New Evidence of Relative Performance Evaluation (RPE) in UK Chief Executive Realised Incentive Compensation

Farmer, Mark Anthony; Alexandrou, George; Archbold, Stuart

doi:10.2139/ssrn.1695905

Cited by 5 publications

(3 citation statements)

References 40 publications

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“…Thus, we support our expectations regarding the impacts of the specific Anglo‐American and Euro‐Continental institutional features on CEOs pay sensitivity to luck. Indeed, we rely on previous evidences of pay for luck (Bertrand and Mullainathan, 2001; Garvey and Milbourn, 2003, 2006) and pay‐for‐firm relative performance (Farmer et al , 2010; Gopalan et al , 2009; Jiménez‐Angueira and Stuart, 2010).…”

Section: Empirical Results and Robustness Checksmentioning

confidence: 99%

Pay for luck: new evidences from the institutional determinants of CEOs' compensation

Jouber

Fakhfakh

2012

International Journal of Law and Management

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PurposeThe optimal contracting view assumes that compensation arrangements should not reward performance upward that is beyond the management's control. Critics to this view assert, however that unearned compensation boom may be suggestive of pay for luck. Hence, the authors ask if CEOs' incentive pay is sensitive to lucky as to purely corporate performance. If such, one could question: Are CEOs rewarded for luck? Do institutional features matter for CEOs pay‐for‐luck? How does systematic incentive effect sensitive to luck's nature? Accepting the premises of both contacting and skimming agency's approaches, this paper aims to answer these questions.Design/methodology/approachGeneral and separate ordinary least squares (OLS) and instrumental variables (IV) estimations have been run to estimate the general sensitivity of CEOs' pay, respectively, to performance and luck. These estimations are based on a sample of 300 publicly traded firms covering four countries from the Anglo‐American and Euro‐Continental corporate governance models for the period 2004 to 2008.FindingsIn support of the paper's theorizing, it was found that CEOs pay to be positively related to outside contingencies as well as to shareholders' interests. Positive pay sensitivity to exogenous shocks, which we label systematic incentive effect, shows that management take advantage of lucky external events. Further analyses show, moreover, two stylized facts. First, this effect is asymmetric as executives are rewarded more for good luck than penalized for bad luck. Second, it is less generous under stronger corporate governance, higher investor rights protection, and stricter law enforcement rules. The latter institutional factors seem to be overwhelmingly influential variables in explaining the differences in such effect across countries.Research limitations/implicationsThe paper contributes to the CEO compensation research by: showing that a simple contracting view can mislead shareholders about the effective CEOs' skills and efforts; and filling the lack of consensus within the empirical literature as to whether pay for luck depends on institutional features such as the law enforcement level, the degree of investors' right protection, and the corporate governance system's quality.Originality/valueThe paper's findings offer insights to shareholders, pay consultants, and regulators about the effects that unobservable macroeconomic shocks can have towards the design and the efficiency of a CEO pay contract. The findings help, however, academics understanding the international pay gap's causes.

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Section: Empirical Results and Robustness Checksmentioning

confidence: 99%

Pay for luck: new evidences from the institutional determinants of CEOs' compensation

Jouber

Fakhfakh

2012

International Journal of Law and Management

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“…Thus, we support our expectations regarding the impacts of the specific Anglo-American and Euro-Continental institutional features on CEO pay sensitivity to luck. Indeed, we rely on previous evidences of pay-for-luck (Bertrand and Mullainathan, 2001;Garvey and Milbourn, 2003;2006) and pay-for-firm relative performance (Farmer et al, 2010;Gopalan et al, 2010;Jiménez-Angueira and Stuart, 2010).…”

Section: Regression Resultsmentioning

confidence: 99%

An Efficient Ic On chip Test Framework To Embed Tsv Testing In Memory Bist Using Dynamic Technique

Ms¹,

Mr²

2017

IJBI

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Corporate governance literature suggests that the relationship between CEO effort and outcomes such as firm performance is highly uncertain due to the influence of numerous organizational and environmental contingencies that are outside CEOs' control. The major focus of this study is to determine whether institutional factors explain cross-sectional differences in CEO pay structure and sensitivity to performance and luck. Thus, we address three ultimate questions; Are CEOs rewarded for luck? Does institutional features matter for CEO pay for luck? How do systematic incentive effect is sensitive to luck's nature? Ordinary Least Squares (OLS) and Instrumental Variables (I.V.) estimations based on a sample of 300 publicly traded firms covering four countries from the Anglo-American and Euro-Continental corporate governance models between 2004 and 2008 show that the answers to the two first questions are a surrounding yes. Robustness check tests relying to the third question provide evidence that pay for luck is asymmetric. That is, executives are rewarded for good luck but they are safe of bad luck.

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“…There is also some new evidence to suggest that remuneration committees have been successful in fulfilling the requirements of the U.K. Corporate Governance Code 21 to link executive pay to relative firm performance. Research from Kingston University 22 shows that payouts from chief executive bonus plans and payouts from LTI plans are in fact strongly related to relative shareholder performance. This finding is consistent with agency theory predictions and consistent with the U.K. Corporate Governance Code.…”

Section: Practitioner Responses and Commentarymentioning

confidence: 99%

Executive Remuneration in the United Kingdom

Farmer

Brown²,

Reilly

et al. 2013

Compensation & Benefits Review

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Despite substantial corporate governance and regulatory reform on both sides of the Atlantic, which started over two decades ago, executive pay remains an unresolved problem. Twenty years since the publication of the groundbreaking Cadbury Report, criticism of executive pay is more severe than ever before in the United Kingdom. The relationship between pay and performance is still highly questionable, and executive remuneration continues to vastly exceed and outpace average employee pay. In this article, we discuss and evaluate the U.K. coalition government's attempts to influence practice, through the Hutton Review of Fair Pay and the latest revised U.K. remuneration reporting regulations. Although we welcome these changes, it is our view that regulation can only go so far in addressing executive pay and in creating a wider perception of fairness. Ultimately, individual remuneration committees must focus far more on managing internal relativities rather than on the external executive pay market, which as well as improving external perceptions is also more likely to increase levels of employee engagement and performance.

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New Evidence of Relative Performance Evaluation (RPE) in UK Chief Executive Realised Incentive Compensation

Cited by 5 publications

References 40 publications

Pay for luck: new evidences from the institutional determinants of CEOs' compensation

Pay for luck: new evidences from the institutional determinants of CEOs' compensation

An Efficient Ic On chip Test Framework To Embed Tsv Testing In Memory Bist Using Dynamic Technique

Executive Remuneration in the United Kingdom

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