Spreading the Yankee Way of Pay
Overseas companies have borrowed plenty of ideas from U.S. corporations, so it was only a matter of time until they adopted the U.S. approach to executive compensation. Once unheard of outside the States, monster bonuses and stock options worth millions are now being dangled in front of execs around the globe. From Tokyo to Taipei, Milan to Mexico City, executive-pay levels are rising, and sweeteners such as bonuses and options are being stirred into the mix.
Just five years ago, for instance, only 10 of 26 countries that compensation-consulting firm Towers Perrin surveyed permitted stock-option plans. By last year, the number had nearly doubled, to 19. Even mainland China has gotten into the act, with a smattering of companies now granting options, says Elaine Ng of compensation-consulting firm William M. Mercer in Hong Kong.
Several factors are driving the Americanization of executive compensation. Foreign equity markets, once sleepy exchanges where only shares of a few large companies changed hands, have become forces to be reckoned with -- making options tastier bait for executives. Among top execs, moreover, there's a lot of keeping up with the Joneses. The Internet has helped speed the news of who makes what, particularly in the U.S., the world pacesetter. "U.S. pay is the higher common denominator," says Anna Tapling, a vice-president for executive compensation at Hay Group.
There's also the unavoidable fact that as corporations become more multinational, they have to compete globally for talent. And that can cost plenty. "Big companies are starting to realize that they're in an international market for staff," says Damian Carnell, a London-based principal at Towers Perrin, who specializes in executive compensation in Europe. "When you have a multibillion-dollar market cap, you don't want to get a second- or third-choice CEO. Paying a really skilled CEO a lot of money can still be a bargain in the long run."
Yet, in no other country do corporations coddle their CEOs as in the U.S., where the average chief exec earned an almost unfathomable $13.1 million last year, according to a BusinessWeek survey of 365 top U.S. companies (see BW, 4/16/01, "Executive Pay"). In England, where pay is closest to U.S. levels, the total take including stock-option gains realized by the highest-paid 500 CEOs in 1997 was still less than the $565 million in options that Walt Disney Co. chief Michael Eisner alone exercised on Dec. 3 of that year, according to a study by Martin Conyon, an assistant professor of management at the University of Pennsylvania's Wharton School, and Kevin Murphy, a professor of finance and business economics at the University of Southern California's Marshall School.
Combine that disparity with the increased mobility of chief execs, and it's no surprise Yankee compensation practices are spreading faster than you can say McDonald's. In Australia, for instance, foreign CEOs have stepped in to run some of the country's marquee corporations: Paul Anderson, former Duke Energy Corp. president, was hired in 1998 as CEO of BHP, a 115-year-old mining, petroleum, and steel outfit. Last year, Anderson pulled down A$1.625 million in salary, plus A$5.468 million in stock options and other incentives ($828,750 in today's U.S. dollars, plus $2.79 million in options and incentives) -- a handsome reward by Australian standards.
"These are large companies with global operations," says Melbourne-based Graham O'Neill, director of Hay Group's reward and recognition practice for the Pacific. "It forces them to think who is the best person for the job. Not who is the best Australian for the job. That tends to affect executive-pay levels in Australia generally."
One measure of the change: In 1990, long-term incentives including options made up only 13.3% of an Australian CEO's pay package on average, according to a study O'Neill conducted for the Australian Human Resources Institute. By 1998, the figure had nearly tripled to 35.2%. Yet O'Neill says Australia is still far outclassed by the U.S. "The head of North American operations [of many Australian companies] is being paid significantly more than the head of the company," he notes.
Just an island away, Japan's insular society largely has precluded foreigners from capturing top corporate jobs. But this hasn't stopped companies from finding a way to pay Japanese executives American-style. In fact, the changes in Japan perhaps best reflect the infiltration of U.S.-type executive compensation around the world. A decade ago, most Japanese companies shunned performance-based pay, choosing to reward seniority instead of superiority. But a decade of economic troubles has forced them to begin linking pay to performance. This movement "really gained steam in 1991, when people noticed that the economic bubble had popped," says Shigeru Tanaka, general manager, Japan, for Hay Group.
The Japanese government helped smooth the way in 1997, when it lifted restrictions on the granting of stock options. More than 590 Japanese companies doled out options last year, Hay Group reports, up more than 7% from 1999. Entertainment and electronics behemoth Sony Corp. was one of the first to jump, with warrants -- option-like financial instruments. "The rationale was that company executives would pay more attention to shareholder value," says Hiro Takahashi, a spokesman for Sony Corp of America in New York. Japanese companies that now grant stock options include such icons as Toyota, NEC, Sega, and Matsushita Electric.
Even so, Japanese CEOs come out looking like paupers compared to their American counterparts. Pay for the big cheese at a Japanese firm ranges from $300,000 to $500,000 on average, says Hay Group's Tanaka, with bonuses averaging a measly 10%. In the U.S., by comparison, bonuses often eclipse base salary. And Japanese CEOs trail those in the U.S. by one other measure: Typically, they earn only about 10 times more than a manufacturing employee, according to a 2000 Towers Perrin survey that looked at industrial companies with about $500 million in annual sales (). In the U.S., where the multiple is the highest in the world by far, CEOs of 365 top companies raked in 531 times more in 2000 than the average hourly worker did.
As Japan goes, so goes Asia. In Korea, which approved the granting of stock options in 1997, about 250 companies now offer them, says Swan Sohn, senior consultant in Seoul with Watson Wyatt, a compensation consultant. Pay lags far behind the U.S., with CEOs at chaebol companies, or conglomerates such as Daewoo and Hyundai, earning from $100,000 to $250,000, Sohn says. But it's beginning to creep up. "Chaebols are belatedly starting to differentiate compensation for executives, based on the size of the companies," Sohn says.
The spread of stock options for non-U.S. CEOs may owe its start to companies like Microsoft Corp. The software giant has offered stock options to employees worldwide since it was legal to do so, says Susan Handler, director of international compensation and benefits for the company, which has 14,000 employees overseas out of a workforce of 42,000. "We have been very successful at attracting people." That's just the kind of PR domestic companies don't want to hear.
As American companies and other multinationals expand their international reach, local outfits are raising defenses to hold on to their talent. Taiwan has come up with "profit shares" that are far more appealing then stock options. Essentially, a company takes a portion of its annual profit and converts it to shares, which are then distributed. Unlike options, profit shares don't require a vesting period and can immediately be sold for cash. "Competition drives Asian companies to be innovative in their executive-compensation packages," says William M. Mercer's Ng. "They don't just want to match the packages offered by multinationals, but surpass them to attract and retain employees."
Europeans don't want to be left behind, either. In England, where CEO compensation perhaps most closely resembles the American model, pay levels are still shy of U.S ones, but they're nosing up steadily. On average, CEOs of the 100 top companies in the FTSE index made off with £1.32 million in salary and bonuses ($1.89 million in today's U.S. dollars) in their most recent fiscal year, according to historical financial-information provider Datastream. That figure excludes options, which are accounting for an increasing share of pay packages at England's largest, global companies, says Sean O'Hare, a compensation expert with William M. Mercer in London. Stock-option grants to CEOs of these businesses have climbed to three-times annual salary from just one-times yearly pay in the past year alone, O'Hare says. "There has been increased movement on this front."
The only thing holding British companies back may be the tarnished image of options over there. In the mid-'90s, the revelation that executives of government utilities had made millions in options when the utilities were privatized set off a firestorm of criticism over such share schemes. In 1995, a committee headed by Sir Richard Greenbury, the former chairman of retailer Marks & Spencer, recommended linking options to corporate performance. Today "share options," as stock options are known in England, vest only when certain criteria are met. Generally, the company must show real growth in earnings per share. U.S. companies rarely impose such restrictions on options. "In the U.K., you have this extra performance hurdle to get over," says the Wharton School's Conyon.
Even then, the Brits generally tend to be less tolerant overall than Americans of gargantuan bonuses and stock-option windfalls for their corporate stewards. The awarding of a $15.2 million bonus (half cash, half options) to Vodafone Airtouch Chief Chris Gent in 1998 enraged a large portion of shareholders. So much so that the world's biggest wireless company issued a mea culpa, and Gent pledged to use a majority of the cash part of his bonus to buy Vodafone shares. "I don't think this would have caused such a stir in the U.S.," Conyon says.
CONTINENT CATCHES ON.
Across the channel, countries on the Continent require scant disclosure on executive pay, making it trickier to determine what's going on. But Towers Perrin's Carnell says the largest companies in countries such as France, Germany, Italy, the Netherlands, and Sweden now offer stock options. The 30 companies that make up France's Dax 30 stock index now all give out options to top execs, he adds. Still, the ratio of CEO compensation to that of an average manufacturing employee remains much more modest than in the U.S. It's 25 in England, 16 in more socialist France, and 11 in social democratic Sweden, according to the Towers Perrin survey.
A catalyst for the beefing up of pay packages in Europe has been the recent high-profile deals marrying European corporations with ones in the U.S., where CEOs typically net far fatter gains. Consider the DaimlerChrysler merger in 1998: Former co-chairman Robert Eaton, who has since left the carmaker, pulled down $11.5 million in 1997, the same year the other co-chairman, Jurgen Schrempp, reportedly took home $2 million. Although the German company doesn't disclose pay for its head honchos, bets are on that compensation has been rising at DaimlerChrysler, at least for Germany-based execs. "I'm sure U.S. pay practices are creeping in to the company," says Hay Group's Tapling.
The one region that has been slower to adopt Uncle Sam-type treatment for corporate chieftains is Latin America. Except for the stock markets in Brazil and Mexico, bourses there are rather illiquid, diminishing the appeal of stock options. Mexico, whose Bolsa is fairly robust, has started to follow the global trend, with many companies even denominating their options in dollars to minimize the risk should the peso be devalued.
"I think they're trying to emulate the U.S.-style compensation package for their top execs almost as quickly as anybody," says the Marshall School's Murphy. The one measure by which Latin America is matching up with the U.S. is in pay disparity between execs and average workers. A Venezuelan CEO is paid 54 times more than a factory drone. In Mexico, the multiple is 45.
Even though more overseas companies are adopting U.S.-style pay practices, America continues to pull ahead. Total CEO compensation grew 6.3% in the U.S. in 2000, outstripping the growth rates in most other countries, compensation execs say. "We have tolerated more wealth inequality than any other nation," Murphy says. "The general public does not seem to mind as long as we can say they got there for running a great company. That is the American way." What remains to be seen is whether this American way will one day become the global way.
|The Global Pay Gap|
Nobody beats the U.S. when it comes to the difference in pay between CEOs and the average worker. On average, CEOs at 365 of the largest publicly traded U.S. companies earned $13.1 million last year, or 531 times what the typical hourly employee took home.
Around the rest of the world, Latin America is the leader in pay disparity, though even it doesn't come close to the U.S. At the other end of the spectrum, Japan has the smallest gap between CEO and average-worker pay.
The calculations below are based on on estimates by the consulting firm Towers Perrin as of Apr. 1, 2000. Average employees were assumed to be working in industrial companies with about $500 million in annual sales.
|Country||CEO compensation as a multiple of average employee compensation|
By Eric Wahlgren in New York
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