Although the pay levels of chief executive officers (CEOs) in the UK have grown in recent years, they remain far behind those enjoyed by CEOs in the United States, especially if account is taken of the gains the latter realise from exercising share options. That is the central finding of new research by Professors Martin Conyon and Kevin Murphy published in the latest issue of the Economic Journal. They find that:
- The CEOs of the UK''s 500 largest companies earned £330 million in total in 1997, an average of £660,000 each. That included £74 million from exercising share options.
- In contrast, the CEOs of the top 500 US firms made £3.2 billion in 1997 (including £2 billion from share options), an average of £6.3 million each.
- Disney''s Michael Eisner, dubbed the ''Prince of Pay'' by pay critic Graef Crystal, exercised options worth £348 million in December 1997, thus single-handedly out-earning the combined paycheques of the top 500 CEOs in the UK that year.
- British Sky Broadcasting''s Sam Chisolm, the highest-paid UK executive in 1997, was a mere pauper by American standards: his £6.8 million pay package would have only ranked as the 97th highest among US chief executives that year.
These anecdotal comparisons, while driven by gains from share options in the robust US stock market, hint at important differences in CEO pay levels and practices in the UK and United States. The study uses data from 510 UK companies and 1,666 US companies in 1997. Of course, US pay levels may be higher because US companies are larger, more successful or are in faster growing industries. So the researchers control for firm size, industry, growth opportunities, CEOs'' individual skills and abilities and other observable characteristics, so as to compare like with like.
The results of this process show that CEOs in the United States earn on average 45% higher cash compensation and 190% higher total compensation (including share options) than their UK counterparts. The divergence between UK and US pay is especially pronounced in large firms and financial firms.
Much of the wage premium enjoyed by the US CEOs stems from the amount of share options they receive. The median stock holding for US CEOs is 0.29%, while the median stock holding for UK CEOs is only 0.05%. Conyon and Murphy argue that the differences in share option awards, surprising given the similarity of the economies and corporate governance structures, can be largely attributed to institutional, political and cultural differences between the two countries. ''The United States, as a society, has historically been more tolerant of income inequality, especially if the inequality is driven by differences in effort, talent or entrepreneurial risk taking'', they say.
The authors conclude:
''We believe that corporate tax deductibility rules – which encourage option compensation in the United States while discouraging option compensation in the UK – help explain the observed differences in pay structures. Ultimately, however, the differences largely reflect subtle political and cultural differences in the two countries.''
''In the United States, the controversy over CEO pay has led to tighter links between executive pay and performance (primarily through an explosion in option grants), exacerbating wage inequality given the robust US stock market. In the UK, the pay controversy has led to statutory and nonstatutory policies that discourage large share option grants, lessening the pay performance and leading to a relatively compressed wage structure.''
''The Prince and the Pauper? CEO Pay in the United States and United Kingdom'' by Martin Conyon and Kevin Murphy is published in the November 2000 issue of the Economic Journal. Conyon is Professor of Economics at the Wharton School, University of Pennsylvania and Warwick University Business School; Murphy is Professor of Economics at the University of Southern California. Financial support for the research was provided by the Economic and Social Research Council (ESRC).