Although the pay levels of chief executive officers (CEOs) in the UK have grown in recent years,
they remain far behind those enjoyed by CEOs in the United States, especially if account is taken
of the gains the latter realise from exercising share options. That is the central finding of new
research by Professors Martin Conyon and Kevin Murphy published in the latest issue of the
Economic Journal. They find that:
l The CEOs of the UK's 500 largest companies earned £330 million in total in 1997, an
average of £660,000 each. That included £74 million from exercising share options.
l In contrast, the CEOs of the top 500 US firms made £3.2 billion in 1997 (including £2
billion from share options), an average of £6.3 million each.
l Disney's Michael Eisner, dubbed the 'Prince of Pay' by pay critic Graef Crystal, exercised
options worth £348 million in December 1997, thus single-handedly out-earning the
combined paycheques of the top 500 CEOs in the UK that year.
l British Sky Broadcasting's Sam Chisolm, the highest-paid UK executive in 1997, was a
mere pauper by American standards: his £6.8 million pay package would have only ranked
as the 97th highest among US chief executives that year.
These anecdotal comparisons, while driven by gains from share options in the robust US stock
market, hint at important differences in CEO pay levels and practices in the UK and United States.
The study uses data from 510 UK companies and 1,666 US companies in 1997. Of course, US pay
levels may be higher because US companies are larger, more successful or are in faster growing
industries. So the researchers control for firm size, industry, growth opportunities, CEOs'
individual skills and abilities and other observable characteristics, so as to compare like with like.
The results of this process show that CEOs in the United States earn on average 45% higher cash
compensation and 190% higher total compensation (including share options) than their UK
counterparts. The divergence between UK and US pay is especially pronounced in large firms and
financial firms.
Much of the wage premium enjoyed by the US CEOs stems from the amount of share options they
receive. The median stock holding for US CEOs is 0.29%, while the median stock holding for UK
CEOs is only 0.05%. Conyon and Murphy argue that the differences in share option awards,
surprising given the similarity of the economies and corporate governance structures, can be
largely attributed to institutional, political and cultural differences between the two countries.
'The United States, as a society, has historically been more tolerant of income inequality,
especially if the inequality is driven by differences in effort, talent or entrepreneurial risk taking',
they say.
The authors conclude: 'We believe that corporate tax deductibility rules - which encourage option
compensation in the United States while discouraging option compensation in the UK - help
explain the observed differences in pay structures. Ultimately, however, the differences largely
reflect subtle political and cultural differences in the two countries.'
'In the United States, the controversy over CEO pay has led to tighter links between executive pay
and performance (primarily through an explosion in option grants), exacerbating wage inequality
given the robust US stock market. In the UK, the pay controversy has led to statutory and nonstatutory
policies that discourage large share option grants, lessening the pay performance and
leading to a relatively compressed wage structure.'
Note for Editors: 'The Prince and the Pauper? CEO Pay in the United States and United
Kingdom' by Martin Conyon and Kevin Murphy is published in the November 2000 issue of the
Economic Journal. Conyon is Professor of Economics at the Wharton School, University of
Pennsylvania and Warwick University Business School; Murphy is Professor of Economics at the
University of Southern California. Financial support for the research was provided by the
Economic and Social Research Council (ESRC).
For Further Information: contact Martin Conyon on 001-215-898-0744 (fax: 001-215-898-
0401; email: Conyon@wharton.upenn.edu); RES Media Consultant Romesh Vaitilingam on 0117-
983-9770 or 07768-661095 (email: romesh@compuserve.com); or RES Media Assistant Niall
Flynn on 020-7878-2919 (email: nflynn@cepr.org).