Contrary to popular opinion, chief executive officers in the United States don't earn significantly more than their counterparts abroad, concludes a recent study by researchers at the University of Virginia and elsewhere.
The researchers analyzed CEO salary data from more than 1,600 companies in the U.S. and 13 European countries from 2003 to 2008. The perception of a pay divide between the United States and other countries is usually based on estimates from professional services firms, they say, but recently expanded disclosure rules made their analysis of actual salary data possible.
"We show that conventional wisdom is wrong," they wrote in their research paper, "Are U.S. CEOs Paid More? New International Evidence," published in the February edition of The Review of Financial Studies.
"Initially, U.S. CEO salaries appear twice as large as salaries of CEOs in other countries, but one is really comparing apples to oranges due to differences in the way U.S. firms operate compared to their international counterparts," says Pedro Matos, an associate professor of business administration at the University of Virginia's Darden School of Business. "If you compare equivalent firms—the same size, the same industry, the same board and ownership structure—you find the gap is very small."
The U.S. pay premium declined substantially from 58 percent in 2003 to a statistically insignificant 2 percent in 2007, he and his co-authors found. They stopped their study at 2008 to exclude the recession's effect on salaries. "We want to show that even in good economic times, when the U.S. stock market was at its high point, we could still explain that gap," Matos says.
The major reason U.S. CEO pay appears higher is that U.S. firms tend to have higher institutional ownership and more-independent boards, which increase the risk of performance-related terminations, Matos says. Controlling for these variables nearly eliminates the pay gap, he says.
"Our evidence does not suggest that U.S. CEO pay is excessive," Matos says. He adds that competitive international firms now offer CEO salary packages that are comparable to those from U.S. firms.
Study co-authors are Kevin J. Murphy from the University of Southern California Marshall School of Business, Nuno Fernandez of the IMD Business School in Switzerland and Miguel A. Ferreira of the University of Lisbon Nova School of Business and Economics.
| Job Program for Middle East Youth Funded The Caterpillar Foundation will contribute $4.4 million over three years to a program aimed at preparing youth in Jordan, Lebanon and Yemen for the labor market. The Middle East and North Africa Youth Empowerment Strategy will target individuals ages 15 to 29, including those who are disadvantaged, low-skilled or female and those who live in rural or hazardous areas. The philanthropic arm of the earth-moving equipment manufacturer will work with Global Communities, an international nonprofit organization, to provide 1,920 youth with demand-driven training to prepare them for jobs. At least 60 percent of those placed in internships and apprenticeships or those who receive technological training will be on track to be employed or to pursue further training 180 days after completing the program, according to a joint statement by the two organizations. Another 1,000 youth will receive training in finance, market development and business management to help them develop entrepreneurial skills. Of those, at least 230 will be linked with banks and credit opportunities. The region has the highest youth unemployment rate in the world, estimated in 2010 at 25 percent (30 percent for young women). The numbers are likely to get worse over the next decade, says David Weiss, president and CEO of Global Communities. "Given the size of the rural populations in the region, illiteracy rates, underemployment, and employment that is transient, cyclical and short-term, these estimates are probably low," Weiss says. Caterpillar dealers sell and service Caterpillar equipment in the three countries, but the company has no manufacturing facilities there.
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