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Top Executive Pay in the United Kingdom: A Corporate Governance Dilemma

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  • Phillip McKnight
  • Cyril Tomkins

Abstract

This study represents a first attempt in the UK literature to split total pay into salary, annual bonus and share options for the purpose of empirically verifying how each is related to executive performance. As predicted from earlier studies on total pay, salaries were found primarily determined by firm size. Contarary to prior research, however, our findings suggest a pronounced link does exist between performance and pay over both the short- and long-term. This is manifested particularly by the magnitude of the coefficient estimates found between changes in shareholders return and changes in executive share options. This finding strongly suggests that the leverage executives achieve, on average, in their rewards as share prices increase may well be substantial; a finding that has not been captured in previous research on executive remuneration and which is of considerable relevance to the current corporate governance debates.

Suggested Citation

  • Phillip McKnight & Cyril Tomkins, 1999. "Top Executive Pay in the United Kingdom: A Corporate Governance Dilemma," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(2), pages 223-243.
  • Handle: RePEc:taf:ijecbs:v:6:y:1999:i:2:p:223-243
    DOI: 10.1080/13571519984241
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    References listed on IDEAS

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    1. Main, Brian G M & Bruce, Alistair & Buck, Trevor, 1996. "Total Board Remuneration and Company Performance," Economic Journal, Royal Economic Society, vol. 106(439), pages 1627-1644, November.
    2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    3. 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 704-714, May.
    4. Paul Gregg & Stephen Machin & Stefan Szymanski, 1993. "The Disappearing Relationship Between Directors' Pay and Corporate Performance," British Journal of Industrial Relations, London School of Economics, vol. 31(1), pages 1-9, March.
    5. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    6. Conyon, Martin J & Leech, Dennis, 1994. "Top Pay, Company Performance and Corporate Governance," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(3), pages 229-247, August.
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Martin J Conyon & Paul Gregg, 1994. "Pay at the Top: A Study of the Sensitivity of Top Director Remuneration to Company Specific Shocks," National Institute Economic Review, National Institute of Economic and Social Research, vol. 149(1), pages 83-92, August.
    9. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
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    Citations

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    Cited by:

    1. M. Ali Choudhary & J. Michael Orszag, 2003. "Are Performance Conditions On Executive Options Driven By Fundamentals?," School of Economics Discussion Papers 1103, School of Economics, University of Surrey.
    2. Paul Gregg & Sarah Jewell & Ian Tonks, 2005. "Executive Pay and Performance in the UK 1994-2002," The Centre for Market and Public Organisation 05/122, Department of Economics, University of Bristol, UK.
    3. Rick Antle & Elizabeth Gordon & Ganapathi Narayanamoorthy & Ling Zhou, 2002. "The Joint Determination of Audit Fees, Non-Audit Fees, and Abnormal Accruals," Yale School of Management Working Papers amz2502, Yale School of Management, revised 02 May 2006.
    4. Rick Antle & Elizabeth Gordon & Ganapathi Narayanamoorthy & Ling Zhou, 2006. "The joint determination of audit fees, non-audit fees, and abnormal accruals," Review of Quantitative Finance and Accounting, Springer, vol. 27(3), pages 235-266, November.

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