Is the Outrage Constraint an Effective Constraint on Executive Remuneration? Evidence from the UK and Preliminary Results from Australia
45 Pages Posted: 29 Mar 2007
Date Written: March 18, 2007
The managerial power thesis of Professors Lucian Bebchuk and Jesse Fried argues that outrage is perhaps the only effective constraint on executive remuneration, where the board of directors is effectively dominated by a sufficiently powerful CEO or senior management group.
The advisory vote on the Directors' Remuneration Report in the UK provides empirical evidence on the effect of the outrage constraint on subsequent remuneration arrangements. Evidence from a sample of FTSE 100 companies for the first 3 years of the vote - 2003 to 2005 - suggests outrage via the advisory vote is having an effect on remuneration practice. Its efficacy as a constraint seems to be linked to the willingness of investors to bring errant companies into line with best practice guidelines issued by key institutional investors, as well as government-sponsored initiatives (for example, the Rewards for Failure consultation by the Department of Trade and Industry).
Preliminary results on the advisory vote in the ASX 200 suggest Australian investors are using the vote on issue of securities to specific directors under an employee incentive scheme, required under ASX Listing Rule 10.14, as well as the advisory vote under s 250R(2) Corporations Act 2001 (Cth), to register outrage.
Keywords: executive compensation, advisory vote, UK, Australia, best practice, outrage constraint
JEL Classification: G18, G38, K22, M52
Suggested Citation: Suggested Citation