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

This paper provides evidence on the level and composition of the pay of the top executives of a sample of UK Public Listed Companies. The study uses hand collected data on the compensation for 698 CEO years and 2609 other-executive years over the period 1995-2000. In order to focus on the consequences of exceptional performance, our sample is stratified to include sub-samples of PLCs experiencing extreme positive and negative stock-price performance.With regard to management compensation, we find clear differences in the treatment of executives across our 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, we find that 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 an 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, we find, consistently with current literature, 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. We argue that the effect of turnover on CEOs' wealth depends on whether departure affects their ability to find an equally lucrative new job