Abstract
This paper examines how different types of interactions with U.S. markets by non-U.S. firms are associated with higher levels of CEO pay, greater emphasis on incentive-based compensation, and smaller pay gaps with U.S. firms. Using a sample of CEOs of UK firms and using both broad cross-sectional and narrow event-window tests, we find that capital market relationship in the form of a U.S. exchange listing is related to higher UK CEO pay; however, the effect is similar when UK firms have a listing in any foreign country, implying a foreign listing effect not unique to the United States. Product market relationships measured by the extent of sales in the United States by UK companies are associated with higher pay, greater use of U.S.-style pay arrangements, and a reduction in the U.S.–UK pay gap. The product market effect is incremental to the effect of a U.S. exchange listing, the extent of the firm's non-U.S. foreign market interactions, and the characteristics of the executive. The U.S.–UK CEO pay gap reduces in UK firms that make U.S. acquisitions. Furthermore, the firm's use of a U.S. compensation consultant increases the sensitivity of UK pay practices to U.S. product market relationships. This paper was accepted by Gérard P. Cachon, accounting.
Highlights
Prior research documents that U.S CEOs are more highly paid than their foreign peers (Abowd and Bognanno 1995, Conyon and Murphy 2000, Fernandes et al 2011)
Using a sample of CEOs of U.K. firms and using both broad cross-sectional and narrow event-window tests, we find that capital market relationship in the form of an U.S exchange listing is related to higher U.K CEO pay; the effect is similar when U.K. firms have a listing in any foreign country implying a foreign listing effect not unique to the U.S Product market relationships measured by the extent of sales in the U.S by U.K. companies are associated with higher pay, greater use of U.S.-style pay arrangements, and a reduction in the U.S.-U.K. pay gap
We use broad cross-sectional and narrow event-window analyses to provide evidence that the presence of U.S product market activities is associated with higher pay, greater use of U.S.-style incentive pay, and a reduction in the U.S.-U.K. pay gap
Summary
Prior research documents that U.S CEOs are more highly paid than their foreign peers (Abowd and Bognanno 1995, Conyon and Murphy 2000, Fernandes et al 2011). Our focus on one country allows us to use more granular data on the geography of foreign exposure (U.S versus non-U.S activity), the different types of market interactions (capital, product, and operational), individual characteristics (director and CEO board experience, nationality, and education), and potential channels by which governance practices are transferred (U.S board experience, use of U.S compensation consultants, U.S institutional ownership, and peer groups).
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