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Executive Pay and Performance in the UK

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  • Paul Gregg

    ()

  • Sarah Jewell

    ()

  • Ian Tonks

    ()

Abstract

This paper examines the relationship between executive cash compensation and company performance for a sample of large UK companies, focusing in particular on the financial services industry, since incentive misalignment has been blamed as one of the factors causing the global financial crisis of 2007/08. We show that base salary and bonuses of UK executives has increased substantially over this period 1994-2006, and we provide evidence on the movement in the pay-performance sensitivity over time. We find that although pay in the financial services sector is high, the cash pay-performance sensitivity of banks and financial firms is not significantly higher than in other sectors. We claim that this finding of a low sensitivity of pay and performance questions the rationale for regulatory changes to remuneration practices in the banking sector. For all companies we identify an asymmetric relationship between pay and performance: for companies in which stock returns are relatively high, pay-performance elasticities are high, but we find that executive pay is less sensitive to performance when stock returns are low.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/DP657_2010_ExecutivePayandPerformanceintheUK.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp657.

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Date of creation: Oct 2010
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Handle: RePEc:fmg:fmgdps:dp657

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Web page: http://www.lse.ac.uk/fmg/

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  1. Robert Gibbons & Kevin Murphy, 1989. "Relative Performance Evaluation for Chief Executive Officers," Working Papers 628, Princeton University, Department of Economics, Industrial Relations Section..
  2. Andrea Beltratti & René M. Stulz, 2009. "Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation," NBER Working Papers 15180, National Bureau of Economic Research, Inc.
  3. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
  4. Conyon, Martin & Gregg, Paul & Machin, Stephen, 1995. "Taking Care of Business, Executive Compensation in the United Kingdom," Economic Journal, Royal Economic Society, vol. 105(430), pages 704-14, May.
  5. Rajesh Aggarwal & Andrew A. Samwick, 1998. "The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation," NBER Working Papers 6634, National Bureau of Economic Research, Inc.
  6. Sourafel Girma & Steve Thompson & Peter W. Wright, 2007. "Corporate Governance Reforms And Executive Compensation Determination: Evidence From The Uk," Manchester School, University of Manchester, vol. 75(1), pages 65-81, 01.
  7. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  8. Gerald Garvey & Todd Milbourn, 2003. "Incentive Compensation When Executives Can Hedge the Market: Evidence of Relative Performance Evaluation in the Cross Section," Journal of Finance, American Finance Association, vol. 58(4), pages 1557-1582, 08.
  9. Conyon, Martin J & Murphy, Kevin J, 2000. "The Prince and the Pauper? CEO Pay in the United States and United Kingdom," Economic Journal, Royal Economic Society, vol. 110(467), pages F640-71, November.
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