An Analysis of the Pay-Performance Association for CEOs in FTSE 350 firms
Dr Salma Ibrahim, Kingston University
Dr Mark Farmer, Kingston University
Prof Myojung Cho, PACE University (previously Fordham University)
The criticism of low-pay performance sensitivity of executive pay has been previously identified empirically in both US and UK studies. In the UK, over the years, recommendations such as those in the Cadbury Report (1992), the Greenbury Report (1995) and the Hampel Report (1998) have been implemented to improve the link between pay and performance. However, empirical results in the UK find that these regulations have not been effective in improving the pay-performance relationship. One area that has not been examined in terms of the pay-performance relationship is the type of performance measures that firms use in the compensation contracts. These can typically be financial (earnings per share, revenue) or non-financial (customer satisfaction, quality). We argue that the pay-performance sensitivity is higher in firms that use non-financial performance measures in their bonus contracts. We use a sample of FTSE350 firms and identify the performance measures as set out in the remuneration policy for the years 2004-2013 in the bonus contracts of the chief executive officer. We find higher pay-performance sensitivity for firms that use non-financial performance measures. We also find that the pay-sensitivity is higher, when more weight in placed on these non-financial measures.