Managerial Remuneration and Disciplining in the UK: A Tale of Two Governance Regimes

52 Pages Posted: 12 Dec 2010

See all articles by Luc Renneboog

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Grzegorz Trojanowski

University of Exeter Business School

Date Written: December 10, 2010


We simultaneously analyze two mechanisms of the managerial labor market (CEO turnover and remuneration schemes) in two different regulatory regimes, namely before and after the sweeping governance reforms adopted in the UK in the 1990s. We employ sample selection models to examine firms in a pre-Cadbury Code period (1988-1993) and a post-Combined Code period (1998-2004). CEOs’ compensation and CEO replacement are performance-sensitive in both periods. There is little evidence of outside shareholder monitoring, whereas powerful CEOs successfully resist replacement irrespective of corporate performance. With regard to CEO remuneration, we sketch a nuanced picture as we find some evidence supporting the alignment of interests hypothesis, but also supporting the managerial power or skimming model for managerial remuneration practices in the UK prior to the governance reforms. In particular, equity-owning CEOs compensate disappointing stock performance by augmenting their monetary compensation. Our results are consistent with the widely perceived failure of internal governance mechanism in tackling the agency problems associated with managerial pay: these mechanisms have relatively little impact on executive remuneration. We also conclude that the regulatory effort undertaken in the UK over the 1990s has had at best a moderate effect on increasing executives’ accountability and performance sensitivity of their turnover.

Keywords: corporate governance, agency costs, CEO remuneration, disciplinary CEO turnover, ownership and control, entrenchment, sample selection model

JEL Classification: G30, G32, G34, J33

Suggested Citation

Renneboog, Luc and Trojanowski, Grzegorz, Managerial Remuneration and Disciplining in the UK: A Tale of Two Governance Regimes (December 10, 2010). ECGI – Finance Working Paper No. 301/2010, Available at SSRN: or

Luc Renneboog (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE

Grzegorz Trojanowski

University of Exeter Business School

Xfi Centre for Finance and Investment
Rennes Drive
Exeter, Devon EX4 4ST
United Kingdom

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