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

This paper examines how different types of interactions with U.S. markets by non-U.S. firms are associatedwith higher levels of CEO pay, greater emphasis on incentive-based compensation, and smaller pay gaps with U.S. firms. Using a sample of CEOs of UK firms and using both broad cross-sectional and narrow event-window tests, we find that capital market relationship in the form of a U.S. exchange listing is related to higher UK CEO pay; however, the effect is similar when UK firms have a listing in any foreign country, implying a foreign listing effect not unique to the United States. Product market relationships measured by the extent of sales in the United States by UK companies are associated with higher pay, greater use of U.S.-style pay arrangements, and a reduction in the U.S.–UK pay gap. The product market effect is incremental to the effect of a U.S. exchange listing, the extent of the firm’s non-U.S. foreign market interactions, and the characteristics of the executive. The U.S–UK CEO pay gap reduces in UK firms that make U.S. acquisitions. Furthermore, the firm’s use of a U.S. compensation consultant increases the sensitivity of UK pay practices to U.S. product market relationships. Key words: CEO compensation; corporate governance; cross-listing; executive pay; globalization; incentives; international pay difference