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Increases in Executive Pay Following Privatization

Catherine D. Wolfram

Journal of Economics & Management Strategy, 1998, vol. 7, issue 3, 327-361

Abstract: The average chief executive at one of Britain's twelve regional electricity distribution companies experienced nearly a threefold salary increase in the two years following the industry privatization in 1990. It is hard to account for the tremendous pay raises with conventional explanations for executive compensation rates. They are not attributable to increases in managerial talent, because privatization brought virtually no changes in personnel at the top rank. In addition, the salary increases did not coincide with dramatic changes in firm scale, and cross‐firm differences in the raises are uncorrelated with stock‐market returns and other measures of firm performance. By contrast, salary increases are highly correlated with firms' potential profits (as measured by the administratively assigned price cap). The findings presented here thus provide new perspectives on the determinants of executive compensation.

Date: 1998
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Handle: RePEc:bla:jemstr:v:7:y:1998:i:3:p:327-361