate court noted that granting non-compensation recognition payments (golden parachutes) that are a special reward and bring no future value to the concern injures the company‟s entrusted assets.227 The case was remanded to the trial court. Ultimately, the trial proceeding were stopped when the defendants agreed to make a settlement payment of $7.6 million, but with no criminal sanctions. 228 However, it seems likely that this one case had a dramatic impact on German executives‟ willingness to seek, and German directors‟ willingness to offer, this form of compensation in the future. C.

Shareholder Voting

67 (1999); G.P. Stapledon, Use of the Oppression Provision in Listed Companies in Australia and the United Kingdom, 67 AUSTL. L.J. 575, 576-78 (1993). . 225

Ivar Simensen, Judge Approves Euros 5.8m in Retrial, FIN. TIMES, Nov. 30, 2006 at 28.See also, 226



Andrew Bulkeley, Court Approves Deutsche Bank Settlement, The Daily Deal, Nov. 30, 2006.



Shareholder voting requirements imposed by corporate law constitute another potential constraint on executive pay levels. In most countries, a company‟s board of directors is given the lead role in determining executive pay, 229 or if a two-tier board structure is used (as in Germany) for the “supervisory” board being charged with this duty.230 However, stockholders may have a role in the process. Some countries give shareholders the power to fix directors‟ annual pay.231 In other jurisdictions, shareholders have to approve the creation of stock option plans for top executives. 232 Sweden is an interesting example. In 2006, the Swedish Companies Act was amended to strengthen the role of shareholders in deciding on remuneration for leading executives and board members. These amendments provided that at publicly traded companies, the shareholders, with the guidance of the board of directors, must approve guiding principles for remuneration to employees in leading positions, including policies regarding the use of options and other similar incentivizing


JAMES D. COX ET AL., CORPORATIONS §11.4 (1998); INTERNATIONAL HANDBOOK, supra note 194, at 15, 26, 76, 124, 147, 162, 206. 230

On Germany, see AktG, §§ 87(1), 112. Even if there is a one-tier board, it is becoming common in some countries for a remuneration committee composed primarily of outside directors to advise the board: Cheffins & Thomas, Say on Pay, supra note 81, at 285, 298 (discussing the U.S. and the U.K.). 231

ROBERT BAXT ET AL., AUSTRALIAN CORPORATIONS & SECURITIES REPORTER ¶ 41, 620 (North Ryde, NSW: CCH Australia, 1990) (discussing Australia); JEAN-PIERRE LE GALL & PAUL MOREL, FRENCH COMPANY LAW 104 (2d ed., 1992) (discussing France); M.T. Kreek & S.E. Eisma, Netherlands, in INTERNATIONAL HANDBOOK, supra note 194, at 60 (discussing the Netherlands); Kawamoto, supra note 193, at 176 (discussing Japan); Neto & Levy, supra note 197, at 63 (discussing Brazil);Van Nieuwenhove, supra note 194, at 86 (discussing Argentina). 232

See infra note ____ and accompanying text, discussing Germany and Japan. The position is the same, for example, in France: Francois Marty & JeanFrancois Dumas, France Opens up the Options, INT‟L TAX REV., July 1997, at 52, 52.



instruments.233 Once adopted, these principles must be followed by the board unless the shareholders are informed and given an explanation for the deviation. Moreover, the new rules provide that the shareholders must approve the compensation for board members. 234 It remains to be seen if these new rules will curb increases in Swedish CEOs pay. Shareholder voting rules seem designed to give shareholders the power to curb excessive managerial compensation, 235 but are often too narrow to accomplish this goal. For instance, giving shareholders the power to set director pay does not permit them to regulate the contracts and pay packets that firm managers receive. 236 Nor would one expect shareholder voting to be important in countries where shareholder ownership patterns feature controlling shareholders. While requiring a shareholder vote on executive pay might appear to be significant, in fact, dominant shareholders already determine executive pay regardless of whether a shareholder vote is required. In dispersed share ownership countries, such as the U.S. and the U.K., shareholder voting on executive pay is a popular issue for institutional investors. 237


Aktiebolagslagen [ABL] [Companies Act] 7:61 and 8:51 (Swed.).


Aktiebolageslagen [ABL] [Companies Act] 8:23 a.


See, e.g., Kawamoto et al., supra note 193, at 175-76 (discussing

Japan). 236

In the Netherlands, the corporate constitution can displace the rule that shareholders must vote and the board in fact does normally settle the terms of the service contracts of managing directors: P. SANDERS, DUTCH COMPANY LAW 72 (1977). In France, the directors settle all executive service contracts. JEAN-PIERRE LE GALL AND PAUL MOREL, FRENCH COMPANY LAW 114 (2d ed., 1992). 237

Even in Germany, investors tired of high executive pay levels are starting to demand a general non-binding voting approval of executive pay at the



However, at present, the available empirical evidence suggests it functions as a potential check on executive pay only when such compensation arrangements significantly deviate from the norm. 238 This suggests that even if more countries move from concentrated ownership patterns toward the more diffuse Anglo-American pattern, this shift would not result in shareholder voting emerging as a significant influence on executive pay. D.

Restrictions on the Distribution of Stock to Executives Companies with executive stock option plans will generally issue new shares

to the option holders when they exercise their options, or alternatively repurchase outstanding stock in order to sell it to their executives.239 Many nations, however, heavily regulate companies‟ ability to issue new stock and/or prohibit stock buy-backs except in special circumstances.240 As a result, it may be very difficult to employ executive stock option schemes. Germany is a good example. Prior to the enactment of the Corporate Sector Supervision and Transparency Act (KonTraG) on May 1 st 1998, German corporations were not permitted to issue stock options unless they were based on convertible annual shareholder meeting. Arne Storn, Aufstehen und Abstimmen, ZEIT [issue #34 of year 2004], at 34, available at 238

Cheffins & Thomas, Say on Pay, supra note 81, at 43.


Cheffins, Metamorphosis, supra note 175, at 14.


See, e.g., COMPANY LAW IN EUROPE B62, D60-61, EC 88, F50, H48, P42, Q66 (Shaun W. Thorpe ed., 1995) (discussing pre-emptive rights in various European countries and European Union company law measures governing share repurchases); WOON, supra note 193, at 592-95 (discussing share repurchases in Singapore and Malaysia); van Nieuwenhove, supra note 194, at 66, 70 (discussing pre-emptive rights and share repurchase rules in Argentina).



bonds. 241 However, even those convertible bonds options were often challenged by shareholders in German courts.242 Therefore only a few of the largest German companies granted those options before May 1998, e.g. Deutsche Bank, Volkswagen und Telekom. 243 After May 1998 and the passage of the KonTraG, stock option plans became more common, especially by large companies quoted on the DAX, because now it was possible to grant options to purchase newly issued shares.244 In Sweden, the Swedish Companies Act requires shareholder approval of the issuance of new shares to be used as part of a compensation package to executives. 245 To approve this issuance, a 90 percent supermajority of the shares represented at the shareholder‟s meeting is needed for approval. 246 In other words, a stockholder representing more than 10 percent of the shares at the shareholder‟s meeting may veto an incentive program based on the issuing of new shares. This occurred in 2007 at the annual shareholders‟ meeting for Ericsson when foreign institutional investors,

241 any.pdf , p. 4 242 any.pdf, p. 4 243 any.pdf, p. 4 244 any.pdf, p. 4 245

Aktiebolagslagen [ABL] [Companies Act] 16:2 (Swed.).


Aktiebolagslagen [ABL] [Companies Act] 16:8 (Swed.).



apparently on the recommendation of Institutional Shareholder Services, voted against an employee incentive plan. 247 Restrictions on the use of stock options are of diminishing importance elsewhere. During the late 1990s, Japan, South Korea and Finland all liberalized their statutory rules to make it feasible for corporations to grant executive stock options. 248 Shareholder approval still must be obtained before option plans can be created, but this does not seriously constrain implementation of them. Indeed, large numbers of Korean249 and Japanese250 companies have begun granting stock option plans. E.

Disclosure Disclosure regulations in many countries require corporations to periodically

publicly reveal some details concerning their executive compensation arrangements. The U.S. system has probably the most demanding set of rules in this regard. Under American federal law, the corporation subject to the 1934 Exchange Act‟s reporting requirements must include in its proxy statement a description of the corporation‟s


“Rött ljus för bonusar”, E24!/SvDNäringsliv,April 12, 2007, available at 248

The Best…and the Rest, supra note 4, at 13. For example, in South Korea regulations dealing with stock issuance now permit companies to satisfy their obligations under stock option plans (Kon-Sik Kim & Chong-Kee Lee, South Korea in INTERNATIONAL ENCYCLOPEDIA, supra note 193, at 85). The same was done in Germany and Japan and changes were also made to the rules governing share buybacks. See Maximilian Grub, The Concept of Corporate Governance and Recent Developments in Germany, CORP. GOVERNANCE INT‟L., issue #4, at 20, 24-25 (Germany); Akira Kawamura, Introduction of Stock Option, 12 J. INT‟L BANKING L. N-226, N-226-27 (1997). 249

105 Listed Firms Introduce Stock Options This Year, KOREA HERALD, Oct. 20, 2000, available at 2000 WL 27394960. 250

Kawamura, supra note 241, at N-226-27.



general approach to executive pay and the amounts and types of compensation (salary, bonuses, share options and other designated categories) paid its CEO and the other four highest paid executive officers.251 In addition, the company must include a performance graph comparing the corporation‟s shareholder return over a five year period to that of a similar index of its peers and a general stock market index, such as the S&P 500.252 The U.K., Canada and Australia regimes are the closest to the American disclosure rules. 253 Elsewhere, disclosure regulation is lax with some jurisdictions lacking any reporting requirements, or more commonly, requirements that public firms disclose the total amount of director compensation. 254 However, these disclosures do not include the details on any individual director‟s pay, including the


Item 402(a)(2), (3), (b), (k) of Regulation S-K; 17 C.F.R. 229.402(a)(2), (3), (b), (k) (2000). 252

Item 402(l) of Regulation S-K; 17 C.F.R. 229.402(l) (2000).


Conyon & Murphy, supra note 9, at F643 (U.S. and U.K. standards close); Xianming Zhou, CEO Pay, Firm Size, and Corporate Performance: Evidence from Canada, 33 CAN. J. ECON. 213, 216 (2000). On the law in Australia, see Michael Quinn, The Unchangeables – Director and Executive Remuneration Disclosure in Australia, 10 AUSTL. J. OF CORP. L. 89, 98 (1999). 254

See, e.g., INTERNATIONAL HANDBOOK, supra note 194, at 4, 27, 77, 94, 106, 137, 201, 212 (discussing Argentina, Denmark, Japan, Malaysia, Netherlands, Singapore, South Korea and Spain). In Germany, where two-tier boards are obligatory, the disclosure requirement applies to the management board. See Handelsgesetzbuch (Commercial Code of May 10, 1897, as amended), § 285, ¶ 9.



types of compensation they receive or whether it is performance-related.255 Typically management compensation is not separately disclosed either. 256 In China, the PRC Company Law (third amendment), which is the fundamental law in the corporate law area, generally requires a company to periodically disclose the remuneration received by its executives to its shareholders.257 This law also requires disclosure of executives‟ stock holdings and any changes thereto.258 Subsequent regulations have clarified that executive compensation information must be disclosed in the company‟s annual report,259 while executives must report any changes in their stockholdings within two trading days after such change.260


Jeffrey N. Gordon, Pathways to Corporate Convergence? Two Steps on the Road to Shareholder Capitalism in Germany, 5 COL. J. EUR. L. 219, 236 (1999) (discussing Germany). 256

See, e.g., INTERNATIONAL HANDBOOK, supra note 194, at 42 (setting out the position in France). 257

See Article 117 of the PRC Company Law (third amendment), which states: A company shall periodically disclose to its shareholders the remuneration received by its directors, supervisors and senior management personnel from the company. 258

See Article 142 of the PRC Company Law (third amendment) provides: …A director, supervisor or senior management personnel of a company shall declare to the company the number of shares in the company held by him and any change thereof … 259

See Article 21 of the Information Disclosure Procedures. It provides: An annual report shall include the following content: …5. details of the office, change of shareholding and annual remunerations of directors, supervisors and senior management personnel;…. 260

Article 11 of the Equity Holding & Related Changes Rules says: In the event of a change in the equity shares of a listed company held by any of its directors, supervisors or senior management personnel, he/she shall report such fact to the listed company within two trading days after the date of the change, and make a public announcement on the portal of the Stock Exchanges via the listed company.



National disclosure policy may influence the use of pay for performance compensation outside the U.S. As previously mentioned, Anglo-American institutional investors have encouraged foreign firms to use pay for performance systems to tie managerial interests with those of shareholders. Strong disclosure requirements could reduce the cost of shareholder monitoring of the relationship between pay and performance.261 Data from Canada suggest that the adoption of enhanced disclosure regulation helped to cause a shift in favor of pay for performance at publicly traded companies. 262 Greater disclosure may also accelerate increases in executive compensation. 263 The availability of information about what similarly situated competitors are paying their executives will likely alert top managers who are receiving less than their peers. Eager to reverse their inferior pay standing, and perhaps correct a perceived loss of social status, these managers will make higher future pay demands. 264 Directors on the firm‟s Compensation Committee may be sympathetic to such requests because


Edward M. Iacobucci, The Effects of Disclosure on Executive Compensation, 48 U. TORONTO L.J. 489 at 497-501 (1998). 262

Id. at 502-3; Yun M. Park et al., Executive Pay and the Disclosure Environment, 24 J. FIN. RESEARCH 347, 348 (2001) [hereinafter, Pay Disclosure]. Note, though, that research conducted in New Zealand, which bolstered executive pay disclosure somewhat in the early 1990s, does not reveal the same pattern. See Aleksandar Andjelkovic et al., Public Disclosure of Executive Compensation: Do Shareholders Need to Know?, 10 Pacific Basin Finance Journal 97, ____(2002); Fayez A. Elayan et al, Executive Incentive Compensation Schemes and Their Impact on Corporate Performance: Evidence from New Zealand Since Legal Disclosure Requirements became Effective, 21 Studies in Economics and Finance (2003), at [page #]. 263

Iacobucci, supra note 256, at 504-17; Mark J. Lowenstein, The Conundrum of Executive Compensation, 35 WAKE FOREST L. REV. 1, 23-24 (2000).



they may believe that below average executive compensation indicates that the firm‟s management is “below average”, 265 and might well lead top executives to defect to firms offering more generous pay.266

The end result is higher pay for managers.

Generalizing from this result to the broader CEO labor market, this process may lead to a ratchet effect: if all companies seek to match or exceed the average pay for CEOs, then pay levels move inexorably higher. 267 The fact that during the 1990s the introduction of more stringent executive pay disclosure requirements was accompanied by accelerated increases in managerial remuneration in Australia, the U.K., and Canada, is consistent with this hypothesis.268 Moreover, some empirical work on Canadian executive pay supports this claim. 269 News reports in Sweden have drawn similar conclusions.270


Randall S. Thomas & Kenneth J. Martin, The Effect of Shareholder Proposals on Executive Compensation, 67 U. CIN. L. REV. 1021, 1041-42 (1999). 265

Room at the Top (Editorial), FIN. TIMES, Feb. 19, 1999, at 19.


Peter Rodgers, The Greenbury Effect: Is it Pushing Pay Higher?, INDEP. (London), Apr. 26, 1996, at 21. 267

Room at the Top, supra note; see also How Greenbury Has Boosted Executive Excess, INDEP. (London), June 29, 1996, at 17. 268

On the U.K., see Rodgers, supra note 261; THE COMMITTEE ON CORPORATE GOVERNANCE, REPORT OF THE COMMITTEE ON CORPORATE GOVERNANCE ¶ 4.5 (1998) [hereinafter HAMPEL REPORT; the Committee was chaired by Sir Ronald Hampel]. On Canada, see Iacobucci, supra note 256, at 512; Barbara Shecter, Canadian CEOs Enjoy Average 8% Hike in Compensation, FIN. POST, Sept. 25, 1996, at 5. On Australia, see Margot Saville, Up, Up and…Execs Double Pay in 5 Years, SYDNEY MORNING HERALD, Nov. 16, 2000, at 29. 269

Park, Pay Disclosure, supra note 255, at 353.


Bengt Carlsson, Full fart på vd:arnas lönekarusell, DN., Jan. 3, 2004, available at



To the extent that greater executive pay disclosures lead to higher managerial pay, then any movement in that direction by countries with lax regimes is significant. One example may be Spain, which enacted laws in 2000 requiring publicly traded firms to divulge a wide range of information when they grant options to board members. 271 Similarly, after 2002, French companies will be obliged to report the individual pay of all company officers. 272 Most importantly, in Germany, before 2005, publicly traded companies were only required to disclose the aggregate compensation for the entire board of directors.273 On June 30th 2005, the German legislature passed the Disclosure of Executive Remuneration Act (the “VorstOG”) which requires mandatory disclosures of the individual pay arrangements (including basic salaries, long term incentives, and many other aspects) for directors of listed companies.274 Sweden enacted similar legislation in 2006, so that it is mandatory for Swedish companies to include information on compensation to the board of directors, the CEO and other leading executives in their Annual Reports.275 Towers Perrin finds


Charlotte Villiers et al., Share Option Plans for Directors in Privatised Companies in the United Kingdom and Spain, 22 COMPANY LAW. 139, 140, 145-46 (2001). 272

Growing Transparency in France About Chief Executives’ Pay, LES ECHOS, May 3, 2001, at 1. 273

Handelsgesetzbuch (“HGB”) § 289(1) No. 9 lit. a.

274 apitalmarktrecht/1132654503.pdf. Corporations can choose to opt out if shareholders approve it. HGB §§ 286(5), 314 (2) 2. Out of the 30 DAX companies only the Merck KGaA opted out of the modifications of the VorstOG. 275

Årsredovisningslagen [ÅrL] [Annual Accounts Act] 5:20.



that increased levels of public disclosure about long term incentive pay plans are likely to be required by many other countries as well. 276 Simultaneously, there has been a trend toward the greater use of stock options internationally. A 2005 Towers Perrin study found that the use of stock options has become almost universal in European and American firms, while option use has significantly increased in Asia and Latin America since 2001. 277 The laggards are India and South Korea, and even in those countries 20 and 25 percent, respectively, of companies use stock options as an element of executive pay. 278 If these two sets of changes go hand in hand, then disclosure reform may help foster a shift towards more pay for performance in executive pay packages. VI. A.

Other Legal Factors

Tax Tax law may also have an impact on the globalization of executive pay. For

example, an executive‟s income tax rates could affect managerial compensation. If a typical company tailors executive compensation arrangements to match these managers‟ preferences, then CEOs in low marginal tax rate countries are likely to be more highly paid. Executives in low tax countries will be able to keep more of what they earn, and therefore will attach greater value to it. 279 Thus, we would expect that






Id. at 4.


CHEFFINS, Company Law, supra note 207, at 704.



lower income tax rates would be correlated with higher executive pay, which is consistent with the available historical and empirical evidence. 280 Taxes may also affect the use of stock options. Outside the U.S., many countries tax regulations give unfavorable treatment to stock option pay. 281 Sweden is a good example, as one recent academic study concludes: “…the use of stock options to encourage and reward entrepreneurial behavior among employees is highly penalized by the tax system, since gains on options are taxed as wage income when the stock options are tied to employment.”282 Conversely, in the U.K., tax reforms enacted in the 1980s are often cited as a catalyst for stock options‟ popularity. 283 Collaboratively, Towers Perrin‟s 2005 stock options study finds that, for many of the


Id. at 704 (discussing the history in the US and the U.K.); John M. Abowd & Michael L. Bognanno, International Differences in Executive and Managerial Compensation, in DIFFERENCES AND CHANGES IN WAGE STRUCTURES 67, 85-87, 91-92, 95 (Richard B. Freeman & Lawrence F. Katz eds., 1995). For additional supporting anecdotal evidence, see Margaret Lyons, Australia’s Top Executives: Are They Paid Too Much, BUS. REV. WKLY., Nov. 16, 1990, at 52; Joann S. Lublin, The Continental Divide, WALL ST. J., Apr. 18, 1990, at R28. Still, there is some historical data that casts doubt on the significance of income tax rates: Brian J. Hall & Jeffrey B. Liebman, The Taxation of Executive Compensation, in 14 TAX POLICY AND THE ECONOMY 1, ___, (James Poterba ed., MIT Press, 2000). 281

Belgium Revamps Stock Options, INT‟L TAX REV., Apr. 1999, at 5; Chwialkowska, supra note 137; Kevin J. Delaney & David Wessel, Lumpy Gravy: Suppose Stock Options Involved More Pain than Financial Gain, WALL ST. J., Dec. 21, 1999, at A1; Mohan Monteiro & Keyur Shah, India Clears the Way for Stock Options, 11 INT‟L TAX REV. 17, 17 (2000), available at: 4&SID=497117]. 282

Henrekson & Jakobsson, supra note 92, at 34.


Don Egginton et al., Executive and Employee Share Options: Taxation, Dilution and Disclosure, 23 ACCOUNTING & BUS. RESEARCH 363, 363 (1993); Helen Kay, Have We Killed the Share Option?, DIRECTOR, Oct. 1995, at 64, 66.



countries surveyed, taxation was an important determinant of stock option implementation.284 Japan, India and a number of continental European jurisdictions have changed their tax treatment of stock options in recent years. 285 These reforms have tried to reduce the tax burden for an employee receiving options and may have stimulated the use of options. 286 If this is correct, further reform in other countries along similar lines should stimulate the adoption of stock options elsewhere. Some evidence suggests that restructuring the tax treatment of stock options may not have much effect. Using data for 1984 to 1992, Abowd and Boganno examined the tax treatment of stock options in twelve countries to see whether differences in the relevant tax rules were correlated with the popularity of stock-based incentive pay. 287 They concluded that tax treatment of stock options did not explain the balance between stock options and other forms of pay. However, this study did not take into account the tax consequences to the corporation granting the options. In the United States, gains executives receive from exercising stock options are typically deductible from corporate profits as an ordinary




STOCK OPTIONS, (S.J. Berwin & Co. ed., 1999); Monteiro & Shah, supra note 274, at 17 (India); Bob Zukis, Japan and USA Compared, BENEFITS & COMPENSATION INT‟L, Sept. 1997, at 9. 286

Belgium Revamps, supra note 278; Jill Eswick, Relative Values, EMP. BENEFIT NEWS, June 15, 2001, available at 2001 WL 7984504; Zukis, supra note 280, at ??. Spain is an exception to the typical pattern since there has been tax reform recently but this did not liberalize the relevant rules: Delaney & Wessel, supra note 276.



business expense.288 This means that when a CEO exercises stock options, the corporation receives a tax deduction equal to the difference between the market price of the stock and the exercise price of the option. Moreover, in other countries, such as the U.K., companies generally cannot deduct gains executives receive from exercising share options because no out-ofpocket expense is incurred.289 This difference in tax treatment between the U.S. and U.K. may account in part for the greater popularity of executive share options in America. 290 Perplexingly, empirical evidence suggests that U.S. corporations which cannot gain much benefit from the gains realized by executives exercising stock options appear to use this form of compensation in much the same fashion as other firms. 291 From this discussion, it appears that the tax rules may have little effect on executive compensation choices. The role of the tax law on executive compensation was highlighted in 1993, when the U.S. government changed its tax code to limit the deductibility for corporations of executive compensation over $1 million annually unless any


Abowd & Bognanno, supra note 275, at 92-95.


I.R.C. §83(h); Conyon & Murphy, supra note 9, at F665; Hall & Liebman, supra note 273, at [5], Table 1. 289

Wolfgang Bernhardt, Stock Options For or Against Shareholder Value? New Compensation Plans for Top Management and the Interests of Shareholders, 7 CORP. GOVERNANCE: INT‟L REV. 123, 129 (1999). 290

Conyon & Murphy, supra note 9, at F665.


Hall & Liebman, supra note 273, at [18-20].



additional compensation was performance related.292 Subsequent analysis indicates that this tax code change had little effect on the rate of growth of executive pay and only led to small shifts toward pay for performance. 293 This suggests that corporate tax policies have had little impact on whatever globalization trends might exist in the area of executive compensation. B.

Labor Law Outside the U.S. there is a potential legal pitfall for pay for performance plans:

labor laws creating so-called “acquired rights.” In countries recognizing the acquired rights concept, payments that are made on a recurrent basis to an executive can, over time, be transformed into an entitlement to receive stock option compensation, or other forms of long term incentive pay that are intended to be awarded conditional upon satisfaction of criteria related to corporate performance. 294 The creation of such an entitlement would make companies more reluctant to award performance-based pay because it would lose its incentive features and become a fixed component of executive pay. In sum, acquired rights laws could deter the adoption of pay for performance executive compensation, a fact duly noted by Towers Perrin‟s study of


Kevin J. Murphy, Politics, Economics, and Executive Compensation, 63 U. CIN. L. REV. 713, 714, 738 (1995). 293

Hall & Liebman, supra note 273, at [22-24].


Tara Parker-Pope, Culture Clash: Do US-Style Compensation Plans Make Sense in Other Countries?, WALL ST. J., Apr. 12, 1995, at R7; Sven Tischendorf, Planning for Stock Options in Germany, INT‟L TAX REV., Dec. 1998Jan.1999, at 39.



stock options as having an “increasingly important” impact in the European Union countries. 295 However, the effects of acquired rights legislation should not be overstated. In Germany, a grant of stock options, or other incentive-oriented pay, can be deemed an acquired right if, because of the constant repetition of such an award, the employee can reasonably conclude that it is granted to him in perpetuity.296 However, companies routinely stop this from occurring in two ways: first, by adding a requirement to the employee‟s employment contract that all changes must be made in writing, 297 and second by clearly stating in the employment contract that the compensation is given on a voluntary basis. 298 Moreover, only some countries consider stock option plans to constitute an entitlement under acquired rights legislation. 299 Even where acquired rights regulations do apply to incentive-oriented pay arrangements, they may have little impact.300 For example, in Brazil during the 1990s, performance-oriented pay grew substantially in popularity because the Brazilian subsidiaries of some multinational companies began offering variable bonus plans to bolster their recruitment of local




NZA 1998, 423, 423; Ulrich Preis in: Erfurter Kommentar, § 611 para 261. (7th ed., Munich 2007) 297

BAG 24.06.2003 - 9 AZR 302/02.


BAG 16. 09. 1998 - 5 AZR 598/97.


Jeffrey R. Gates & David E. Reid, Translating Your ESOP Abroad, FIN. EXEC., July 1994, at 26. 300

Tom Leander, Latin Comp Joins the Fray, GLOBAL FIN., Aug. 1998, at




managerial talent. To assist local firms in retaining their workers, Brazil‟s Labor Ministry expressly authorized domestic companies to use variable pay based on corporate performance, effectively overruling acquired rights laws. 301 VII.

“Soft Law”

“Soft law,” or the rules and guidelines directed at corporations promulgated by private organizations rather than by legislatures, government regulators, or judges, can have an important impact on internationally-oriented corporations.302 This definition of soft law includes standards promulgated pursuant to a statutory mandate, so that it covers accounting standards in the U.S. developed by the privately organized Financial Accounting Standards Board (FASB), even though the FASB is exercising powers delegated to it by the SEC.303 It also includes the listing rules that apply to corporations traded on the New York Stock Exchange and NASDAQ. Both the listing standards and the accounting rules are soft law, despite the fact that the SEC has the power to veto, or amend, any existing or proposed regulations, because the relevant stock exchanges and the FASB formulate and enforce these standards. 304


In the Towers Perrin study of stock options, “acquired rights” legislation were found to be “somewhat important” in Brazil. TOWERS PERRIN, EQUITY INCENTIVES, supra note 16, at 10. The situation was found to be the same in six other countries. Id. 302

Branson, supra note 177, at 670-71.


For more background on the FASB and its relationship with the SEC, see CHEFFINS, COMPANY LAW, supra note 207, at 376-77, 410-11. 304

Securities Exchange Act of 1934, 15 U.S.C. §78s(b)-(c). For discussion, see Roberta S. Karmel, The Future of Corporate Governance Listing Requirements, 54 SMU L. REV. 325, 339 (2001).



Soft law affects executive pay plans in several different ways. For instance, with few exceptions, in the U.S., the listing rules of the NYSE and NASDAQ require listed companies to obtain shareholder approval before introducing a stock option plan. 305 In Australia, New Zealand, Hong Kong and Singapore, stock exchange listing rules require a shareholder vote if an employee incentive plan will award securities to corporate directors.306 Accounting soft law standards can require disclosures about managerial compensation as well. For instance, for many years in the U.S., stock options received favorable accounting treatment under FASB guidelines. 307 At that time, a corporation that awarded stock options without performance conditions attached had the option of not reducing its earnings to reflect the cost.308 As a result, many commentators claimed that U.S. accounting rules created a preference for stock options. 309 However, the FASB recently ruled that employee stock options are a


Richard H. Wagner & Catherine G. Wagner, Recent Developments in Executive, Director, and Employee Stock Compensation Plans: New Concerns for Corporate Directors, 3 STAN. J. L.,, BUS. & FIN. 5, 12-13 (1997). 306

Australian Stock Exchange Listing Rules, ¶10.14; Jonathan Lemberg & Kathleen Keeler, Equity Compensation: Bringing US-Style Stock Option Plans to Asia, INT‟L FIN L. REV., Oct. 2001, at Supplement 33, 36; Taking Stock of Business, N.Z. HERALD, Jan. 22, 2000, available at 2000 WL 7609569. 307

Bebchuk et al., Rent Extraction, supra note 3, at [45].


If the company chose this option, then it only needed to disclose the cost in a footnote to its accounting statements. See SIRKIN & CAGNEY, supra note 6, §5.02[5]; Susan J. Stabile, Motivating Executives: Does Performance-Based Compensation Positively Affect Managerial Performance?, 2 U. PA. J. LAB.& EMP. L. 227, 276-78 (2001). 309

Murphy, supra note 2, at 2514-15 ; Gretchen Morrison, Investors May Now Eye Costs of Stock Options, N.Y. TIMES, Aug. 29, 2000, at C1; David Leonhardt,



compensation expense that must be included on a company‟s income statement. 310 As a result, there is no longer any accounting advantage to using stock options instead of other forms of compensation. Accounting standards cannot explain why stock options are more popular in the U.S. than they are in other countries though. For one thing, not all countries have such standards – Germany only established an independent accounting standard setter in 1998 for example311 -- and even many countries with well-established accounting standards do not require expensing of stock options. 312 Other factors must account for the unique popularity of stock options in America.

Will Today’s Huge Rewards Devour Tomorrow’s Earnings?, N.Y. TIMES, Apr. 2, 2000, § 3, at 1. 310

Under accounting standard FAS 123(R), the company is required to reflect the liability when the stock option is granted. The practical effect is that the liability for a stock option appears much earlier on a company‟s financial statement, and is therefore far less attractive from an accounting standpoint. For a critical view of this change, see Thomas P. Ferguson, The Requirement to Expense Options: A Reactionary and Deleterious Response to Outrage (2007), available at: 311

Reform in Germany, ACCOUNTANT, July 21, 2000, at 17.


Id. (Germany); Thorold Barker & Michael Peel, Companies Given No Choice on Revealing Share Options, FIN. TIMES, July 21, 2000, at 27 (U.K.); Matthew McClearn, Cruising for a Losing, CAN. BUS., Sept. 18, 2000, at 63 (Canada); Ron Paterson, Grasping the Nettle, ACCOUNTANCY, Sept. 5, 2000, at 102 (U.K.); see also John Flower, A House Built on Sand, ACCOUNTANCY, Nov. 28, 2000, 99; Accounting Standards Board (U.K.), “Share-Based Payment”, Discussion Paper (2000), Appendix E (on file with authors) (discussing the accounting treatment of the issuance of shares in return for services in countries represented in the G4 +1, an accounting think-tank composed of standard-setters from Australia, New Zealand, Canada, the U.K. and the U.S.).



Soft law can provide guidelines for the determination of executive pay, such as those created in various corporate governance codes promulgated in recent years. 313 These codes, often drafted by committees of business leaders and/or stock market officials, 314 quite often contain guidelines about setting executive pay. In Sweden, for instance, the Swedish Code of Corporate Governance was created by business representatives and made as part of the listing agreement for companies traded on the Stockholm Stock Exchange.

It requires the establishment of a remuneration

committee, which must prepare recommendations for senior management‟s pay to be presented for a vote at the shareholders‟ meeting. Their proposal is posted on the company‟s website, and includes such information as the principal terms of bonus and incentive schemes, the variable components‟ relative importance to the fixed components, and how these components are linked to firm performance.315 The effect of the Code has been “positive but not dramatic.”316 The most ambitious arrangement of this type was originally developed in the U.K. The Greenbury Committee‟s 1995 Code of Best Practice, backed by the London


Voluntary guidelines issued by institutional investors on executive pay constitute another example of “soft law” aimed at the setting of managerial remuneration. On the role they play in the US and the U.K., see Cheffins & Thomas, Say On Pay, supra note 81, at 313. 314

On the countries where a governance code has been issued and on those responsible for such activity, see Brian R. Cheffins, Corporate Governance Reform: Britain as an Exporter, 8 HUME PAPERS ON PUB. POL‟Y (#1) 10, 13-14 (2000) [hereinafter Cheffins, Reform]; David Noburn et al., International Corporate Governance Reform, 12 EUR. BUS. J. 116 , 120 (2000). 315

The Swedish Code of Corporate Governance 2005, Sec. 4.2.2.


Heidrick & Struggles, Corporate Governance in Europe - Raising the Bar (2007), at 32.



Stock Exchange, spelled out how executive pay packages should be configured. 317 As a result, listed companies were instructed to avoid paying more than was necessary to hire talented executives, and given detailed guidance on the design of performancerelated compensation. The current version of the listing rules, now administered by the Financial Services Authority, contains a somewhat modified version of the Greenbury Code guidelines in an appendix referred to as the Combined Code.318 Although listed companies were not obliged to comply with the Greenbury Report‟s recommendations, only to disclose whether or not they conform with its standards, 319 nervertheless there is substantial compliance overall. 320 In this indirect manner then, soft law guidelines on executive pay have had an influence on the configuration of managerial pay. 321


Brian R. Cheffins, Corporate Governance in the United Kingdom: Lessons for Canada, 28 CAN. BUS. L.J. 69, 79-80 (1997) [hereinafter Cheffins, Corporate Governance]. 318

See Financial Services Authority, Listing Rules, Combined Code, Code of Best Practice, Section 1, ¶¶ B1 – B3, Schedule A. The provisions dealing with executive pay were amended in 1998 as a result of recommendations made by the HAMPEL REPORT, supra note 266, ¶¶ 4.1-4.20. 319

Financial Services Authority, Listing Rules, para. 12.43A(b); Cheffins, Corporate Governance, supra note 312, at 82-83. Those failing to divulge departures from the relevant guidelines have been subject to various possible sanctions, including delisting. Cheffins, Corporate Governance, supra note 312, at 83; Financial Services Authority, Listing Rules, ¶ 1.9. 320


HAMPEL REPORT, supra note 266, ¶ 1.9 (discussing disclosure); PENSIONS & INVESTMENT RESEARCH CONSULTANTS LTD., CORPORATE GOVERNANCE 2000 25 (2000) (discussing the length of directors‟ service contracts, dealt with in the Combined Code, ¶ B.1.7).



Outside the U.K., it is less clear that soft law has had a significant impact on executive pay for several reasons. First, in some jurisdictions, compliance with the corporate governance code is purely voluntary because the code does not have the additional strength from stock market listing rules, or securities regulations. 322 Second, many codes provide little detailed and specific guidance save a few hortatory sentences emphasizing the need to link pay with performance. 323 This type of soft law is unlikely to have a significant impact on executive pay. VIII. Culture Culture is a notoriously difficult concept to define with any precision. 324 However, the term surfaces frequently in compensation consultants‟ work as an explanation for why international compensation levels and practices vary so


For a breakdown of countries where the corporate governance code is merely voluntary as compared with those where there is regulatory backing, see Cheffins, Reform, supra note 311, at 14; Holly J. Gregory, Overview of Corporate Governance Guidelines & Codes of Best Practice in Developing & Emerging Markets, in Corporate Governance: A Frame Work for Implementation, World Bank, 1999, at 3. 323

See, COMMITTEE ON CORPORATE GOVERNANCE, CODE OF BEST PRACTICE FOR CORPORATE GOVERNANCE ¶ 9.1 (1999) (Korea), and related discussion; COMMITTEE FOR THE CORPORATE GOVERNANCE OF LISTED COMPANIES, REPORT; CODE OF CONDUCT ¶ 8.2 (1999) (Italy); PETERS COMMITTEE, CORPORATE GOVERNANCE IN THE NETHERLANDS ¶¶ 4.5-4 (1997); Harilaos V. Mertzanis, Principles of Corporate Governance in Greece, 9 CORP. GOVERNANCE: INT‟L REV. 89, 97 (2001) (discussing a report issued in 1999). 324

Amir N. Licht, The Mother of All Path Dependencies: Toward a Cross-Cultural Theory of Corporate Governance System, 26 DEL. J. CORP. L. 147, 166 (2001).



substantially. 325 As a result, culture, which can be defined as a society‟s shared values, understandings, and assumptions, 326 is an important variable to consider when analyzing executive pay. One major theme in the literature is that cultural differences explain the wide gap between American CEOs pay and that of top executives in other countries. 327 The underlying assumption behind this claim is that Americans are more tolerant of income inequality that is perceived to arise out of differences in “effort, talent or entrepreneurial risk taking.” 328 Despite considerable criticism of CEO pay, 329 ultimately the U.S. accepts the need for high pay for performance executive pay. 330 By contrast, in other countries, strong egalitarianism leads to the rejection of the notion of high CEO pay, 331 and to avoid conspicuous displays of wealth. This is true


Sydney R. Robertson, Establishing Global Compensation Strategies, in COMPENSATION HANDBOOK, supra note 18, at 603, 606-7; Conyon & Murphy, supra note 9, at F667-68. 326

DERESKY, supra note 181, at 105.


Damn Yankees, supra note; see also Herbert A. Henzler, The New Era of Eurocapitalism, HARV. BUS. REV., July-Aug. 1992, at 57, 60. 328

Conyon & Murphy, supra note 9, at F667.


See supra note ____ and accompanying text (see Introduction); Susan J. Stabile, Viewing Corporate Executive Compensation Through a Partnership Lens: A Tool to Focus Reform, 35 WAKE FOREST L. REV. 153 (2000). 330

James Cox, US Success Draws Envy, Protests, USA TODAY, Aug. 3, 2000, at B1; Michael Crawford, Peanuts for Elephants, CAN. BUS., July 1994, at 16; Maria Slade, NZ Executives Pay Third World Salaries, INDEP. BUS.WEEKLY, Sept. 26, 1997, at 23. For anecdotal evidence consistent with this view, see David Leonhardt, Executive Pay Drops Off the Political Radar, N.Y. TIMES, Apr. 16, 2000, at Week in Review 5. 331

Fung, supra note 60, at 39; Parker-Pope, supra note 289.



even in the U.K. 332 and in Canada, 333 which supposedly have adopted the American business culture.334 In Australia, similar arguments have been made to explain comparatively modest managerial pay arrangements in that country. 335 If culture is important, it could potentially act as a check against American style executive pay levels in other countries. Germany and the Mannesmann case are very good examples. In those proceedings, Germany‟s highest appellate court referred to local compensation norms in rejecting the need for a special payment to top executives, noting: “The size of the special payment for the accused Dr. Esser, which was uncommon for the German business locale...”336 As further proof that parochialism remains an important consideration in CEO pay, a recent study of Japanese CEO salaries found that Japanese executives earn one-third of their US counterparts.337 However, the same study found that executive pay in Japan is not dependent on accounting profitability or stock returns. Thus, in Continental Europe and Japan, self –restraint by executives


Conyon & Murphy, supra note 9, at F667-68; Martin Van der Weyer, Too Much Cream, INDEP., Aug. 16, 1998, at 16. 333

Crawford, supra note 323.


On business culture typologies, see DERESKY, supra note 181, at 117-

18. 335

Slade, supra note 328; see also Florence Chong, Salary Secrets: What Companies Have to Fear, BUS. REV. WKLY., June 5, 1987, at 50; Lyons, supra note 277; Julie McBeth, Who Pays the Top Salaries, BUS. REV. WKLY., Nov. 25, 1988, at 60. 336

BGHSt, 21.12. 2005, 470, 3 StR 470/04


Minoru Nakazato, J. Mark Ramseyer & Eric Rasmusen, Executive Compensation in Japan: Estimating Levels and Determinants from Tax Records,



against high pay may lead those who run companies to limit their compensation demands. Violations of this self-restraint can lead to a public uproar. For example, in 2007, the German public was shocked at the revelation that Wendelin Wiedeking, the CEO of Porsche AG, had earned approximately $90 million in the previous year.338 The company, however, was unapologetic because when Wiedeking‟s employment contract in the early 1990‟s,339 Porsche was in serious financial distress. He turned the company around, and as a reward the controlling shareholders voted to give Wiedeking a 0.9 percent share of the firm‟s profits.340 While no one contemplated what that might mean in the event of record profits, the company‟s current chairman said that Wiedeking is “worth every Euro.”341 This revelation could have major policy consequences because of strong worker resentment of large pay inequities within society.342 This example illustrates both the importance of the equalitarian norm, and its limitations as a check on executive pay.

Harvard Law and Economics Discussion Paper No. 567, Dec. 2006, at 31 (available at 338

Mike Esterl, In Germany, Scandals Tarnish Business Elite, Wall St. J., March 4, 2008, at A1, A14. 339, Wolfgang Porsche Verteidigt WiedekingGehalt, (last visited Mar. 13, 2008). 340



Dietmar Hawranek et al., Böse Millionen, DER SPIEGEL, Dec. 10,

2007, at 22] 342

Esterl, supra note 336, at A14.



Sweden is another important example of how a strong egalitarian culture can have an important effect on CEO pay. 343 After an intense debate in Swedish media about the “unreasonably high” compensation given to certain executives, and its seeming lack of connection to the companies‟ results, the Swedish government set up the special committee that ultimately determined it to be in everyone‟s‟ interest that executives‟ remuneration is reasonable in relation to a company‟s result and growth. 344

Even the Confederation of Swedish Enterprise, an organization of prominent

business members, stated in issuing their influential guidelines for Remuneration of Company Directors and Senior Management Personnel in 2004 that “the debate has chiefly centered on the remuneration of managers of the very largest listed companies, where the amounts have been considered at times to be excessive and hard to explain. In certain cases, completely unreasonable levels of remuneration have been paid that – justifiably – have been condemned and that have undermined confidence in the business community”.345 Similarly, in China, “there has been public unrest about the increasing compensation of executives at listed firms. The State-owned Assets Supervision and Administration Commission (SASAC), which is a government unit that administers


Oxelheim & Randøy, supra note 128, at 6; Peter Högfeldt, The History and Politics of Corporate Ownership in Sweden, in R. Morck (ed.), A History of Corporate Governance Around the World: Family Business Groups to Professional Managers, University of Chicago Press (2005), at 19. 344

Proposition [Prop.] 2005/06:186 Ersättning befattningshavare i näringslivet, at 27 [government bill] (Swed.). 345



The Confederation of Swedish Enterprise‟s Guidance for Remuneration of Company Directors and Senior Management Personnel 2004, at 3.



much of the state‟s stockholding in listed firms, has recently announced plans to investigate the salary increases of senior executives of state controlled listed firms.”346 Different corporate objective functions may also lead to different compensation approaches. For example, in Continental Europe and many marketoriented economies in Asia, managers are seen as trustees who act on behalf of all corporate constituencies, only one of which is shareholders. 347 Large pay for performance oriented compensation packages might lead corporate management to promote shareholder interests at the expense of other stakeholders, which would undermine these firms‟ stakeholder approach.348 As a result, these companies may be reluctant to move to strongly in the direction of adopting pay for performance for their executives.349 Social resistance to high pay is another important concern that may lead to corporate self-discipline350 if there are reputation costs for the firm‟s directors when


Firth et al., Top Management Pay, supra note 34, at 7.


See, e.g., Ronald Dore, The Asian Form of Capitalism, in THE CORPORATE TRIANGLE: THE STRUCTURE AND PERFORMANCE OF CORPORATE SYSTEMS IN A GLOBAL ECONOMY 35, 42-43, 47 (P.H. Admiraal ed., 1997); Henzler, supra note 325, at 60-61. 348

Cheffins, Metamorphosis, supra note 175, at 18-19.


Cheffins, Metamorphosis, supra note 175, at 17-19 (focusing on employees in German companies). 350

CHEFFINS, COMPANY LAW, supra note 207, at 699.



they authorize large contracts.351 Directors may be more reluctant to approve, and CEOs slow to ask for, pay packages viewed as outside the social norm. 352 Social pressure may also function as a catalyst for legislative reform. As mentioned earlier, the U.S. tax code was amended to exclude deductions for managerial pay over $1 million in response to public pressure. Similarly, in the U.K. growing disquiet over executive pay motivated the U.K.‟s Greenbury Committee to tackle executive pay and thereby avoid tough statutory regulation. 353 Cultural values can evolve though, thereby creating scope for change in executive pay practices. This certainly seems to have been the case in the U.K. Up through the 1970s, top British executives were paid less well than their counterparts in all other major industrial countries, 354 perhaps because the British managerial culture was very egalitarian and U.K. firms reflected this in their pay structures. 355 However, throughout the 1980s, Britain‟s political scene shifted dramatically, as its ruling Conservative party espoused strong free-market ideologies. Coincident with this political and cultural shift there were dramatic increases in executive compensation.


Bebchuk et al., Rent Extraction, supra note 3, at [33]; see also Alex Brummer, Failing Brakes on Boardroom Pay, GUARDIAN, June 1, 1996, at 38. 352

Bebchuk et al., Rent Extraction, supra note 3, at [32]. For an example of this process, see Parker-Pope, supra note 289. 353

CHEFFINS, COMPANY LAW, supra note 207, at 655-56.


Hugh Parker, The Effective Executive: What is He Worth?, MCKINSEY Q., Winter 1976, at 22, 27-28. 355

CHRISTEL LANE, MANAGEMENT AND LABOUR IN EUROPE: THE INDUSTRIAL ENTERPRISE IN GERMANY, BRITAIN AND EUROPE 131-32 (1989); Andreas Budde et al., Corporate Goals, Managerial Objectives, and Organizational Structures in British and West German Companies, 3 ORG. STUD. 1, 27 (1982).



The gross pay of CEOs in large, publicly traded U.K. firms rose nearly 600 percent between 1979 and 1994.356 By the mid-1990s, British CEOs were among the best paid in the world. 357 On the other hand, substantial increases in CEO pay have largely failed to materialize in Japan. In the 1980s, firm values and CEO pay in the U.S. sprang upward in unison. During the same period, the value of Japanese firms also grew significantly, but Japanese CEOs pay did not rise proportionally. 358

The dynamic

nature of cultural trends, however, makes it hard to project whether these movements will continue or reverse themselves over time. IX.


Top executives, especially CEOs, at U.S. firms are better paid than their counterparts in other countries. In large part for this reason, management compensation has been controversial in the U.S., and to a lesser extent, the U.K., which most closely follows American practices. Executive pay has attracted less


David Goodhart, In Search of Wages that Work, FIN. TIMES, June 27,

1994, at 14. 357

Abowd & Kaplan, supra note 42, at 146.


Xavier Gabaix & Augustin Landier, Why Has CEO Pay Increased So Much?, ___Quarterly Journal of Economics_____ (2008), at [17].



attention in other countries for the most part, 359 save perhaps in Canada and Australia, 360 again most likely because levels have been much lower. Are American pay practices spreading throughout the world? Several factors point in this direction: wider dispersion of share ownership, more cross-border hiring of executives, growing international M & A activity and the expansion of business activity by multinationals. Although it is hard to know how influential these factors will be over time, any shift towards higher pay levels, and more pay for performance, is likely to lead to vigorous debate in the countries affected, especially those with strong egalitarian tendencies.361 What is the likely reaction of policymakers in these countries? One possibility is that the shift will be encouraged, perhaps because domestic companies will need to ensure that they do not lose their top managerial talent. Alternatively, increased levels of pay for performance might be defended as necessary to encourage greater


See, e.g., Thomas J. André, Cultural Hegemony: The Exportation of Anglo-Saxon Corporate Governance Ideologies to Germany, 73 TUL. L. REV. 69, 15961 (1998) (Germany). 360

See, e.g., Clegg, supra note 80; Deirdre McMurdy, The Polarized Economy, MACLEAN‟S, Oct. 7, 1996, at 49; Rod McQueen, Executive Payoffs are out of Control, NAT‟L POST, Apr. 3, 2000, C3; S. Karene Witcher, Big CEO Pay as Lure Riles Some Australians, GLOBE & MAIL (Canada), July 31, 1998, at B6. 361

For examples of where this has already occurred to a certain extent, see David Gow & Mark Milner, Continental Shift on Top Pay, GUARDIAN, July 1, 1995, at 37; Robert Graham, Market Forces Meet French Resistance, FIN. TIMES, Apr. 10, 2001, at 21.



shareholder investment through closer alignment of managerial and investor interests.362 Of course, the American approach has plenty of critics. Managerial rent extraction theorists claim the system is strongly biased in favor of executives. 363 Heavy use of stock options can also create incentives for managers to artificially inflate stock prices. High executive earnings could adversely impact the morale of rank-and-file employees and lead to productivity drops. And in some nations with strong traditions of relatively equal distribution of income, a widening pay gap between those at the top and those on lower rungs of the corporate ladder could cause serious political repercussions. For those favoring a more Americanized system of executive pay, some policy options seem unlikely to produce the desired outcome. For example, implementing corporate laws intended to directly regulate executive pay, strengthening directors‟ fiduciary duties and courts‟ ability to police those duties, or imposing new shareholder voting requirements, seem unlikely to yield the desired outcome. One option for these policymakers may be to simply let market forces lead pay levels and composition to their equilibrium position and to focus on removing as many legal obstacles as possible from their path. Introducing stronger disclosure requirements might also be prudent, because giving shareholders additional


Steven Brull, Sony Links Executive Pay to Stocks, INT‟L HERALD TRIB., Aug, 11, 1995, at 11; Ira T. Kay, Why High CEO Pay Helps US Economy Thrive, WALL ST. J., Feb. 23, 1998, at A22; Pay Japan’s Executives to Perform, ASIAN WALL ST. J., Apr.12, 1999, at 10. 363

Bebchuk, Rent Extraction, supra note 3, at .



information may permit them to press harder for greater pay for performance linkages. It might also cause a ratchet effect in executive pay that might be a needed complement such a movement to compensate executives for the greater risk attached to their pay. Another policy intervention that could lead to higher pay for performance levels would be to reduce control shareholding concentrations. Countries encourage such movement by strengthening protections for minority shareholders. While there are no guarantees this will succeed, it may lead to at least a partial shift in executive pay practices. On the other side of the policy debate, those seeking to hold down CEO pay levels and discourage the use of pay for performance, should not count on soft law guidelines to do the job. The U.K. experience with the Greenbury Committee is instructive. Despite quite detailed guidance, managerial compensation levels rose substantially in U.K. companies in the years that followed. 364 Increases in the top marginal income tax rate seem more likely to directly reduce executive pay levels because executives keep less of what they earned and will therefore be unlikely to seek large pay increases. This presupposes that such increases are politically feasible though, which requires that social concerns about high executive pay are very strong.


Charles Arthur, The Fat Cats are Back, INDEP., July 25, 2000, at 3; Philip Thornton, Executive Pay Increase Set to Revive Row, INDEP., Oct. 23, 2000, at 15.