Globalization Stops Short at the Corporate Suite

Agenda-Setting Financial Insight.
Feb. 28 2012 11:34 AM

Globalization Stops Short at the Corporate Suite

Andrew Liveris, Chairman and CEO of the Dow Chemical Company, is one of only three Fortune 500 firm leaders who are not American nationals

Photo by Chip Somodevilla

The global war for talent is a popular justification for exorbitant chief executive pay. But with few exceptions, expatriate chiefs are a tiny minority at most major publicly traded corporations. It’s bad news for shareholders, especially in high-pay hubs, who could find better-value stewards overseas.

Multinationals are constantly in search of cheaper workers. The one exception appears to be the most expensive staff of all, in the boardroom. Particularly in the United States and Britain, boards have shown little desire to get the maximum bang for their buck by insisting companies cast wider recruitment nets. Anglo-American companies continue to tolerate steep rises in pay at the top that far exceed returns.


In 2010, compensation for the head honchos at American and British companies climbed 36 percent and 43 percent, respectively, dwarfing shareholder returns of around 15 percent, according to research firms GMI and Incomes Data Services. As recently as 1993, U.S. corporate bosses were paid some 130 times more than the average worker. Now they command about 350 times more, according to Duke University economist Dan Ariely. 

A big plank of the defense has been globalization. Since the brightest CEOs can take their pick of posts across the globe, or so the argument goes, shareholders should not be surprised by astronomic remuneration - a point recently made by the Corporation of London’s policy chief. This oft-repeated excuse for overcharging shareholders is seldom backed up with evidence.

In fact, a domestic passport holder typically heads leading companies. According to a Reuters Breakingviews analysis of Fortune 50 companies, just a handful of CEOs were foreign nationals. And performance doesn’t explain the home bias. In a study conducted by Obermatt, a financial research company, roughly 42 percent of the largest U.S. firms surveyed paid their CEOs above-average compensation despite underperforming their peers.

Broader metrics also debunk the notion that Americans, who earn some 60 percent more than their European counterparts, according to the Hay Group, are somehow more astute at creating shareholder value. In fact, the Continentals lead the pack when it comes to performance over the last decade, producing returns of 85 percent, including dividends, against just 63 percent by better paid Brits and the 47 percent managed by the lavishly rewarded Americans.

Even though the correlation between pay and performance is non-existent in the United States, according to an Obermatt study, other countries like Britain persist in using the American pay standard to justify spikes in CEO compensation. There’s also surprisingly little evidence that globe-trotting chiefs are causing bidding wars among multinational companies who want to poach, or retain, the best corporate leaders. For instance, the top 10 German companies by earnings are all run by Teutonic chiefs, while Japan’s biggest companies also favor CEOs born and bred in the land of the rising sun.

In fact, the tendency of CEOs to nest in their home countries could actually be part of the problem. A mobile workforce should exert a downward pressure on top executive compensation. Given outsized U.S. pay, American companies should have little problem recruiting foreign-born bosses. For large multinationals that increasingly depend on overseas sales, naming a European, Indian or Brazilian CEO could not only be cheaper, but also a potentially strategic move to win over customers in foreign markets.

Yet, there are a host of non-economic reasons why national borders will keep limiting such movement at the top. Cultural differences, entrenched networks and, in some cases, political barriers are likely to trump cost when hiring a CEO. Shareholders, however, should be more skeptical when they hear the global free market used as an excuse for fatter executive paychecks.

Read more at Reuters Breakingviews.

Chris Swann is a Reuters Breakingviews columnist, based in New York. He writes about hedge funds, commodities and asset management. He joined from Bloomberg News, where he covered global poverty issues and the International Monetary Fund.

Agnes T. Crane is a Reuters Breakingviews columnist, based in New York, where she covers capital markets and Latin America. She joined from Dow Jones Newswires, where she was an award-winning journalist who led a team of reporters covering the credit crisis.



Meet the New Bosses

How the Republicans would run the Senate.

Even by Russian Standards, Moscow’s Anti-War March Was Surprisingly Grim

I Wrote a Novel Envisioning a Nigerian Space Program. Then I Learned Nigeria Actually Has One.

The Best Thing About the People’s Climate March in NYC

Friends Was the Last Purely Pleasurable Sitcom

The Eye

This Whimsical Driverless Car Imagines Transportation in 2059

Medical Examiner

Did America Get Fat by Drinking Diet Soda?  

A high-profile study points the finger at artificial sweeteners.

The Government Is Giving Millions of Dollars in Electric-Car Subsidies to the Wrong Drivers

John Oliver Debunks the Miss America Pageant’s Claim That It Gives Out $45 Million in Scholarships

Trending News Channel
Sept. 20 2014 11:13 AM Watch Flashes of Lightning Created in a Lab  
  News & Politics
The World
Sept. 22 2014 12:30 PM Turkey Just Got Forty-Six Hostages Back From ISIS. How Did That Happen?
Sept. 22 2014 12:44 PM The U.S. Is So, So Far Behind Europe on Clean Energy
The Shortcut
Sept. 22 2014 12:31 PM Down With Loose Laces A simple trick to tighten your running shoes for good.
  Double X
The XX Factor
Sept. 22 2014 12:29 PM Escaping the Extreme Christian Fundamentalism of "Quiverfull"
  Slate Plus
Sept. 22 2014 8:08 AM Slate Voice: “Why Is So Much Honey Clover Honey?” Mike Vuolo shares the story of your honey.
Sept. 22 2014 1:10 PM One Photographer’s Beautiful and Devastating Response to Climate Change
Future Tense
Sept. 22 2014 12:14 PM Family Court Rules That You Can Serve Someone With Legal Papers Over Facebook
  Health & Science
Sept. 22 2014 12:15 PM The Changing Face of Climate Change Will the leaders of the People’s Climate March now lead the movement?
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.