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Vanderbilt Law Review

First Page

557

Abstract

This study compares CEO employment contracts across two common law countries: the United States and Australia. Although the regulatory regimes of these jurisdictions enjoy many comparable features, there are also some important institutional differences in terms of capital market, tax, and regulatory structures, which are discussed here. Debate has raged in the United States on the issue of whether executive compensation is efficient and determined at arm's length, or skewed by a power imbalance between managers and shareholders. A comparative analysis of the kind undertaken in our study provides an additional perspective on the optimal contracting and managerial power models of executive pay in U.S. academic literature. Even if one model has greater explanatory power in the U.S. context, this will not necessarily be the case in other jurisdictions, such as Australia.

In order to do our comparison, we create pairs of U.S. and Australian firms that are matched on a number of dimensions including firm size and industry. We find that Australian CEOs have significantly greater base salaries than their U.S. counterparts, while U.S. CEOs are more likely to be compensated with restricted stock and stock options than the Australian CEOs. More striking is the fact that U.S. CEO employment contracts tend to last longer than Australian contracts, and they are more likely to have arbitration provisions, change-in-control provisions, tax gross ups, do-not-compete clauses, and supplemental executive retirement plans. We also find that Australian contracts are much more apt to include performance hurdle requirements before CEOs can receive restricted stock and options, and restrictions on CEO hedging of restricted stock and options. A number of the contractual differences we document appear to be consistent with key institutional differences between the two countries.

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