Do U.S. Market Interactions Affect CEO Pay? Evidence from UK Companies

This paper examines the extent that interactions with U.S. markets impact the compensation practices of non-U.S. firms. Using a sample of large U.K. companies, we find that the total compensation of U.K. CEOs is positively related to the extent of the firm's interactions with U.S. markets, as captured by the percentage of total sales generated in the U.S., the presence of prior U.S. acquisition activity, the presence of a U.S. exchange listing, and CEO and director-level U.S. board experience. More importantly, we find that exposure to U.S. product markets is associated with the adoption of U.S.-style compensation arrangements (i.e., incentive-based pay packages). In contrast, we find no such association with exposures to other (non-U.S.) foreign product markets. Together, our evidence is consistent with U.S. market interactions impacting U.K. compensation practices through two mechanisms: 1) to alleviate internal and external pay disparities arising from the presence of U.S. operations and businesses (proxied by the percent U.S. sales and prior U.S. acquisitions) and 2) to compensate CEOs for bearing the additional risk and responsibility associated with exposure to foreign securities laws and legal environments (proxied by both U.S. and non-U.S. exchange listings).