Unit 4 European ceOs Make Half the Pay

Jul 26th 2006

From Company Focus

By Michael Brush

Regardless of their performance or the size of company, American bosses rake in far bigger rewards, beneficiaries of a superstar culture and more passive shareholders.

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Forgive European CEOs if they suffer from a bit of paycheck envy.

They're not doing bad, mind you. Many still get to use the word "million" when tallying up their compensation. But compared to their American counterparts, whose total pay increased an average 27% last year, they're practically destitute.

Consider:

The average pay for the top executive at the 200 largest U.S. companies last year was $11.3 million, according to Pearl Meyer & Partners, the compensation division of Clark Consulting. That's more than 2.5 times the average $4.3 million earned by the top executive at 100 companies in GB.

It's the same story at midsized companies. Bosses at U.S. businesses with annual sales of about $500 million earned $2.16 million last year. CEOs at similar-size companies in the UK, France and Germany earned $1.2 million, about half as much, according to Towers Perrin, another compensation consulting firm. In Japan, the typical CEO at this size company made $543,000.

You see even more striking contrasts when you examine individual companies in the same sector.

Deutsche Telekom Chairman and Chief Executive Kai-Uwe Ricke got $3.3 million in salary and bonus last year, and he accrued $400,000 in incentive pay. His counterpart at AT&T, Edward Whitacre, had a pay package worth more than $38 million. That included $9.2 million in salary and bonus, $4.7 million in long-term incentive payouts and $24.8 million worth of long-term incentive grants. Ricke got paid one-tenth as much as Whitacre even though Ricke manages a bigger company; Deutsche Telekom has annual revenue of around $75 billion, while AT&T's is $50 billion.

U.K.-based GlaxoSmithKline paid CEO Jean-Pierre Garnier in salary and bonus of $6.4 million in 2005, using exchange rates from last week to convert his salary to dollars from pounds. When you add in "other" pay and options, his total pay package was worth around $9.4 million. In contrast, Henry McKinnell, chairman and CEO of Pfizer, had a pay package worth more than $17 million last year. He got a salary and bonus worth $6 million.

Just what accounts for these huge differences in pay for CEOs on the two continents? After all, you can't write off higher pay for U.S. CEOs as the price of better talent – especially if you expect that talent to produce better results.

GlaxoSmithKline's Garnier earns significantly less than Pfizer's CEO. But over the past five years GlaxoSmithKline shares are flat while Pfizer shares are down more than 40%. Shares of both AT&T and Deutsche Telekom are down significantly in the past five years but Deutsche Telekom shares are down less.

So if it's not pay for performance, what explains the difference? Here's a breakdown.

Rewarding risk

In the United States, there's a deeper history of granting large equity stakes to CEOs at young companies to entice them to work hard. That kind of thinking has spilled over into pay policies at mature companies. The emphasis on incentive pay in the United States shows up clearly in the numbers. "Variable pay," things like options and incentive pay, accounts for 62% of pay for U.S. CEOs at mid-size companies. But it makes up just 35% of CEO pay for similar-size companies in the UK and 41% in France. In contrast, base pay made up only 27% of the pay for U.S. CEOs while it accounted for 43% in the UK and 40% in France.