Vanderbilt Law Review, Vol. 64, No. 2, pp. 559-608, 2011
55 Pages Posted: 25 Aug 2010 Last revised: 21 Nov 2011
Date Written: August 24, 2010
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.
Keywords: Executive Pay, Compensation, Australia-U.S. Comparison
JEL Classification: G30, G32, G38, J33, J41, J44, K1, K22, M52, N3, N20
Suggested Citation: Suggested Citation
Hill, Jennifer G. and Masulis, Ronald W. and Thomas, Randall S., Comparing CEO Employment Contract Provisions: Differences between Australia and the U.S. (August 24, 2010). Sydney Law School Research Paper No. 10/81; 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. Available at SSRN: https://ssrn.com/abstract=1664615 or http://dx.doi.org/10.2139/ssrn.1664615
By Kevin Murphy