Comparing CEO Employment Contract Provisions

The following post comes to us from Jennifer Hill, Professor of Corporate Law at the University of Sydney; Ronald Masulis, Professor of Finance at Vanderbilt University and at the University of New South Wales; and Randall Thomas, Professor of Law and Business at Vanderbilt University.

In our paper, Comparing CEO Employment Contract Provisions: Differences between Australia and the U.S., forthcoming in the Vanderbilt Law Review, we compare and contrast CEO employment contracts across two very different common law countries.

In the wake of the global financial crisis, executive compensation is front page news, with soaring rhetoric about excessive pay to ungrateful bank employees and personal attacks on CEOs and other executives. Frequently missing from the discussion, however, are basic facts surrounding the terms and conditions of the executives’ relationships with their firms. While several recent studies in the United States have begun to fill in some of the details surrounding American executive employment contracts, or the lack thereof, none have fully captured the U.S. experience, particularly from a legal perspective. Likewise, none of these studies even touch on Australian CEOs’ contractual employment relationships.

Our empirical study is designed to fill this gap. Our study also provides an additional perspective on the optimal contracting and managerial power models of executive pay in U.S. academic literature. Even if one accepts that a particular model has greater explanatory power in the U.S. context, this will not necessarily be the case in another jurisdiction, such as Australia. The United States and Australia, while enjoying many comparable regulatory features, display interesting differences in terms of capital market and regulatory structures. For example, capital markets in Australia differ markedly from the classic U.S. dispersed model of share ownership.

In order to do our comparison, we created pairs of U.S. and Australian firms that are matched on a number of dimensions including firm size, industry and year. We find that Australian CEOs have significantly greater base salaries than their U.S. counterparts, while American CEOs are more likely to be compensated with restricted stock and stock options than the Australians. More striking is the fact that American 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 supplemental executive retirement plans (SERPs). In making this comparison, we also take into account that some U.S. nationals are CEOs of Australian firms and the cross-listing of some Australian firms in the United States. We also note that Australian CEOs are much more likely to face performance hurdle conditions before they can obtain stock and option grants than is the case in the United States.

We therefore find that there are many statistically significant differences between the provisions of CEO employment contracts in the U.S. and Australia. Some, but by no means all, of this variation can be explained by underlying differences in the legal and regulatory environments of these two jurisdictions, and we explore possible explanations for the contractual differences identified in our study.

The full paper is available for download here.

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