Globalization and Executive Compensation: An Analysis of Pay Practices in U.K. Companies

Abstract

This paper examines the impact that interactions with the United States market have on the compensation practices of non-US firms. We find strong evidence that the total compensation of UK executives is positively related to the extent of the firm’s interaction with the US market, as captured by the percentage of total sales generated in the US, the presence of prior US acquisition activity and the presence of a US exchange listing. Further tests reveal that UK firms with higher levels of US sales utilize greater levels of bonus pay and are more likely to issue option grants, while UK firms listed on a US exchange offer their executives higher average salaries than their non-listed peers. Executives of UK firms engaging in a US exchange listing experience a significant increase in total cash and salary-based compensation in the year following the listing event. Executives of firms engaging in their first acquisition of a US business experience a significant increase in the relative use of equity-based compensation in the year following the acquisition. Together, this evidence is consistent with US market interactions impacting UK compensation practices through two sets of incentives: (1) to alleviate internal and external pay disparities arising from the presence of US operations and businesses (proxied by percent US Sales and US acquisitions) and (2) to compensate executives for bearing the additional risk associated with exposure to US securities laws and legal environment (proxied by a US exchange listing).