Insights from professors Shane Dikolli and Scott Dyreng and PhD student Dirk Black
Are CEOs paid more when they manage subsidiaries in foreign countries? The answer is yes, according to research from Duke's Fuqua School of Business. The research, forthcoming in Contemporary Accounting Research, counterintuitively shows that pay levels are not as high when the enterprise has subsidiaries in "risky" foreign countries in which there are high levels of corruption, low rule of law and low tax rates and therefore easier means for the CEO to divert resources for private benefit.
Fuqua accounting professors Shane Dikolli and Scott Dyreng together with PhD student Dirk Black came to these conclusions by analyzing numerous data sources including Execucomp (resource which provides information on CEO compensation), the World Bank Worldwide Governance indicators, and the Miedema listing of countries identified as tax havens, among others.
"Highly corrupt, low rule of law countries create greater complexity and thus a higher ability CEO is likely necessary to manage associated foreign operations," said Dikolli. "We demonstrate that the association between enterprise complexity and CEO pay depends on the type of complexity, factoring into account the ease to exploit the country for personal gain."
One of the several examples of diversion cited in the paper is a CEO adopting a pet project in a country that creates opportunity for the CEO but at a cost to the enterprise.
The researchers also construct new measures of how CEOs can divert resources from multi-national enterprises by looking at a country's tax regulation, corruption index, rule of law, language and geographical remoteness.
"By broadening the ways in which we think of managerial diversion, the research provides insights about why CEOs are paid the way that they are, and why enterprises expand across international borders the way that they do," said Dyreng.
Download the full research paper.