Managerial remuneration and disciplining in the UK: a tale of two governance regimes
Renneboog, Luc; Trojanowski, Grzegorz
Date: 12 December 2010
Working Paper
Publisher
University of Exeter
Publisher DOI
Abstract
We simultaneously analyze two mechanisms of the managerial labor market (CEO turnover and remuneration
schemes) in two different regulatory regimes, namely before and after the sweeping governance reforms adopted
in the UK in the 1990s. We employ sample selection models to examine firms in a pre-Cadbury Code period
(1988-1993) and ...
We simultaneously analyze two mechanisms of the managerial labor market (CEO turnover and remuneration
schemes) in two different regulatory regimes, namely before and after the sweeping governance reforms adopted
in the UK in the 1990s. We employ sample selection models to examine firms in a pre-Cadbury Code period
(1988-1993) and a post-Combined Code period (1998-2004). CEOs’ compensation and CEO replacement are
performance-sensitive in both periods. There is little evidence of outside shareholder monitoring, whereas
powerful CEOs successfully resist replacement irrespective of corporate performance. With regard to CEO
remuneration, we sketch a nuanced picture as we find some evidence supporting the alignment of interests
hypothesis, but also supporting the managerial power or skimming model for managerial remuneration practices
in the UK prior to the governance reforms. In particular, equity-owning CEOs compensate disappointing stock
performance by augmenting their monetary compensation. Our results are consistent with the widely perceived
failure of internal governance mechanism in tackling the agency problems associated with managerial pay: these
mechanisms have relatively little impact on executive remuneration. We also conclude that the regulatory effort
undertaken in the UK over the 1990s has had at best a moderate effect on increasing executives’ accountability
and performance sensitivity of their turnover.
Finance and Accounting
Faculty of Environment, Science and Economy
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