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Executive pensions and the pay–performance relation—Evidence from changes to pension legislation in the UK

Author

Listed:
  • Damon Morris
  • Ian Gregory-Smith
  • Brian G. M Main
  • Alberto Montagnoli
  • Peter W Wright

Abstract

This article evaluates the role of executive pensions in the relationship between executive compensation and corporate performance. As a natural experiment, we exploit a major change to the tax-free allowances governing executive pensions. This reform affected the cost of pensions for firms whose executives had accumulated pension benefits in excess of the prescribed limit. We find a strong reaction to the reform. After 6 April 2006, many executives saw their defined benefit pension schemes replaced with risk-free cash payments. This imposition of an exogenous constraint on the contracting over CEO pay significantly decreased the relationship between executive pay and firm performance.

Suggested Citation

  • Damon Morris & Ian Gregory-Smith & Brian G. M Main & Alberto Montagnoli & Peter W Wright, 2021. "Executive pensions and the pay–performance relation—Evidence from changes to pension legislation in the UK," Oxford Economic Papers, Oxford University Press, vol. 73(3), pages 1304-1323.
    • Handle: RePEc:oup:oxecpp:v:73:y:2021:i:3:p:1304-1323.
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    File URL: http://hdl.handle.net/10.1093/oep/gpaa050
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    More about this item

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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