We simultaneously analyze two mechanisms of the managerial labor market: CEO turnover and monetary remuneration schemes. Sample selection models and hazard analyses applied to a random sample of 250 firms listed on the London Stock Exchange over a six-year pre-Cadbury period show that managerial remuneration and the termination of labor contracts play an important role in mitigating agency problems between managers and shareholders. We find that both the CEO's industry-adjusted monetary compensation and their replacement are strongly performance-sensitive. Top executive turnover is shown to serve as a disciplinary mechanism for corporate underperformance, whereas the level of monetary compensation rewards good performance. We also investigate whether specific corporate governance mechanisms (different types of blockholders or of boards of directors) have an impact on managerial disciplining or on the pay-for-performance contracts. There is little evidence of outside shareholder monitoring and CEOs with strong voting power successfully resisting replacement irrespective of corporate performance. This case of strong managerial entrenchment is even exacerbated when the CEO also holds the position of chairman of the board. In firms with large outside shareholdings, CEO compensation is lower, but outside shareholder do not impose a stricter performance-related incentive remuneration scheme. When insiders have strong voting power, the CEOs remuneration is lower except when the stock price performance is poor: it seems that when the CEOs wealth resulting from their investment goes down due to decreasing stock prices, the CEOs cash compensation is higher. The presence of a remuneration committee has no impact on remuneration. Finally, we find strong support for the incentive effect-hypothesis of remuneration: CEOs with higher levels of monetary compensation attain better subsequent accounting and stock price-based measures of corporate performance.
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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
68.
Find related papers by JEL classification: G30 - Financial Economics - - Corporate Finance and Governance - - - General G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Shleifer, Andrei & Vishny, Robert W, 1997.
" A Survey of Corporate Governance,"
Journal of Finance,
American Finance Association, vol. 52(2), pages 737-83, June.
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