Managerial Remuneration : The Indirect Pay-for-Performance Relation

This article examines the relation between executive cash compensation and corporate governance in Europe. Most research performed on the pay-for-performance relation has been conducted in the United States and the United Kingdom, because the widely held nature of shareholding makes the potential agency conflict between shareholders and management most prominent. Arguably, a stronger relation between pay and corporate performance might be expected in market-oriented than in control-oriented regimes. This is not, however, the case. Instead, there is recent evidence which shows that CEO cash-based compensation in the United Kingdom (a market-oriented system) hinges more on corporate sales growth. Conversely, executive compensation in some control-oriented systems appears not to depend solely on corporate sales growth, but relies, to a large extent, on share price and accounting performance. In particular, executive directors of Spanish firms controlled by strong investor groups receive increases in cash remuneration if their companies generate increases in shareholder value. In contrast, Spanish executives' cash compensation is linked to accounting performance if the company's equity concentration is diffuse