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The Myth of the Overpaid American CEO

John Watson, chairman and CEO of oil giant Chevron
Nicholas Kamm | AFP | Getty Images
John Watson, chairman and CEO of oil giant Chevron

Are American CEOs paid much more than their foreign counterparts?

Slate's Matt Yglesias thinks so and offers one explanation: "America's CEOs are paid a lot largely because other American CEOs are also paid a lot."

For example:

On the one hand, it might seem strange that John Watson of oil giant Chevron was paid "only" $22.3 million in 2012—less than the CEOs of CBS or Viacom, even though his company is much bigger than either. On the other hand, compare Watson to the CEO of the similarly sized French oil giant Total S.A.: poor Christophe de Margerie earned a mere $3 million in 2011 (the most recent year for which numbers are available). That same year, Watson brought home $18.1 million. The reason for this is both mysterious and epically clear—American chief executives are systematically better paid than CEOs from continental Europe or Japan. CEOs of U.K., Canadian, and other Anglophone firms tend to earn at close to American levels.

This, however, is a particularly poor example to make Yglesias's point. The reasons for the difference in pay at Chevron and Total are not "mysterious" at all. And it isn't just a matter of American CEOs being paid more than Europeans.

It's pure performance. In the past 10 years, shares of Total have appreciated 10.84 percent. In the year Yglesias looks at, the shares were down 5.67 percent. Meanwhile, shares of Chevron are up 231.12 percent over the 10 year period. In 2011, they were up 16.67 percent. If anyone is relatively overpaid compared to performance, it is Christophe de Margeriesure.

And it's not just Yglesias's example that's wrong. The entire notion that American chief executives earn a lot more than their foreign counterparts is largely misplaced. A study that looked at this question last year found that what appeared to be the great variance in CEO pay between the U.S. and Europe is largely illusory.

After controlling for firm size, ownership, and board structure, all characteristics that often differ between U.S. and international companies, the gap is reduced, with U.S. executives earning only a 26 percent premium. And when the analysis adjusts for the greater use of stock options and share awards in the U.S., the pay premium is reduced to an economically modest 14 percent. Maybe that would be a nice raise for a European CEO, but it's not likely enough to induce him to cross the Atlantic and emigrate to the U.S.

The fact is that U.S. companies are more likely to be owned by institutional owners and to have independent boards. These features of the American corporate ownership are closely linked to a larger fraction of compensation being paid in stock, for the very good reason that diversified institutional shareholders are interested in a rising stock market and want to provide incentives for stocks across the board to rise. Concentrated ownership—by families, by the government, by banks—is far more common outside the U.S. and apparently has an effect on how CEOs are paid.

Pedro Matos, an associate professor of business administration at the University of Virginia's Darden School of Business, was one of the authors of that study.

"In other words, the world is flat for CEOs, or nearly so," Matos wrote in Forbes earlier this year.

It's also worth pointing out that U.S. CEOs at large companies are far more likely to serve for a decade or more than European counterparts. At the very far end of long-serving CEOs, only 3 percent of European CEOs have served for 20 years or more; in the U.S. and Canada that number is 8 percent, according to this report from Booz Allen. The median tenure for a CEO in a top U.S or Canadian company is seven years; in a European company it is six years. That's a 16.66 percent difference.

(Read more: Why Say on Pay Failed)

In other words, the American CEO's pay isn't some kind of group conspiracy or the result of a national delusion. It's largely in line with the rest of the world. Any marginal difference is better explained by actual performance and time spent at the company.

—By CNBC's John Carney. Follow me on Twitter @Carney

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