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Compensation across executive labor markets: What can we learn from cross-listed firms?

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Abstract

There is wide consensus that chief executive officers (CEOs) of US firms earn significantly more than their Canadian counterparts. Using a matched sample, we find that the majority of this difference is due to US CEOs earning 50% more than CEOs of Canadian non-cross-listed firms. We find no such “US premium” for Canadian cross-listed firms, because the use of options allows the cross-listed firms to keep pace with their neighbors to the south. While firms that list only in Canada compete in the labor market defined by their national boundary, cross-listed firms appear to be competing directly with their US counterparts for executive talent. In investigating alternative explanations for the elimination of the compensation differential for Canadian cross-listed firms, we find evidence consistent with both the bonding and the rent extraction hypotheses.

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Figure 1

Notes

  1. Jensen and Murphy (1990) and Rosen (1992) report weak pay performance sensitivities in the US. Even weaker relationships are reported for the UK (Conyon & Leech, 1994; Rosen, 1992) and Canada (Zhou, 1999).

  2. Unlike other foreign firms, Canadian companies can obtain this “bonding through cross-listing” more cheaply, since they can list on US exchanges by satisfying the same requirements as domestic firms. Many Canadian firms take advantage of this, and until recently constituted half of all foreign listings in the US (Karolyi, 1998).

  3. On 26 March 2002 the Toronto Stock Exchange Inc. (TSE) changed its name to TSX Inc. (TSX), and since 1 May 2002 the major Canadian equity index, the S&P/TSX Composite Index (formerly the TSE 300), has been managed by Standard & Poor's. The index represents roughly 80% of the Canadian market capitalization.

  4. Resource firms constitute a third of his Canadian sample, but only 1–2% of the US samples.

  5. The average size of US firms in his comparison set is 12 to 15 times that of the Canadian firms (Zhou, 1999).

  6. http://www.fin.gov.on.ca/english/budget/ontariobudgets/2002/paperc.html

  7. Marginal tax rates for individuals do vary across states and provinces.

  8. The capital gains tax rate was preferential in the US before January 2000 (it was 50% of the marginal income tax rate in the US, compared with 75% in Canada), but both tax rates were the same afterwards. Since most US employee stock options do not qualify for the capital gains rate, and thus are taxed at the full marginal tax rate, this difference in two of the five years of the sample is not likely to affect our findings.

  9. This difference in incentives to grant options across countries is further exacerbated by the so-called One Million Dollar rule implemented by the SEC in 1992. This provided a significant tax disincentive for US firms to pay their CEO a salary over $1 million, and an incentive to increase the percentage of compensation that was performance-based, such as options.

  10. Firms must have a perfect match for the GICS, a robust measure for global studies that performs better than SICS or North American Industry Classification System (NAICS) in most research settings (Bhojraj, Lee, & Oler, 2003).

  11. We screened for firms with 2002 revenues within 20% of the Canadian firm's revenues. If no match was found using revenues, we screened for firms that had market capitalizations within 20%. When more than one revenue match was found, we screened for firms with market capitalizations within 20%. If no firms met the additional market capitalization criteria, the match was the firm with the closest sales revenue. If more than one firm met both criteria, the firm with the closest sales revenue was chosen. If no firm could be found with revenues within 20% of the Canadian firm's, but at least one firm did have a market capitalization within 20%, the match was chosen as the firm with the market capitalization closest to the Canadian firm's. In the end, 70% were matched on revenues, 6% on market capitalization, and 24% on both criteria. There was no re-matching each year.

  12. Industry composition of all of the firms on the TSX in 2002 was 25% resources, 16% manufacturing, 4% utilities, and 16% financial, while of the S&P500 was 10% resource, 18% manufacturing, 11% utilities, and 14% financial.

  13. US studies tend to include only US firms included in Compustat's ExecuComp Database (S&P 1500). We did not restrict our matches this way, so we include US companies not included in other studies.

  14. Since Nasdaq/Amex firms are smaller than the non-cross-listed firms (data not shown), but their compensation is similar to that of the non-cross-listed firms, this suggests that it is not just firm size that is responsible for the differences between the cross-listed and non-cross-listed firms.

  15. Over the sample period, 70% of the Canadian cross-listed and 55% of the non-cross-listed firms paid options.

  16. The analysis is presented only for the Canadian firms, since our US sample is matched to our Canadian sample, and is therefore not representative of the population of US firms. In results not shown, probit analyses of the US firms in our sample find size and the finance dummy to be significant and positive, and the estimated coefficient on the utilities dummy to be negative and significant, which is consistent with representative US sample data.

  17. The marginal effects are defined as φ(βx)β, where φ() is the standard normal probability density function , x is the mean value of the explanatory variable, and β is the coefficient estimate.

  18. When the exchange-listing dummy variables are not included in the model for the Canadian firms, sales and the finance and utilities industry dummy variables are still not significant up to α=0.25 (results not shown). Therefore the cross-listing dummy is not merely capturing other effects.

  19. Cross-listing is not proxying for size, since the Nasdaq firms are, on average, smaller than non-cross-listed firms.

  20. In t-tests performed by year (results not presented) we did not find the cross-country differences to become smaller in 2001 and even smaller in 2002, as one would have expected if the change in corporate tax rate impaired a Canadian firm’s ability to reward top executives and therefore had a measurable impact on the US premium.

  21. Results for the differences in TCC were remarkably similar to those for TC.

  22. We do not find a significant difference in P/E ratios before and after cross-listing.

  23. To verify the robustness of our results we also run all of the regressions with the winsorized data set. Since all of the results are similar in this and the subsequent analyses, we present only the primary results.

  24. Prior studies used the elasticity of cash compensation, and we found this value to equal 0.30 for both countries (results not shown).

  25. Canadian and Mexican companies routinely include US companies in the peer groups to determine competitive pay levels, and US companies are exporting their pay practices through foreign subsidiaries (Murphy, 1999).

  26. Because the model uses ln(compensation), the premium for the estimated coefficient of 0.34 is obtained as (exp(0.34)−1)=0.40 and thus corresponds to a premium of about 40% for the US CEOs.

  27. In results not presented we investigated differences in pay–performance sensitivities and found no significant differences between Canada and the US. Further, the pay–performance sensitivities were very low, and none was statistically significant at α=0.05.

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Acknowledgements

The authors are grateful for the extensive feedback from the three reviewers, and for guidance from Paul Beamish, Walid Busaba, Craig Doidge, Craig Dunbar, Steve Foerster, Mark Huson, Michael King, Kai Li, Mathijs van Dijk and our editors Lemma Senbet, Mary Ann Von Glinow, Raj Aggarwal and Lorraine Eden, the Editor-in-Chief. Financial support was provided by SSHRC (Sapp) and a G. Mark Curry Fellowship (Southam).

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  1. Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada

    Colette Southam & Stephen Sapp

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  1. Colette Southam
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Correspondence to Colette Southam.

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Accepted by Lemma Senbet, Area Editor, 26 February 2009. This paper has been with the authors for four revisions.

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Southam, C., Sapp, S. Compensation across executive labor markets: What can we learn from cross-listed firms?. J Int Bus Stud 41, 70–87 (2010). https://doi.org/10.1057/jibs.2009.34

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