Are Performance Conditions on Executive Options Driven by Fundamentals?

18 Pages Posted: 5 Apr 2006

See all articles by J. Michael Orszag

J. Michael Orszag

Willis Towers Watson - Reigate (Surrey Office); Institute for the Study of Labor (IZA)

M. Ali Choudhary

State Bank of Pakistan; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Abstract

A special feature of UK executive pay is the heavy reliance on performance conditions for executive share options. Using data compiled from 2002-2003 Remuneration Committee reports of 130 of Britain's largest companies as well as linked data on analyst earnings forecasts and realised earnings, this paper computes probabilities of Britain's CEOs meeting their performance conditions and how much this varies across firms. Our main findings are that there is not much cross-company variation in how tough performance conditions are, though there are some outliers. We also find that the probability of meeting the targets depends on certain fundamental variables such as the number of non-executive directors, salaries of the chairs of the remcom committees, CEO tenure, CEO base pay and CEO notice periods. While most of the variables have the some sign as expected from theory, the statistical relations are weak. Overall, our results provide some support that good corporate governance leads to tougher targets for CEOs but at the some time the weakness of these links suggests that there is still much room for improvement.

Keywords: Executive Pay, Performance Conditions, Probabilities

JEL Classification: J33, J44, G30, G38

Suggested Citation

Orszag, J. Michael and Choudhary, M. Ali, Are Performance Conditions on Executive Options Driven by Fundamentals?. Watson Wyatt Technical Paper No. 2005-6, Available at SSRN: https://ssrn.com/abstract=892741 or http://dx.doi.org/10.2139/ssrn.892741

J. Michael Orszag (Contact Author)

Willis Towers Watson - Reigate (Surrey Office) ( email )

Watson House
London Road
Reigate, Surrey, RH2 9PQ
United Kingdom
+44 1737 241144 (Phone)
+44 1737 241496 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

M. Ali Choudhary

State Bank of Pakistan ( email )

I.I. Chundrigar Road
KARACHI, Sindh 74000
Pakistan

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Houghton Street
London WC2A 2AE
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
149
Abstract Views
1,217
Rank
354,898
PlumX Metrics