How much exactly does it pay to have had an international career when you reach a top executive position? While internationally seasoned CEOs are assumed to be more expensive, for the first time, a duo of ESCP researchers unpacks the precise mechanisms that allow CEOs with international experience to receive higher compensation than those who stay put.
Overseeing the construction of a new factory in Brazil, chatting with the manager of a subsidiary in Germany, attending a board meeting in London, it's all in a day's work for the CEO of a multinational corporation. To accomplish all these tasks though, the said CEO arguably needs a certain background, not least foreign language skills and cultural sensitivity to understand local nuances and customs. How better could this baggage have been acquired than through international experience? As firms operate in an increasingly globalised environment, it seems likely that they value executives who are able to navigate such contexts – and are willing to compensate them accordingly.
However, “international experience” is a general term – how much time do you need to have spent, say, in Japan to master the subtleties of local business etiquette and successfully negotiate with Japanese partners? And would it have to be in one stretch or would repeated visits prove just as useful? Does studying abroad count as well? Also, how do such skills really translate into more generous paychecks? A duo of researchers set out to understand exactly how different facets of a CEO's international background shape remuneration.
Why experience abroad is valuable – and valued
To explain why international work experience matters in the first place, Stefan Schmid and Sebastian Baldermann, respectively management professor and PhD candidate at ESCP Business School (Berlin campus), used the human capital theory. Its basic assumption is that an individual's characteristics transfer into his or her ability to perform certain tasks or jobs. In short, work experience abroad enhances creativity, adaptability and other characteristics that help to cope with a globalised business world.
Indeed, multinational corporations depend on human capital resources to build their competitive advantage: “Firms can rely on individuals who are able to deal not only with a challenging external environment, but also the intricate cultures and expectations that prevail in many large organizations operating across borders,” the researchers write in Management International Review.
Multinational corporations (MNCS) will therefore attempt to attract internationally seasoned CEOs, which they view as a “rare and inimitable resource”. As such, they need to be retained or recruited with adequate salaries. In addition, top managers with valuable prior experience may have a stronger influence on the decisions made in MNCs, including those regarding their own compensation, so they are likely to bargain attractive packages for themselves.
The three dimensions of international experience
To obtain a finer-grained picture of international experience, the researchers distinguished between duration, timing and breadth of stays abroad. Duration obviously matters, as “to get the benefits, you need to stay long enough to make some mistakes and correct those mistakes,” in the word of a former CEO of Pfizer quoted in the research paper. Schmid and Baldermann also theorize that the timing of a stay abroad – earlier or later in the career – matters. What they termed the “breadth” of international work experience, or the number of different stays abroad, is likewise relevant in that it broadens the stock of knowledge and competencies.
Last but not least, the researchers argue that maturity, a trait gained both through age and career length, would enhance the value of the international experience. “Maturity allows CEOs to better access and utilize the human capital resource that was built throughout stays abroad,” they explain.
Years abroad are valuable – at any time
Working with a sample of 275 CEOs from the 500 largest firms in Europe, the researchers collected highly detailed data on biographies including international careers as well as both fixed and variable components of executive compensation. Using statistical analyses, they were able to confirm a significant and positive effect of two dimensions of international work experience.
“Our results suggest that an increase in the duration of a CEO's international work experiences by one year causes an increase in total compensation of 1.56% on average,” they specify. “Broader international experiences also pay off for CEOs, as each additional international work experience yields a total compensation that is 7.48% higher on average.”
However, the results for timing were unexpected, as a higher temporal distance of a stay abroad entailed a higher increase in compensation compared to experiences later in the career. Early international experiences may be particularly valuable due to their formative character, providing “general-purpose” capital as opposed to the (also valuable) “task-specific” capital obtained with higher responsibilities. Finally, the empirical analyses also confirmed that maturity enhances the effects of international experience.
Never too early, never too much experience abroad
Fine-tuning their analyses, the researchers also examined international education experience. When including studies abroad, they found evidence for a significant relationship between the timing and breadth of international experience and compensation, such that “earlier and manifold international education experiences are particularly valuable”.
Furthermore, the authors incorporated cultural distances between the home and host countries of the CEOs’ stays abroad into their measures for international experience. It becomes apparent that going to countries that are culturally more distant pays off more in terms of compensation.
Additionally, Schmid and Baldermann tested for potential negative effects of international experience beyond certain thresholds. Indeed, while international experiences increase human capital, they may weaken social ties and thus decrease social capital in the local firm or home country, which could be to the detriment of compensation. However, their data did not support the argument that very long or manifold international work experiences could be “too much” or “too early” from the point of view of CEO compensation.