Wages Comparison

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CEO Pay RatesU.S. vs. Foreign Nations

Management 510

Dr. Mark Kroll

November 17, 2005

Presented By:

Adam Choate

Dana Rowzee

Jerrod Tinsley


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Executive Summary

Are American Chief Executive Officers (CEOs) paid more in relation to the rest

of the world? In this paper, our research will show that Americas corporate executives

get paid huge sums of money for the work that they do. Be it in salary, bonuses, or

options, American CEO pay dwarfs the pay of CEOs around the world.

The fact that American CEOs have been extremely overcompensated for their

work has received a great deal of attention in management and economicsjournals and in

the popular press. We will discuss the duties and responsibilities of American and

foreign CEOs, the CEO compensation compared to other countries, and also the

minimum wage disparity that CEO overpay can create. Along the lines of pay gap

disparity, three theories found in research will be addressed. These theories include the

marginal revenue product theory, tournament theory, and opportunity theory. Each

theory takes a different approach on why American CEOs seem to be overcompensated

compared to their foreign counterparts.


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Introduction

The American dream is one of upward mobility. US citizens believe that if one

works hard, and plays by the rules they can ensure themselves the quality of life that they

desire. Recently, the dream toward upward mobility has been limited to a select class of

corporate executives that have received record levels of compensation in recent years.

Today American Chief Executive Officers (CEOs) are paid outrageously large amounts

of money compared to foreign CEOs who essentially perform similar jobs as their

American counterparts. AFL-CIO Secretary Treasurer Richard Trumka said "what looks

excessive in the context of US workers is truly outrageous when viewed globally. The

global economy is not working for working families when boards of directors hand US

CEOs tens of millions of dollars while paying the people who actually do the work less

than ten dollars a day (Burton 2005).

CEOs total pay packages have continued to spiral upward over the years, even

though thousands of average employees lose their jobs, corporate profits fall, and

shareholders lose money. An executive compensation package is typically comprised of

total base salary, yearly bonuses and benefits, stock-options, and anticipated value of

long-term projects. Base salary is generally a fixed component that is the value an

organization attributes to the position, and is usually relevant to the labor market, but may

vary based on performance. Chief Executive Officers are continually reaping larger and

larger benefits each year. Over the past two years the average compensation among the

top 200 companies has increases thirty-seven percent. At the end of 2003 the average

CEO compensation was almost ten million dollars, excluding profits made on stock


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options. As of 2004 the median compensation for a CEO in one of the top public

corporations in the United States has increased 25% to $13.7 million.

In 2004, the average American CEO was paid $10 million, as reported in The

Wall Street Journals annual analysis of the 350 largest public companies (WSJ 2005).

This is a huge 14.5 percent increase over the annual CEO compensation in 2003.

American CEO pay currently dwarfs foreign CEO pay. German CEOs make 13 times

more than the average German manufacturing employee an in Japan, the CEO-to-worker

pay ratio is just 11-to-1 (Greenfield 1999).

Characteristics of CEOs

Two questions can come about when dealing with CEO pay. What actual job

tasks do foreign and American CEOs perform, and how much do CEOs deserve to be

paid for these tasks? It is when you look at the actual work that a CEO actually does,

compared to the pay they receive, when the irrelevance between work and pay is most

prominent. To address the first issue, compared to many other average American jobs,

being a CEO requires little or no physical work. It is not strenuous or physical, but it can

cause a great deal of stress (Kudo 1988). Some writers say that CEOs are prone to more

stress related illness that many other average American jobs (Seymour 2002). According

to one study, the average American CEO works 13 hours a day, which includes time

spent traveling to meetings (Kudo 1988). The CEOs job is difficult in the sense that

their job requires them to complete many complex tasks such as negotiating deals,

processing information, and meeting with subordinates and clients (Keiser 2004).


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What does it take to perform the job of CEO? 97% of American CEOs hold

college degrees; 50% of those holding advance degrees. Of the 50% of American CEO

with advance degrees, 68% of those are MBAs. The average American CEO is 53 years

old, and worked an average of 13 years before become CEO (Keiser 2004). When

comparing the average requirements to be a CEO between American firms and foreign

firms as far as experience goes, American CEO seem to be promoted at younger ages

than that of their foreign counterparts.

Today, over 60% of foreign CEOs had 15 or more years of tenure before being

appointed as the CEO of their company. The Average Japanese CEO joined the company

at the age of 29, spent 27 years in the company, and was promoted to CEO at the age of

56 (Kato 2005). As far as education credentials go, 95% of Japanese CEOs hold college

degrees, close to 30% of those being earned at the University of Tokyo.

CEO Job Responsibilities

The second question of how much CEOs should be paid is connected to the first.

Once the job and responsibilities of the CEO have been determined, the amount of pay

that the CEO deserves for those tasks can be fairly dispersed. Or in actuality, is it really

fairly dispersed? To pay a CEO accordingly, one much see how deserving he or she

actually is. Say a CEO works 4000 hours in a year, should that person make $400,000 or

$4 million dollars? If the firm sees a 20% increase in the years profits, the CEO

rightfully deserves a 20% pay increase for their contribution to the firms success. But

what should the starting salary be in the first place? It is required to match the CEOs

responsibilities and jobs to the rate of pay, to come up with a fair base salary.


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Comparing the job to the rate of pay can be extremely difficult, it is this difficulty

of comparison that leaves the business open for criticism about CEO overpay. Consider

the topic of this paper, the complaint that American CEOs are paid more than foreign

CEOs. Skeptics could say that American CEOs are not overpaid, but foreign CEOs are

underpaid. American CEOs are paid roughly twenty-two times more than Japanese

CEOs, and six times more than British CEOs (Conyon 2000). But twenty-two times

more is a far jump from being just slightly over paid. Executive officers of foreign

corporation make between 4% and 27% of the amount earned by the average American

executive.

As far as what they deserve for their current responsibilities, American CEOs are

paid too much, no matter how stressful their job may be. In response to the proposed

question of how much CEOs should be paid, no matter how much they feel that might be,

they do not deserve to make 301 times more than their employees. If the average

American employee makes $27,000 a year, CEOs do not deserve to make $8 million a

year. Who is to say that a CEO is 301 times more deserving than their employees that

actually do the work?

Examples of CEO Compensation

This following chart is a list of the most well compensated American CEOs, and

their salary as a percent of their direct compensation.


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Name (company) Salary (mill. $) Total Direct Salary as % of totalCompensation direct compensation

George David 1.2 88.3 1.4%(United Technologies)

Ray R. Irani 1.3 66.4 2.0%(Occidental)

Richard Fairbank 0.0 56.5 0.0%(Capital One)

Richard Kovacevich 1.0 51.4 1.9%(Wells Fargo)

Bruce Karatz 1.0 50.0 2.0%(KB Home)

Jeffrey Bleustein 0.9 46.7 1.9%(Harley-Davidson)

Lawrence Ellison 0.7 45.8 1.5%(Oracle)

William Greehey 1.4 44.8 3.1%

(Valero Energy)

Irwin Jacobs 1.1 44.1 2.5%(Qualcomm)

Robert Toll 1.3 44.0 3.0%(Toll Brothers)

Source: Wall Street Journal, CEO Compensation Survey, April 11, 2005.

The CEO pay rate among American public companies is outrageous. They are

receiving astronomical amounts of money compared to the average American worker.

Meanwhile, the average full-time worker over the age of 25 struggles to get by on a mere

$683 a week, an increase of less that one percent over the last year (Chattman 2005).


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Compared to the pay rate of an average CEO, the average full-time worker would have to

work in the upwards of 385 years to make what a CEO receives in one year. During the

1980s the pay gap between CEO and ordinary factory workers grew from 42 times to

almost 85 times (Byrne 1991). In 2004 CEOs in the United States made over 475 times as

much as the average worker. Compared to the pay ratio between US CEOs and US

average workers, other countries ratios between the two are significantly lower, as

indicated in the chart below.

Country Ratio of CEO pay to

average worker payJapan 11:1

Germany 12:1

France 15:1

Italy 20:1

Canada 20:1

South Africa 21:1

Britain 22:1

Hong Kong 41:1

Mexico 47:1

Venezuela 50:1

United States 475:1

Compared with other countries in the world the gap between CEO pay rates and the

minimum wage in the U.S. is obviously the largest. We have allowed more wealth

inequity than any other nation. A question that has remain unanswered or unseen is, will

the U.S. pay trends among CEOs versus production workers soon be the global trend?

CEO Minimum Wage Disparity

If the issue of minimum wage disparity is addressed, many startling points can be

made in opposition of the huge pay gap between the minimum wage and CEO pay. If the


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average pay of workers had risen as fast as the pay of CEOs since 1990, the minimum

wage rate would not be $5.15, it would now be $23.03 per hour. As of January 2001, the

real value of minimum wage due to inflation is $4.77 per hour. The following chart

compares the minimum wages around the world and what percent of gross domestic

product it currently accounts for.

Country Min. Wage ($US) % of GDP

Australia $362/week 54%

Belgium $1,500/month 48%

France $9.18 51%

Greece $34/day 42%

Ireland $8/hour 32%

Netherlands $1,507/month 47%

New Zealand $6.45/hour 49%

Spain $592/month 26%

UK $8.53/hour 45%

USA $5.15/hour 25%

If the minimum wage was raised to $23.03 as projected by the CEO inefficiencies

in pay, the average production worker would now make $110,126 per year, instead of the

average $32,594. Dr. Brian Fitzpatrick, professor of finance at Rockhurst University,


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stated that CEOs should not receive a raise unless his or her workers receive a raise

(Hepp 2005). This would significantly decrease the pay gap between CEOs and the

average worker. The full-time worker average is 11% less than 1973s average worker

pay of $36,629, adjusting for inflation, even though productivity rose 78% between 1973

and 2004 (Sklar 2005). Plato contended that in a community the earnings of the highest

paid person should not exceed those of the lowest paid by more than five times (Walters

1995). It is amazing to see that the pay gap has increased that much over such a short

period of time. Do these numbers seem fair to America when total national poverty and

debt has increased over that past few years?

American vs. Foreign Compensation

Shifting attention from just over compensation of American CEOs, we can now

further compare them to that of foreign CEOs. There is some difficulty in comparing the

United States compensation packages with those of other countries because of the way

the packages are compiled. An international comparison of CEO pay---rather than total

compensation---necessarily understates the full size of American compensation packages

by excluding bonuses and other non-cash forms of compensation (Burton 2005).

Compared to the plethora of information on American CEO pay, some foreign firms are

not required to disclose information about their companys CEO. This holds true mainly

in the Asian based firms. Though they are not required to report salary and bonuses of

CEOs, Japanese corporations are required to report total salary and bonuses earned by all

directors (Kato 2003).


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This table is an international comparison of CEO pay:

International Comparison of CEO Pay

Country Average CEO Pay % change 1988 Foreign CEO

to 2003 pay relativeto U.S.

(U.S.=100)________________________________________________________________________

1988 2003Japan $437,655 $456,937 -4% 20%Belgium $361,591 $697,030 93 31France $381,015 $735,363 93 33Sweden $221,138 $700,290 217 31Netherlands $373,545 $675,062 81 30New Zealand $449,414 20

Switzerland $481,125 $1,190,567 147 53Germany $388,486 $954,726 146 42Spain $331,708 $620,080 87 28Australia $170,336 $694,638 308 31Italy $322,743 $841,520 161 37Canada $398,946 $889,898 123 40UK $427,335 $830,223 94 37

United States $759,043 $2,249,080 196 100Non-U.S. avg. $360,969 $748,904 129 33

Source: Economic Policy Institute, State of Working America 2004/2005,Ithaca, NY: Cornell University Press.

Despite being ranked third in percentage growth of pay, the CEOs in the United

States are paid extremely well compared to their equivalents in other industrialized

countries. Usually CEO pay in industrialized companies is one-third of U.S. CEOs. So

far our hypothesis about CEO over pay among U.S. companies is true compared to other

countries. One aspect to consider is that the average work load between American CEOs

and other countries work loads; the U.S. work load is perceived to be much greater.


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Another inefficiency between American CEO pay and that of foreign CEOs is the

pay based on firm performance. When looking at the average pay of the Japanese

directors, one can see that the CEOs cash compensation is sensitive to firm performance.

However, the opposite seems to be true when referring to some of the average American

CEOs pay. According to Michael Brush, the worst offenders of the insensitivity

between the performances of the firm and the CEO compensation include Gary Smith at

Ciena, and Scott McNealy at Sun Microsystems. Gary Smiths compensation over the

past four years has been $41.2 million, even thought his shareholders have been virtually

wiped out, losing 93% over that period. Although Sun Microsystems shareholders lost

76% of their money over the past four years, McNealy raked in $13.1 million a year over

that span (Burton 2005). It is this difference between many foreign and American firms

that has caused common criticism about the American CEO pay increase in years when

firms have performed badly. Many argue that a CEO should get the wages they deserve,

that the wage a CEO deserves is determined by his or her contribution to the firm. If the

firm performs worse in year two than in year one, one can argue the CEO deserves to

make less, and rightfully should make less, in year two than in year one.

Company Comparison

When comparing Foreign CEO pay rates to that of American CEO pay rates,

taking similar companies and comparing their compensation and responsibilities can give

outside viewers a more accurate look at the inequities between them. For instance, the

Vietnam Online News recently reported that the Viet Nam Shipbuilding Industry

Corporation, Vinashin, has announced it would become the first State-owned company in


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the country to hire a foreign chief executive officer. The company currently has three

candidates in mind from Poland, Japan, and South Korea. All three are qualified in the

field, and have extensive training in the area of shipbuilding. Compensation for the job

will include a three year contract for $3,500 a month or $42,000 a year, and a share of the

companys profits. Under oversight of the management board, the new CEO will be

expected to develop plans on organization and operations of the corporation, as well as

ways to reach its business targets (VNS 2005).

A similar American comparison to the Vietnam Company, Vinashin, is Tidewater

Inc. Tidewater is an American company based in Houston, TX, whose fleet of more than

560 vessels provides services such as transporting crews and supplies to offshore

platforms, towing oil rigs, aiding in offshore construction, and anchoring rigs and

equipment. Tidewater owns Quality Shipyards, which builds, repairs, and modifies

vessels for its parent company and for third parties. The CEO for Tidewater, Dean E.

Taylor, makes a $490,000 salary a year and $600,000 in bonuses.

In comparing the two ship building companies, it is obvious to see that the

American CEO is far more overcompensated for his job than the foreign CEO of

Vinashin. The American CEO is bringing in $490,000 a year compared to the measly

$42,000 the future CEO of the Vietnam Company will earn. Both perform the similar

jobs in that they are in charge of the oversight of the management board and responsible

for the organization and operation of the corporation. If the American CEO performs

similar functions as the foreign CEO, one would think that they would be similarly


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compensated.

CEO Overcompensation Theories

Based on facts and statistics it is apparent that American CEOs are rewarded more

monetarily than their foreign counterparts. The question now is why this pay gap exists.

In our research, we discovered several theories that address the issue, which include

marginal revenue product theory, tournament theory, and opportunity theory.

Marginal Revenue Product Theory

The basis behind marginal revenue product theory stems from the neo-classical

economic analysis that well-functioning labor markets have informed, active buyers and

sellers. In this analysis the belief is that negotiations between an informed buyer, the

board of directors, and an informed seller, the CEO, lead to a competitive price prevailing

in the market. The firm hires additional labor until the cost of an additional worker

equals the additional revenue that the worker brings to the firm, that workers marginal

revenue product (Bok 1993).

This theory predicts that in a competitive labor market the firms CEO should be

paid his/her marginal revenue product. If an executive contributes more to the firm, then

the executive should be more highly compensated. According to Khurana, 10-20% of

firm performance can be attributed to economic climate, 30-45% of performance depends

on the state of the firms industry. The amount left over, 35-60% of the firm value, can

be attributed to management. For example, managers approach in determining policy,

acquisition and diversification strategy, cost-cutting policies, and others, will affect firm

performance (Betrand 2002). From this we would expect that if top managements


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contribution to firm value is lower in foreign countries than in the United States, then

foreign top executives will be paid less that American CEOs. If this holds true, there are

several predictions that can be made about executive compensation.

Greater Growth Opportunities in the US

First, we would expect that firms with more growth opportunities will compensate

managers more highly. The United States economy is the leader in the area of

intangible, or intellectual property, and this is the main engine of future economic

growth (Colecchia 2001). Intangible assets fall into the categories of discovery,

organizational structure, and human resources (Lev 2001). In each of the three

categories, the U.S. is at or near the top when compared globally. The nation ranks high

in Gross Domestic Expenditure on R&D, seems to be the most productive nation in terms

of patents, and possesses an advanced venture capital infrastructure, turning invention

into business success (Colecchia 2001). Giving support is one of the top educated and

trained work forces in the world. If these intangibles are the biggest engine of future

economic growth, then it would seem that the United States firms have the greatest

opportunities for economic growth. In the marginal revenue product theory, if it is the

case that firms with greater growth opportunities should pay their managers more because

of creation of wealth, then American CEOs may be entitled to higher pay than foreign

CEOs.

Greater Role for U.S. CEOs

Also, larger firms have greater resources to be used by their managers. The

resources of these larger firms are obviously affected by managerial decisions, giving


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managers the ability to create greater value for the firm. In the U.S., where the

shareholder base of corporations is widely dispersed, the CEO plays a pivotal leadership

role and has tremendous discretion in decision-making. Large firms executives have a

greater scale of operations, handling a more complex organization, and these large firms

should employ the better-qualified, more talented executives to make these decisions

(Rosen 1999). The fundamental difference is that the U.S. CEO is usually the true leader

in their company, therefore having the ability to create high marginal revenue product. In

many foreign countries, where the norm is concentrated shareholder ownership, the role

of the CEO is smaller. In these countries, most large corporations have a control

shareholder, or controlling shareholder group (Prahalad 2000). For example, in Japan,

the CEO is thought of as more a first among equals who carries out a set of tasks that

could be performed capably enough by various others, as the controlling shareholders

help make critical decisions about the future of the firm (Meyer 1992). Assuming that

the U.S. CEO has more power and decision making ability than its foreign counterparts,

and supply of talented managers is relatively fixed in the short run, the demand for good

executives that can create a high marginal revenue product will drive industry-wide

compensation levels upwards.

Under marginal revenue product theory, if firms in the U.S. economy have greater

growth opportunity and resources to be used, and the CEO has greater decision making

authority, contributing more to the firm, then in theory they should be paid more than

foreign CEOs.


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Tournament Theory

A second opinion that offers an explanation of international pay gap is the theory

that U.S. CEOs are paid more because they are participants in the biggest tournaments.

This theory, aptly called tournament theory, of executive pay claims that internal firm

labor markets are like single elimination tournaments, meaning that as the winners

advance, the prize of moving on to the next round of the competition gets

disproportionately larger. The winner of the tournament is the CEO, getting the most

power within the firm, and receiving the largest paycheck. According to the theory, the

greater the power that the CEO exercises, the more fierce the competition to win

becomes. If American firms give their CEOs more power than foreign firms do, then we

would expect that obtaining the CEO position at one of these corporations would offer

the biggest prizes, or compensation packages. In short, United States executive pay

should be greater than in foreign firms if internal tournaments are bigger events at

American firms.

A basic premise is used that analyzes promotions within an internal labor market

to tournaments: the best performers in the workplace are promoted to the next level of

jobs. At each level of the organizational job ladder, workers are competing with other

workers for a fixed number of spots in elimination tournaments (Wilkins 1999). The

winner not only receives the immediate prize of a higher paying job and benefits, but also

the chance to compete for a job at the next level. The value of this ability to compete

later for higher positions gives additional incentives to the players in the lower rounds of

competition (Wilkins 1999).


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As the winners progress up the job ladder, there are fewer higher levels to attain.

For each winner, this reduces the value of their option to compete for future jobs. In

order to maintain the incentives to compete, an employer must therefore increase the

direct financial gains from obtaining a promotion as individuals rise in the hierarchy. In

other words, the amount of the increase in pay associated with a promotion must

increase as an individual reaches the higher managerial levels (OReilly 1996). This is

especially true for the pay gap between the CEO and the level of executives directly

below that position, because there are no further competitions for the CEO to win.

Internationally, CEOs have less power in the control shareholder dominated

companies most prevalent abroad. Less power equates with smaller prizes for winning

the tournament. Foreign CEO pay should therefore be lower than in the United States.

Equally important, foreign firms control shareholders are likely to want to retain their

power within their family. This is especially true in Asian countries. Children and

relatives of the controlling shareholder therefore have an excellent chance of being

promoted to the top job. As outsiders are not destined to arise from the middle level

management ranks, the internal tournaments for jobs at these firms will offer much lower

prizes to outsiders.

Opportunity Cost Theory

Another theory is the opportunity cost theory. It claims that the returns to skilled

labor, such as top corporate management, have increased in the United States in recent

years. This has occurred as increased access to financial markets has driven down the

barriers to entry in many industries, which, accompanied by increased international


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competition, has forced many large vertically integrated firms to break up and allowed

the development of many smaller niche firms. The human capital required by these

smaller firms is much less firm specific than before, allowing skilled managers to change

jobs more easily, or to create their own firms (Rajan 2001). These options have led to a

shift in the balance of power within firms, shifting it towards skilled labor and away from

capital, in turn increasing the returns to skilled labor. There are implications of this shift

in power for executive compensation. Established firms will need to offer their most

skilled employees, the ones that have the most alternative options for employment, a

larger amount of the firms surplus in order to retain quality employees.

The flip side to the fact that American managers have been able to gain more

power as compared to capital is that until very recently this phenomenon has not spread

to other countries. Continental Europe and the market-oriented economies of Asia have

not witnessed the expansion of financial markets with nearly the speed, or measure, that

this has happened in the United States. Further, many foreign countries have smaller

internal labor markets for managers, more capital intensive industries, and more

restrictive legal regulations on executive pay arrangements, all of which will tend to

depress executive compensation (Cheffins 2002). The opportunity cost theory believes

simply that executive pay in those nations will not reach the levels seen the United States.

American CEOs Opportunity Costs are Higher

For years, larger, vertically integrated firms controlled most of the United States

economy. These firms employed professional salaried managers, and dominated most


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sectors of the economy. They were heavily capital intensive, with oligopolistic

positions in their industry, and protected by barriers to entry (Rajan 2001).

Managers of these types of firms were unable to break away and start their own

businesses because larger amounts of capital were needed to start a competing firm and

existing financial markets were underdeveloped. Further, managers skills were highly

firm specific, with limited transferability to other industries. These vertically integrated

firms continued to grow until the 1970s. Beginning around that time, several factors

combined to force their break up. These factors include increased openness in trade and

markets, financial innovations, and new technologies (Rajan 2001).

The opportunities for American executives expanded tremendously from this. For

example, the internet boom in the 1990s created great opportunities for managers to start

up new businesses. Almost anyone with a good idea, and a modest amount of managerial

experience could start a new business. These changes increased the employment options

for managers. Although lasting only a short while, it had a dramatic effect on executive

pay levels as the executives greater potential to move from current jobs raises their

opportunity cost.

If executive pay levels accurately reflect the returns to skilled labor, then the

opportunity cost theorys prediction should be that the returns to managerial inputs are

lower at foreign companies than at American firms. The question is why foreign CEOs,

in the past, have had lower opportunity costs which resulted in receiving lower pay than

American CEOs. Two factors that may explain why are foreign executives more limited

access to financial capital, and the more limited job options of foreign executives. The


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fact is that now these forces may be changing. International labor markets are growing,

and financial capital is becoming more available to foreign executives. If this continues,

the opportunity cost theory would lead to a prediction that executive pay levels will

converge.

Limited Access to Financial Capital

For European executives, the fractionalized nature of continental European capital

markets and securities regulation has made it more difficult and expensive for executives

to raise capital to start new firms. Venture capital funding, a prime source of financing

for start-ups in the United States, is much less available in Europe EU market

capitalization is only about half that of the U.S., even though the EU economy is about

three-quarters the size of American economic output (Hofheinz 2002). This suggests that

funding start-ups will be more difficult in Europe, and therefore reduce the potential

opportunities for executives to create their own firms.

Fewer Job Options

One important implication of the opportunity cost theory is that the size of the

relevant labor market for executives will have an important impact on their opportunity

costs and therefore compensation. In a small labor market, firms should have more

power over their executives since those managers will have fewer job options, other

things being equal, if they leave an established firm (West 2000). For example, in the

past, the continental European countries offered relatively small job markets compared to

the U.S. because of the comparatively small size of their national economies. However,

with the growth of multinational business, the number of potential jobs available to top


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executives may be expanding. Cross border hiring, which is simply hiring foreign talent,

may have an impact on this. The argument is that if senior management departs to the

United States from elsewhere, this will cause significant increases in executive pay. This

could, in effect, cause foreign firms to fear that their most talented executives will

migrate to the U.S. to grab the more generous American compensation packages. In

order to keep their best managers in place, these companies would need to reconstruct

managerial compensation along American lines to compete. Moreover, if foreign owned

companies seek to hire an American CEO, they will need to offer that person a

compensation package comparable to those American companies provide. Therefore, in

theory, the emergence of a global market for executive talent may foster changes in

managerial compensation.

Conclusion

Americas corporate executives get paid huge sums of money for the work that

they do, whether

in salary, bonuses, or options. From research findings of statistics and

the opinions of others it seems apparent that American chief executive officers are paid

more in relation to the rest of the world. The exact reason for this difference in

compensation between the U.S. and foreign CEOs can not be totally explained.

Examining the marginal revenue product theory, tournament theory, and opportunity cost

theory only scratch the surface of the underlying causes.

The fact that American CEOs have been overcompensated for their work does

receive a great deal of attention in management and economicsjournals and in the

popular press. This argument is probably only just beginning with the growth of


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multinational businesses exploding over recent years, and the gap only seems to continue

to get bigger.


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