In recent years, especially after the financial crisis, there has been a fierce debate over the level of executive pay, especially in Europe and the United States. According to a Towers Watson study of 225 Fortune 1000 companies, the median total direct compensation increased only 5.6% for CEOs in 2011, compared to a 14.5% increase in 2010. It seems as though the recent outcry is having an effect. Though compare these numbers to Forbes 2011 study on the 500 biggest U.S. company’s CEOs and their pay, and you will see a different story. U.S. CEOs received a collective pay raise of 16% in 2011, compared to 3% for the average American worker. It is interesting to see the vast differences not only on the level of pay, but especially on how the culture of a certain country affects the debate.
Nowadays you cannot measure executive pay by just looking at salaries. Many executives also receive bonuses, severance pay, stock, and stock options which can overall create a very lavish package (total direct compensation). The recent popularity of the $1 salary for the most part is just a publicity stunt. So why do we have so called “excessive pay” in the first place? The popular theory of the agency problem states that relative to the firms’ owners (shareholders), managers (CEOs) are more risk averse. This can cause CEOs to actually reject projects that may be profitable and play things safe. In order to incentivize more risk, they are given items like stock options and bonuses to motivate them. Of course, sometimes excessive severance pay can actually incentivize executives to not care if they fail, but that is the extreme example. There are many interesting cultural aspects to not only this risk taking but the level of pay as a whole.
One of Hofstede’s cultural dimensions is uncertainty avoidance, and a country with a low score means that they are open to ambiguity and are prone to more risk taking. The United Kingdom scores low on the scale, and interestingly enough this is one of the countries where executive pay is a hot topic. Another dimension, individualism, also is highly correlated with CEO compensation. A country with a high score such as the United States feels that rewarding a CEO lucratively may be considered appropriate, where a collectivist country such as South Korea will be the opposite. High executive pay in a collectivist culture would not be tolerated easily because high pay dispersion and low income equality would produce social tension.
Countries such as the Netherlands, Belgium and France, whose cultures are characterized by solidarity and egalitarianism are more prone to public outcry. For example in France, President-elect Francois Hollande has pledged to change the bonus culture in big business, after a 16 million Euro bonus was set aside for the CEO of an ad company there. In the UK, the government is amending company law to make the shareholder's vote on executive pay plans binding. I believe this is a great idea, because investors will be able to speak out against excessive unmerited pay. This is a huge change because shareholders want highly skilled CEOs that perform well to be compensated well, but they do not want to see large bonuses and severance pay for the underperformers. Globally, this form of control on pay is becoming commonplace. Globalization adds a unique twist to the issue, as multinational corporations deal not only with a diverse workforce, but diverse shareholders as well. Being able to manage all stakeholder's interests will be key to a company’s compensation policy, and cultural dimensions cannot be overlooked.