Executive Pay and Performance in the UK

Paul Gregg, Sarah Jewell and Ian Tonks

FMG Discussion Papers from Financial Markets Group

Abstract: This paper examines the relationship between executive cash compensation and company performance for a sample of large UK companies, focusing in particular on the financial services industry, since incentive misalignment has been blamed as one of the factors causing the global financial crisis of 2007/08. We show that base salary and bonuses of UK executives has increased substantially over this period 1994-2006, and we provide evidence on the movement in the pay-performance sensitivity over time. We find that although pay in the financial services sector is high, the cash pay-performance sensitivity of banks and financial firms is not significantly higher than in other sectors. We claim that this finding of a low sensitivity of pay and performance questions the rationale for regulatory changes to remuneration practices in the banking sector. For all companies we identify an asymmetric relationship between pay and performance: for companies in which stock returns are relatively high, pay-performance elasticities are high, but we find that executive pay is less sensitive to performance when stock returns are low.

Date: 2010-10
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Working Paper: Executive pay and performance in the UK (2010)
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