The Compensation of UK Executive Directors: Lots of Carrots but are There Any Sticks?

Abstract

This article provides evidence on the level and composition of the pay of the top executives of a sample of UK public listed companies (PLCs). The study uses hand-collected data on the compensation for 698 CEO years and 2,609 other-executive years over the period 1995–2000. In order to focus on the consequences of exceptional performance the sample is stratified to include sub-samples of PLCs experiencing extreme positive and negative stock-price performance. With regard to management compensation clear differences are found in the treatment of executives across the three sub-samples. Consistent with standard contracting theory, the executives of exceptionally well performing firms fare better than the executives of mid-performing firms, who in turn fare better than the executives of poorly performing firms. In particular it appears the executives of exceptionally poorly performing firms experience mean cuts in their salaries and bonuses. That trend also applies to equity-based compensation. It should be mentioned, though, that a time-series investigation reveals increased participation and value in the equity-based schemes provided to CEOs and other executives of poorly performing firms. This is against the agency theory prediction that agents refrain from risk sharing in more volatile corporate environments. With regard to loss of tenure the finding, consistently with current literature, is that the CEOs of poorly performing firms are significantly more likely to be dismissed. This turnover, though, does not seem to directly affect the CEOs' emoluments during the year of departure. It is argued that the effect of turnover on CEOs' wealth depends on whether departure affects their ability to find an equally lucrative new job.