Comparing CEO Employment Contract Provisions: Differences between Australia and the U.S.
Jennifer G. Hill
University of Sydney - Faculty of Law; European Corporate Governance Institute (ECGI)
Ronald W. Masulis
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)
Randall S. Thomas
Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)
August 24, 2010
Vanderbilt Law Review, Vol. 64, No. 2, pp. 559-608, 2011
Sydney Law School Research Paper No. 10/81
Vanderbilt Law and Economics Research Paper No. 10-23
This study compares CEO employment contracts across two common law countries: the United States and Australia. Although the regulatory regimes of these jurisdictions enjoy many comparable features, there are also some important institutional differences in terms of capital market, tax, and regulatory structures, which are discussed here. Debate has raged in the United States on the issue of whether executive compensation is efficient and determined at arm's length, or skewed due to a power imbalance between managers and shareholders. A comparative analysis of the kind undertaken in our study provides an additional perspective on the optimal contracting and managerial power models of executive pay in U.S. academic literature. Even if one model has greater explanatory power in the U.S. context, this will not necessarily be the case in other jurisdictions, such as Australia.
In order to do our comparison, we create pairs of U.S. and Australian firms that are matched on a number of dimensions including firm size and industry. We find that Australian CEOs have significantly greater base salaries than their U.S. counterparts, while U.S. CEOs are more likely to be compensated with restricted stock and stock options than the Australians. More striking is the fact that U.S. CEO employment contracts tend to last longer than Australian contracts, and are more likely to have arbitration provisions, change-in-control provisions, tax gross ups, do not compete clauses, and SERPs. We also find that Australian contracts are much more apt to include performance hurdle requirements before CEOs can receive restricted stock and options, and restrictions on CEO hedging of restricted stock and options. A number of the contractual differences we document appear to be consistent with key institutional differences between the two countries.
Number of Pages in PDF File: 55
Keywords: Executive Pay, Compensation, Australia-U.S. Comparison
JEL Classification: G30, G32, G38, J33, J41, J44, K1, K22, M52, N3, N20
Date posted: August 25, 2010 ; Last revised: November 21, 2011