CEO Compensation Benchmarking in a European Context

Abstract

Fairness and equality are important matters to people. However, inequality has long been rising both in Europe, and particularly the US. This led to increasing levels of scrutiny on the high salaries of top-level CEOs.

Within the US, there has been extensive literature on CEO compensation and how it is benchmarked. A large amount of literature has found that benchmarking peers are often upwardly biased in order to extract additional rent for CEOs. While European attitudes towards inequality and unfairness are more negative compared to the US, no literature has yet looked into whether upward biasing of benchmarking peer groups similarly is an issue within Europe. This paper aims to fill that gap by comparing European companies’ CEO compensation with those of their named peers.

This study utilizes the STOXX Europe 50 index as a proxy for large European companies and outlines total CEO compensation packages and compensation benchmarking peer groups for the indexed companies. This allows it to utilize t-tests and regression analysis to test various hypotheses derived from the literature.

The analysis shows that European companies, like their United States counterparts, do engage in upward biasing of peer groups. However, company size within Europe does not appear to have any significant effect on the occurrence of bias. Furthermore, the level of income inequality similarly does not appear to have an effect.