In many ways, the U.S. and Britain have a similar approach to free markets. So, why do they pay their CEOs so differently?

The typical British CEO earns a little more than half what his or her U.S. counterpart makes, according to a Towers Perrin study completed this year that compared compensation packages for executives in 26 countries. The typical CEO at a large U.S. company receives almost $2.2 million a year, whereas a British CEO earns nearly $1.2 million, the Stamford, Conn., consulting firm reports. Bonuses and long-term incentives for the U.S. CEO also make up a larger proportion of the typical pay package, 62 percent, than they do in any other country in the study; in Britain, bonuses and long-term incentives make up 35 percent of the typical package.

Why the big gap?

Part of the reason may be simply the free market. U.S. CEOs have more employment opportunities than do company chiefs in other countries, including positions in private equity and venture capital, says Ira Kay, national director of executive-compensation consulting at Watson Wyatt Worldwide, New York.

But cultural attitudes play a part as well. British shareholders, like many throughout Europe, tend to be more conservative than Americans in terms of how deserving they think management ultimately is. This attitude can be seen at work in the British equity market, and in its regulation, where real pressure is repeatedly brought to bear to temper executive pay.

Cultural differences aside, the British system has its U.S. supporters, including such large shareholder groups as the California Public Employees' Retirement System and the American Federation of State, County and Municipal Employees. Both are leading efforts to rein in CEO pay in the U.S. and have cited the U.K. as a model for change.

Among the forces at work in Britain: a corporate reform regulation passed in 2002 that requires an annual shareholder vote on executive-compensation practices; a greater concentration of company shares in the hands of a few institutions, making it easier to bring about changes in the boardroom; and an active leadership role on the compensation issue by two important pension groups.

"The vote (on executive-pay plans) has served to slow down some of the excesses," says Stephen Cahill, the London-based head of executive remuneration in Europe for Mercer Human Resource Consulting. "It prevents individual executives from getting too much."

The relative ease of dismissing directors in the U.K. is another factor, says Peter Montagnon, director of investment affairs at the Association of British Insurers. If shareholders feel executives are paid too much, "a remuneration-committee chairman could be voted off the board," he says. In America," he adds, "shareholders are weak."

More shares are in fewer hands in Britain -- mostly the hands of pension funds and other large institutions -- which makes it easier to hold consultations with shareholders on executive pay. In Britain, a much smaller equity market than the U.S., "the top 10 shareholders will usually be about 50 percent of your company," says Mr. Cahill. And even at the 100 largest companies, the top 10 shareholders might own 20 percent to 25 percent of the shares. For smaller companies, it's not unusual for one shareholder to own 10 percent or more.

Companies contemplating changes in their executive-pay plans usually consult with two powerful trade groups, whose members together own about one-third of the shares listed in the U.K. equity market, before the proposed change comes to a shareholder vote. The opinons of the Association of British Insurers and the National Association of Pension Funds consequently have a large influence on compensation and governance proposals.

While the companies aren't obligated to follow the recommendations of the two groups, "if you have ABI and NAPF backing what you want to do, you're just about guaranteed 60 percent of the vote," says Mercer's Mr. Cahill.

By contrast, Mr. Cahill says, "there's nobody (in the U.S.) with the market dominance" that ABI and NAPF enjoy in Britain.

It's an influence that has grown since the U.K. in 2002 started requiring companies to hold annual shareholder votes on executive pay. The votes are purely advisory, but companies have gone to great lengths to make sure their proposals pass.

"Companies are very concerned about failing the vote," says Mr. Cahill.

In 2003, 166 companies sought consultations with ABI on executive-pay plans, according to the trade group. Since then, roughly 200 companies a year have sought consultations. Most of the consultations have taken place before the votes were held.

In a few high-profile cases following defeats of proposals, companies sought consultations with the groups to figure out how those proposals could pass muster.

In 2003, for example, the first year the voting rule went into effect, shareholders of GlaxoSmithKline PLC narrowly voted against a company executive-pay proposal, largely because of the planned severance agreement for CEO Jean-Pierre Garnier. Some shareholder estimates had put the value of the proposed severance package at about $35 million, although Glaxo disputed that figure, arguing that it included about $12 million of already vested stock options. After a public review, during which Glaxo consulted with major shareholder groups, Glaxo restructured the agreement with Mr. Garnier, lowering the value of the severance package by roughly half, while removing other perks as well.

After Glaxo's experience, a few other companies withdrew proposals before votes in order to rework them in consultation with shareholder groups. Mr. Cahill estimates 85 percent to 90 percent of publicly traded U.K. companies in recent years have consulted with the major shareholder groups about executive-pay plans. Those that haven't consulted, he says, generally are assured of shareholder support some other way, such as having one majority owner that supports the proposal.

Finally, differences in performance incentives in U.S. and U.K. pay packages can be revealing as well. For instance, while the Towers Perrin study points out that bonuses, stock grants and other long-term incentives tend to make up a smaller part of a British CEO's compensation than that of an American, such rewards for the British CEO are also more likely to depend on his or her performance. And performance standards in the U.K. can be far more demanding than in the U.S. For example, often a British company's shares will have to perform above the median share performance for its industry in order for executives' options or restricted shares to vest.

Vicky Wright, a senior consultant in London at the consulting firm Watson Wyatt Worldwide, gives an example of a commodities firm that recently performed very well. Its shares rose about 75 percent over three years. But the whole U.K. commodities industry was booming, she says, so the company's total shareholder return was below the median in the sector. As a result, she says, the CEO's performance-linked restricted shares didn't vest.

In the U.S., on the other hand, rich stock awards often accrue to the CEO just for staying in the job, and are sometimes even awarded despite relatively poor performance. For most U.S. executive-pay packages, company performance has a lower impact, Ms. Wright says. Restricted shares for U.S. executives, for example, typically vest after the person has stayed in his or her position for a certain length of time.

In a recent effort to bring executive-compensation practices in the U.S. closer in line with those of Britain, AFSCME this year filed stockholder proposals that would require an advisory shareholder referendum on board compensation-committee reports at Home Depot Inc., Countrywide Financial Corp., Merrill Lynch & Co. and U.S. Bancorp.

In their 2006 proxy statements, Merrill Lynch and U.S. Bancorp both advise shareholders not to adopt the proposals, citing an existing linkage of pay and performance, as well as competitive pressures.

Countrywide and Home Depot have not yet released their 2006 proxy statements.

Rich Ferlauto, director of pension and investment policy for AFSCME, says, "In the U.K., we believe (the annual advisory vote by shareholders) has had a highly desirable result of restraining CEO pay packages from escalating in ways that are not performance-based."

However, he adds, "nothing has succeeded in the U.S."