Cross-Country Examination of Executive Compensation: A Comparison of the United States, the United Kingdom, and South Korea
Ji Soo Yim
Abstract: A comparison of CEOs’ compensation in three different countries demonstrates that CEOs in the United States get paid far more, simply by virtue of their location. But thanks to globalization, other countries are quickly following the United States’ steps by increasing their CEOs’ pay. Current executive compensation practices are not true reflections of performance levels, but this paper suggests that policy changes may fix this problem.
Executive Compensation as a Solution to the Agency Problem
The “excesses of the 1980s,” coupled with studies showing that the median pay of S&P 500 CEOs have more than doubled since the 1970s,[1] have instilled in academia, financial circles, and the general public an increased interest in executive compensation. This interest has also been influenced by the general acceptance of agency theory around the early 1980s and populist attacks on wealth after the bull market of the 1990s. Now, in 2012, we must delve deeper in order to grasp the totality of laws and regulations shaping executive compensation policies in their many nuanced forms. This paper will comparatively analyze executive compensation policies in three countries, each from different regions of the world: the United States, the United Kingdom, and South Korea.
There is a contract between CEOs and shareholders that, in modern corporations, is a result of the separation of ownership and control of production. Specifically, the CEO is expected to take action a, producing shareholder value x(a), and in turn receiving compensation w(x, z) and utility u(w, a)[2]. In modern corporations, CEOs do not necessarily seek to maximize the interests and profits of the shareholders, and no contract can fully stipulate every action to be taken by a party. In the same way, shareholders hold power over the CEOs and can ensure contract terms are being fulfilled. This struggle between the interests of CEOs and
