In brief: UK chief executives: paid for performance?
AbstractDoes it matter whether you work for a successful company? And if so, does it matter who you are? To answer these questions we construct a unique panel dataset covering the pay of all CEOs, senior managers and a fully representative sample of workers for a large group of publicly-listed companies covering just under 90% of the market capitalization of the UK stock market. We show that senior management appear to have pay that is strongly associated with various measures of firm performance (such as shareholder returns and quasi-rents), while workers' pay is only weakly associated with such measures. A 10% increase in firm value is associated with an increase of 3% in CEO pay but only 0.2% in average workers' pay. Falls in firm performance are also followed by CEO pay cuts and significantly more CEO firings. This is essentially a result of the responsiveness of flexible pay to performance and only senior executives have a large enough share of pay in bonuses to generate a sizeable overall effect on pay. External control matters for pay - firms with lower levels of institutional ownership have smaller pay-performance elasticities for CEOs and do not cut their pay when performance is poor.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CentrePiece - The Magazine for Economic Performance with number 373.
Date of creation: May 2012
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Web page: http://cep.lse.ac.uk/centrepiece/
CEO; performance pay; executive pay; firms; management;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-05 (All new papers)
- NEP-BEC-2012-06-05 (Business Economics)
- NEP-HRM-2012-06-05 (Human Capital & Human Resource Management)
- NEP-LAB-2012-06-05 (Labour Economics)
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