Executive Compensation in Europe : Realized Gains from Stock-Based Pay

This paper adds to the empirical evidence on the extent to which stock-based pay incentivizes and rewards European corporate executives. It shows that the actual realized gains (that is, take-home compensation) from stock-based pay of CEOs in European publicly-listed firms may be underestimated by the use of “estimated fair value” measures. The paper also documents the heterogeneity among countries in terms of the levels and components of CEO take-home pay. We base our work on a sample of 301 large, publicly-traded companies listed in the S&P Europe 350 index from 11 EU countries: Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Spain, Sweden and United Kingdom for the fiscal year 2015. Through analyzing companies' annual reports, we have hand-collected data on various elements of compensation of the company's CEO in 2015, including the gains that executives realize from stock-based pay. We document that on average half of the total compensation of the European CEOs in our sample is stock-based, measured by actual realized gains, with large differences among countries. Although in some European countries the majority of total compensation is stock-based, the proportions are still well below those that prevail in the United States. A comparison of the realized-gains measure of CEO compensation with the data based on fair value estimates shows that the latter underestimates the relevance of stock-based pay, in the case of some countries dramatically. Our research findings add to the existing research on CEO pay and the link between pay of EU-based corporate executives and the performance of the companies that they manage. Based on our work, we argue that realized gains measures of CEO pay should be the standard for assessing the incentives and rewards of senior corporate executives in Europe. Our research is the first step in building time series of European executive compensation that will be useful for policies concerning corporate governance and economic performance