UK Executive Compensation Practices: New Economy vs. Old Economy
Posted: 18 Jan 2005
This paper examines the executive compensation practices of listed U.K. retailing companies. We compare New Economy retailers (e-commerce/dot.coms) to more traditional retailers operating in the Old Economy. We also discriminate between recently floated retailers and their more seasoned counterparts. Using a sample of remuneration contracts for 549 directors in 72 listed U.K. companies in the New and Old Economy, we investigate the structure and level of executive (and non-executive) compensation defined as the sum of salary, annual bonus, and the values of executive stock options and long-term incentive plans (LTIPs). We investigate the extent to which the contract features are determined by firm characteristics, economic sector, and governance/ownership factors. In contrast to the U.S., where almost all executive stock options are issued at the money, there is a greater variety of practice in the U.K. with some options being granted substantially in the money. We, therefore, pay special attention to this U.K. institutional feature by producing a model designed to explain the cross-sectional variation in the moneyness of stock options at the date of issue. We also examine the determinants of a number of other contract features. These are: the time to maturity of the executive stock options, the leverage of the compensation package, the ratio of long-term pay relative to short-term pay, and pay performance sensitivity. We find that differences in compensation arrangements can be explained to a significant extent by differences in firm size, growth/growth opportunities, firm financial policy, ownership characteristics, and governance arrangements. We also find some systematic differences between the compensation arrangements of CEOs and other executives.
Keywords: Managerial compensation, remuneration committee, executive stock options, new economy
JEL Classification: G30, G34, J33
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