The report, from management consultancy Hay Group, shows that CEOs at the UK’s largest public companies are paid on average about €6m a year, the second highest total in Europe behind France. However in the US, the figure is nearer to €13m. Admittedly the companies concerned tend to be bigger, but that can’t be the only reason for a pay gap of that size.
One explanation is the different approach to pay structures. In Europe there’s a greater emphasis on basic salaries – the average base is about €1.3m, about 20% higher than the equivalent figure for the US (UK CEOs do particularly well here, with an average base of €1.4m). However, across the Atlantic reward packages are much more heavily skewed in favour of bonuses and long-term incentives like stock options – which means the upside can be much greater if the company does well
Not that we should conclude that US companies are more focused on long-term performance. In fact, according to Hay Group’s Simon Garrett (who wrote the report), it’s really for tax reasons that companies have kept base salaries low and used higher bonuses to increase rewards. In Europe, activist shareholders have prevented this from happening – and we’re starting to see this development in the US too. ‘I think US shareholders and regulators are now starting to demand more bangs for [their long-term incentive] bucks,’ says Garrett.
But the more immediate problem across the pond seems to be that the upside for a CEO (particularly from stock options) seems to be enormous even if they run the company into the ground. Take Merrill Lynch’s Stan O’Neal and Citigroup’s Chuck Prince – both presided over record losses, only to leave with massive severance pay-outs. It’s all very well skewing pay packages to reward good performance – but there should also be a downside if they fail to deliver. At the moment it looks more like a one-way bet.
Which is good news if you’re a US CEO with one eye on the golf course, but not so good for all the shareholders you leave behind...