eThesis - School of Business electronic theses

This paper provides an overview of the main theoretical elements and empirical underpinnings of executive compensation system designs. It is argued that the components affecting CEO pay studied up to today including e.g. company size, performance, industry, and ownership structure are not enough to explain the differences observed in international executive pay. Thus, the analysis is expanded to take into consideration also geographical and cultural influences. In this study geographical distance is measured at the continent level whereas Hofstede's cultural country scores are used to proxy cultural aspects.

The study is realized as archival research with a sample of 120 observations from 10 countries and 6 industries. The countries included are Australia, Canada, Finland, France, Germany, Portugal, Spain, Sweden, The United Kingdom and The United States. The industries included are energy, telecom & information technology, machinery, commercial, transport, and chemicals & pharmaceuticals. The compensation data was gathered from the webpages of the companies and the company specific control data from the Orbis database. The data was analysed with statistical methods using SPSS.

The results are surprising by nature and challenge the sole reliance on agency theory and agency costs of debt theory in the field of executive compensation: the study indicates that the rational explanations such as company size, profitability, industry, and capital structure often offered to explain the determination of executive pay actually explain only a very small percentage of the international differences observed in executive compensation practices and in the use of share-based pay systems. On the contrary, the results suggest executive compensation relies very much on geographical and cultural considerations and as a consequence it seems there is no universal fit-for-all compensation practice that can be developed. Thus, this study gives indication against the recent suggestions towards a convergence of executive compensation.