An Investigation into the Relationship between Executive Compensation in the Financial Services Sector and the Credit Crisis in the U.K.

Posted: 7 May 2018 Last revised: 12 Nov 2018

See all articles by Christine Christofi-Hau

Christine Christofi-Hau

Southampton Business School; Imperial College Business School

Date Written: August 15, 2017


Executive compensation has been a controversial topic for many years and it has accumulated a wealth of research. The most recent financial crisis of 2007-2008 has accelerated this debate. There is a general consensus amongst market participants that incentive misalignment was one of the biggest contributory factors to the crisis.

It has been argued that one of the most important elements of executive compensation is performance-related pay. Traditionally, this is used as a corporate governance mechanism to reduce agency costs and mitigate moral hazard. Many studies have shown that the divergence of interest between agents and principals has been accurately, or commensurately, reflected in their respective performance and compensation structures.

This paper has used a combination of research and literature-based approaches by reviewing past theories and also investigating the relationship between executive compensation in the financial services sector during the relevant period of the credit crisis in the U.K., primarily by observing the evolution of compensation structures of financial intuitions and performance measures between 1997 to 2016. In order to bridge the gap in the literature between the disciplines, a variety of performance indicators have been considered including market-based and accounting-based indicators. The analysis of the paper has focused on three key areas. Firstly, an analysis on the entire sample from 1997-2016. Secondly, an analysis on each time period (before, during and after the crisis). Finally, an analysis based on the size of the firms (small, medium and large).

Consequently, this study concludes: (1) The U.K. financial market has an oligopolistic nature, with few firms (mainly banks) holding a significant portion of market share. (2) When comparing each period, the average salaries and fees of executives have decreased whilst the equity-based pay has increased. (3) When comparing firms by size, smaller firms paid a greater portion of total compensation toward fixed pay such as salaries whilst larger firms paid the biggest portion in bonuses, suggesting a greater bonus-oriented culture. (4) Smaller firms had a better return on assets figure compared to medium and large firms, suggesting they are more efficient at generating income using fewer assets. (5) On average, a higher return on equity corresponded to a higher debt burden and lower equity position, indicating a possible risk-return trade-off that contributed to the crisis.

Keywords: Executive Compensation, Remuneration Policies, Incentives, Credit Crisis, Financial Institutions, Performance Measures, Corporate Governance

JEL Classification: G30, G34, J33

Suggested Citation

Christofi-Hau, Christine, An Investigation into the Relationship between Executive Compensation in the Financial Services Sector and the Credit Crisis in the U.K. (August 15, 2017). Available at SSRN: or

Christine Christofi-Hau (Contact Author)

Southampton Business School ( email )

Highfield Campus
University Road
Southampton, SO17 1LP
United Kingdom

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom

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