How Much, Where, And Why

In the following international CEO compensation survey, two major trends stand out: The pay gap between U.S. and non-U.S. CEOs is narrowing; and the restructuring and increased foreign ownership of U.S. firms is introducing a dose of reality into the compensation process.

June 1 1990 by Brain Dunn And James E. Keilley

American CEOs continue to earn more than their counterparts abroad. But the gap is narrowing. Last year, the typical CEO in charge of a $250 million operation earned $350,000 in base salary and annual bonus. A similarly situated executive in Switzerland earned about $100,000 less, as did CEOs in Canada, Germany and Japan. In the two decades that we’ve surveyed worldwide remuneration, U.S. CEOs have always been the highest paid, by a substantial margin. But our most recent studies indicate that this pay differential is shrinking.

Although U.S. CEOs enjoy the first place position in total cash compensation, they also have the most at risk. Their pay is the most highly leveraged in the survey group; their annual bonus represents 40 percent of base salary. CEOs in Switzerland have the smallest portion of pay-18 percent-at risk in terms of overall earnings.

The comparative picture changes somewhat when we focus on employer-provided benefits, including insurance (medical, dental, life, disability, etc.) and retirement income plans. With benefits valued at $53,750, or 37 percent of base pay, CEOs in the U.K. are in first place, and American chief executives come in third.

Because most perquisites are taxable in the U.S., and there is no strong cultural bias in their favor, U.S. CEOs are near the bottom of the list when it comes to the cash value of such items as cars, drivers and club memberships. Hong Kong CEOs are at the top of the pile, receiving perquisites valued at $105,700-some 75 percent of base salary.

Despite lower rankings in the benefit and perquisite categories, American CEOs still come out ahead when it comes to total remuneration. Their lead widens considerably with the addition of long-term incentives-the final element of the compensation package.


For the U.S. CEO, long-term awards provide an annualized value of approximately $140,000, some 56 percent of base salary. The value of such long-term incentives drops to approximately 35 percent of base salary in Canada and France, 25 percent in the U.K. and 3 percent in Switzerland. Although use of long-term incentive plans is growing-one sign of the Americanization of multinational business-these plans still don’t constitute “typical” practice in the other countries surveyed.

Relatively low tax rates (ca. 30 percent) keep U.S. CEOs in the top four when it comes to net pay. They’re joined by CEOs from Switzerland, Hong Kong and Brazil-all of whom pay tax rates between 15 and 25 percent. In making this calculation, we assume that chief executives receive all their income in their home countries, pay the full marginal rate, receive benefits and perquisites that are tax-free, and that long-term incentives are deferred.

It’s interesting to note that pre-tax pay is considerably more consistent than after-tax pay among CEOs in our study. Salaries and bonuses typically don’t change when marginal tax rates change-witness the absence of pay cuts following recent declines in taxes in both the U.S. and the U.K. That means compensation, particularly on the downside, is relatively inelastic when it comes to changing taxes. On the other hand, arguments that pay should rise with rising taxes haven’t proven terribly persuasive over time either.


Net pay after taxes needs to be adjusted for relative purchasing power to reflect differences in cost of living. We have attempted to compare purchasing power with respect to regularly incurred expenditures on goods and services (excluding housing). On this basis, the U.S. CEO is once again in premier position, followed by executives in Brazil, Mexico, and Hong Kong. (Recent economic controls in Brazil will doubtless have an effect on this ranking, and elsewhere in this study as well.) Compensation goes further in these nations. Our analysis is strictly quantitative, however, and does not take “quality of life” considerations into account.

In some countries, company housing-and even servants-can substantially enhance a CEO’s lifestyle. That’s why, at the request of Chief Executive, we’ve included an extra purchasing power measure in this study. It’s based on a basket of executive goods and services, ranging from the cost of a limousine ride to the airport to a custom-made suit, and including a laptop computer and a bottle of the highest quality perfume. While sales and luxury taxes have had an effect on this data, it does provide a second look at the true cost of executive living in the nations surveyed.


The CEO of an Asian company recently asked us how he could justify the fact that the CEO of his newly acquired American subsidiary (whose salary was public information) was making nearly twice as much as the CEOs of other comparable subsidiaries-and even more than he was earning himself. The answer is that’s what the market demands. A more difficult question is, why has the market provided such an answer? We believe that a combination of economic, political, historical and cultural forces are at work, shaping the disparity between executive pay in the U.S. and abroad.

American CEOs haven’t always earned more than their peers overseas. This situation began to change shortly after the Second World War, with the emergence of the professional manager in the U.S. The managerial revolution has been well-documented, particularly because for the first time individuals without an ownership stake were dictating company policy at the highest levels-as individual or family ownership gave way to public ownership. Shareholders in turn ceded power to chief executives who took on the burden of protecting the public’s investment.

Elsewhere, family ownership, powerful independent directors, interlocking patterns of ownership, government control and even strong trade unions, served to counterbalance independent CEO power. These forces reined in the growth of CEO pay, but this has simply not been the case in the U.S. in the last half century. The need to provide non-owner management with a financial stake in the business operations under its control has led pay higher.


Market forces have also played a role in setting pay levels. In some countries, social contracts between an executive and a company may bestow a lifelong right to employment, as well as a lifelong obligation to serve. By contrast, executives in the U.S. are relatively free to move from one company to another, often within the same industry, and they may have abundant opportunity to do so in our large marketplace. The possibility of losing key executives has brought about price escalation based on increased competition for top talent-just as expected in a free market.

CEO pay levels have been fueled by more than the competitive dynamic, however. Shareholders expect that a CEO will be paid for performance, and will have a large stake in the business being managed. This requires an incentive plan, typically stock-related. But it is rare for incentive plans to actually replace even a portion of fixed compensation. Incentives are usually added to existing compensation packages on the theory that they will activate only when a CEO increases shareholder value.

American accounting practice and tax policy, which encourage the view that stock options are a free lunch (and a tasty one at that), have further contributed to increased upward pressure on U.S. executive compensation. There is no accounting charge for stock options; they are fully deductible with no cash expense at exercise, and they are thought to create parity between executive earnings and shareholder gains. Furthermore, the Financial Accounting Standards Board has been unable to find a basis for valuing granted options. And since accountants say these options have no value, the conclusion is that they must indeed be free.

But the argument that options put executives in the same boat as shareholders is flawed. It fails to recognize that option holders have no actual equity interest and therefore no downside risk other than the loss of potential gains, a luxury that individuals who purchase stock in the marketplace do not enjoy. Second, the grant (and subsequent exercise) of an option has a very real cost-that is the actual dilution of the remaining shareholders’ equity that occurs if and when the grant is exercised.

We won’t get into the debate over the value of executive stock options here. It suffices to say that public policy and perception have created a significant and yet seemingly cost-free compensation opportunity. This is something that compensation committees would naturally take advantage of, and they have-with U.S. CEO total remuneration rising accordingly.


It’s difficult for anyone who participates in the process by which executive pay gets determined-a CEO, a board compensation committee, a human resources manager or a compensation consultant, for example-to be totally objective. Granted, there are cases in which a CEO does play an overly aggressive role in the compensation setting process, but it’s been our experience that most parties try to bend over backwards to achieve objectivity and to exert no undue influence. But even when all parties have the best intentions, a natural bias toward the plus side exists, particularly during robust economic times.

The future may tell a different story, however. In our work, we’re seeing the emergence of assertive and independent compensation committees. Along with this trend, highly leveraged restructurings and buyouts, as well as more aggressive shareholders (e.g., state pension funds), will also bring new constraints to bear.

Finally, generous executive pay packages reflect the American spirit of competition. Quite simply, public companies want their CEOs-whose pay is a matter of public record-to be paid as much as, or more than their peers. One might suppose that public disclosure would lead to moderation, but this hasn’t been the case. When it comes to CEOs, a modest compensation figure is a source of embarrassment, not of corporate pride. The pay situation is exacerbated by the distinctly American trait of excusing or explaining away poor performance, while richly rewarding superior performance.

A recent study of senior executive pay policies confirmed that virtually all large public companies in the U.S. want to set pay levels at or above the median. None of the companies we surveyed advocated a policy which put pay “below the median”-and nearly 30 percent of those surveyed favored compensation set at the 75th percentile. When companies set pay above the median level, compensation rachets upward. That’s just what has happened in the U.S. Increases in CEO compensation continually outstrip salary growth for other employees, overall inflation, and other benchmarks as well.


Globalization has resulted in cross-ownership, and-with respect to CEO compensation-a degree of cross-referencing. Today, many non-U.S. companies look to their U.S. subsidiaries, or their U.S. competitors for pay benchmarks. Not surprisingly, this has resulted in the narrowing of pay differentials. In 1985, our study of companies with $100 million or more in annual sales showed that CEOs in Canada, France, Germany, Japan and the U.K. were making (on average) slightly less than 50 percent as much as a comparable U.S. CEO. By 1989, the differential had fallen by more than eight percentage points.

The reason is that multinational business goes beyond national boundaries. This globalization has had its effects on compensation, and these effects can be expected to continue, with a profound impact on pay practices worldwide. One executive told us: “As the role of the U.S. as the engine of world GNP declines, so too must its ability to reward its executives.” Pressure for international pay equity will inevitably become too great to ignore.

In the U.S., foreign ownership has brought some American companies back full circle, to the time of the individual owner-now seen as the foreign parent corporation-an owner who is directly concerned with compensation issues. This phenomenon, to date, has only rarely resulted in a pay freeze or wholesale reduction. But it has clearly resulted in some moderation of compensation escalation. We’re seeing rigorous performance measures for annual bonuses (often tied to shareholder returns). Another important change is a trend among foreign-based companies toward trimming back longterm incentive programs. That’s because stock is unavailable in certain instances, which forces the use of performance plans, or so-called phantom stock, which on an accounting and cash basis more closely reflects true cost, and thus serves to check liberally granted incentives.


Looking ahead, we think the spread of compensation programs which separate performers from non-performers is a positive development-along with the use of stock to make executives true owners. And worldwide, the continuation of the sense of moderation that has helped companies avoid excessive, improperly calibrated, or counterproductive compensation programs is important. We believe that concentration of ownership will play an important role in the policing of pay plans, and we support the expansion of knowledgeable and credible board compensation committees. Both can inject a healthy dose of reality into the compensation process.

Globalization inevitably will mean a much greater degree of consistency in CEO pay worldwide. One CEO has commented: “It’s increasingly important that we establish total compensation levels for chief executives on a global basis because their companies and their thinking must be multinational.” Although linguistic, cultural and geopolitical differences will continue to pose barriers to a truly free market for executive talent, pay practices are destined to incorporate the best elements of existing programs in the U.S. and abroad.


Respective current compensation databases available to Towers Perrin through its network of international offices are the source of all statistics. Compensation data is given for CEOs of firms with 1989 sales of $250 million or more.

Exchange rates are as of April 1, 1989. Fixed pay includes salary plus guaranteed bonuses; variable pay is performance-based; net pay is after taxes, social security and other levies which are calculated for CEOs residing in specific cities to normalize local taxes; purchasing power indexes net pay using cost-of-living data for the same cities.

 Brian Dunn specializes in executive pay and incentive plan design for Towers Perrin and manages international compensation consulting. James E. Kielley, chairman and CEO, has served with Towers Perrin in consulting and management positions for more than three decades.