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Abstract
Shareholder value ideology and the rise of executive pay are widely acknowledged but only partly explored aspects of financialization. This paper adds to the empirical evidence on the extent to which stock-based pay incentivizes and rewards corporate executives, demonstrating that CEO pay, and hence pay inequality, is substantially under-stated in Europe. It shows that the actual realized gains (that is, take-home compensation) from stock-based pay of CEOs in the largest European companies are underestimated by the use of ‘fair value’ measures, in the case of some countries dramatically. We base our work on a sample of 301 large, publicly-traded companies listed in the S&P Europe 350 index from 11 EU countries. We document that on average half of the total compensation of the European CEOs in our sample is stock-based, measured by actual realized gains, with differences among countries. Based on our work, we argue that realized gains measures of CEO pay should be the standard for assessing the incentives and rewards of senior corporate executives in Europe. We consider this to be a preliminary step to question shareholder value-based corporate strategies in Europe.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Acknowledgements
We are grateful to William Lazonick and Matt Hopkins for helpful comments and suggestions. We also thank Dejan Guduraš and Alenka Slavec who helped with the data collection.
Notes
1 Two Danish S&P 350 Europe companies – A.P. Møller-Maersk and Vestas Wind Systems – are not included in the analysis due to lack of their CEO pay data.
2 We kept the U.K. in our sample, as it was an EU member in 2015.
3 In case when the exact vesting date is not provided, we had to take the average stock value for the month or the fiscal year of the company. In such cases, realized gains end up being ‘estimated realized gains’, a compromise that further justifies the need for full disclosure of stock-based pay information. For Germany, Ireland, Spain and the UK we were able to identify the exact amounts of realized gains for all companies in our sample. We had to use annual average prices in about one third of the cases of exercised stock options and vested stock awards for France (30%), Sweden (33%), Italy (29%) and Belgium (38%). In the case of the remaining three countries, the percentage of companies without exact exercise/vesting dates ranges from 10 to 20 percent: Netherlands (14%), Finland (11%), and Denmark (17%).
4 The figures of the extraordinarily highly paid CEOs of Fiat and Anheuser-Busch Inbev in 2015 are removed from some of the calculations represented in the tables and charts of this section.
5 Cash-settled stock awards are virtual stock awarded at the beginning of the vesting period which are paid in cash, equivalent to the stock market value of the awards at the time of vesting. No new stocks are issued.
6 Note that our 2015 data on the number of companies with stock-based remuneration will not necessarily reflect the number of companies that granted stock-awards and stock-options to their CEOs in 2015 because our analysis of CEO compensation is based on realized gains from the stock-based components. As an example, in 2015, 30 out of 38 German CEOs were awarded a certain form of stock-based compensation but only 24 CEOs actually realized any stock-based remuneration in the same year. If the performance criteria are not met or if the CEO is a new hire from the outside, she would not receive any stock-based compensation in 2015. Neither U.S. nor European companies are required to report the realized gains of their retired or departed CEOs after they leave. Only if a CEO retires or leaves during 2015 are the figures for that year still accessible. In such cases, we add the compensation of the new and the former CEO.
7 More than half of the U.K. companies’ 15 CEOs who have realized gains from stock options have exercised only SAYE (Save As You Earn) stock options which are granted in very small numbers compared to normal executive stock option grants. Different than executive stock options, SAYE is a savings-related stock-based pay scheme where an employee can be granted stock options for a fixed price set at a discount to the market value at the time of grant. This has resulted in relatively small realized gains (not more than £10,000 per CEO, on average) presenting not more than 2% of total compensation for U.K. CEOs.
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Notes on contributors
Patricia Kotnik
Patricia Kotnik is an assistant professor at the School of Economics and Business in University of Ljubljana. She holds a Ph.D. in economics from the same university. Her main research interest lies in entrepreneurship, entrepreneurial finance, innovation and entrepreneurship policy. She is a member of a research program group focusing on competitiveness, innovativeness and sustainable development of Slovenian economy.
Mustafa Erdem Sakinç
Mustafa Erdem Sakinç is an assistant professor at Université Sorbonne Paris Nord and a senior researcher of the Academic-Industry Research Network. He holds a Ph.D. in economics from University of Bordeaux. His research focuses on the interactions between business strategies, corporate governance, corporate finance and industrial relations that specify contrasting and converging corporate practices in the U.S. and Europe.