The Equity Mix in Executive Compensation: An Investigation of Cross-Country Differences

Why do firms from some countries use no equity in the compensation mix, while others use amounts equivalent to that observed in the U.S.? We examine this issue by investigating compensation data from 317 firms in 43 countries over the 1996 to 2000 period. We find that firms from countries with equity-oriented capital markets, and from countries where shareholder rights are strong, tend to use more equity in the compensation mix. After controlling for these country-level macro-factors, we also find that firms with higher growth opportunities use more equity in the compensation mix. This is consistent with the predictions of contracting theory. However, unlike previous findings for U.S. firms, equity compensation for the foreign firms in our sample is unrelated to proxies for asset substitution, event risk, firm size, or the difficulty in monitoring a firm's activities.