Comparing CEO Employment Contract Provisions: Differences Between Australia and the United States
Thomas, Randall S., 1955-
Hill, Jennifer G. (Jennifer Gae)
Masulis, Ronald W.
The results of our comparison of U.S. and Australian contracts offer some interesting contrasts with several earlier studies that compare U.S. and U.K. CEO compensation. In those prior studies, the authors conclude that U.S. CEOs' compensation is significantly higher than U.K. CEOs' compensation. What is interesting about our initial results is that U.S. CEOs clearly do not have higher base salaries in comparison to Australia. On the other hand, U.S. contracts are much more likely to include restricted stock and stock option features, which generally require payment after a CEO remains at the firm a fixed number of years, typically without imposing any performance requirements. Thus, it is unclear whether the total pay package of Australian CEOs is higher than that of U.S. CEOs, especially when we recognize that stock options can be out-of-the-money when they expire, which we have frequently observed in recent years. But what is clear is that U.S. CEOs have much stronger stockbased compensation, while Australian firms have significantly less frequent stock-based compensation. In addition, when stock-based pay is included in Australian CEO pay packages, their compensation is also conditional on meeting performance hurdles, which should further motivate Australian CEOs to perform at a high level. This performance hurdle is much less common in the United States, though it appears to offer CEOs stronger incentives to perform well.