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CEO Compensation and Firm Performance: an Empirical Investigation of UK Panel Data


  • Financial support for this paper is gratefully acknowledged from the UK Economic and Social Research Council Grant no: RES-000–22-1762. I would like to thank C. Florackis, M. Umana-Aponte, C. Quinto de Valle,and Sijia Wen for excellent research assistance. I also would like to thank the editor, John Doukas, an anonymous referee and the participants of seminars at the University of Bristol, University of Bath, FMA 2007, Orlando, and EFMA 2007, Vienna for helpful comments.


This paper examines the link between CEO pay and performance employing a unique, hand-collected panel data set of 390 UK non-financial firms from the FTSE All Share Index for the period 1999–2005. We include both cash (salary and bonus) and equity-based (stock options and long-term incentive plans) components of CEO compensation, and CEO wealth based on share holdings, stock option and stock awards holdings in our analysis. In addition, we control for a comprehensive set of corporate governance variables. The empirical results show that in comparison to the previous findings for US CEOs, pay-performance elasticity for UK CEOs seems to be lower; pay-performance elasticity for UK CEOs is 0.075 (0.095) for cash compensation (total direct compensation), indicating that a ten percentage increase in shareholder return corresponds to an increase of 0.75% (0.95%) in cash (total direct) compensation. We also find that both the median share holdings and stock-based pay-performance sensitivity are lower for UK CEOs when we compare our findings with the previous findings for US CEOs. Thus, our results suggest that corporate governance reports in the UK, such as the Greenbury Report (1995) that proposed CEO compensation be more closely linked to performance, have not been totally effective. Our findings also indicate that institutional ownership has a positive and significant influence on CEO pay-performance sensitivity of option grants. Finally, we find that longer CEO tenure is associated with lower pay-performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure.