The Managerial Labor Market and the Governance Role of Shareholder Control Structures in the UK

45 Pages Posted: 16 Apr 2003

See all articles by Grzegorz Trojanowski

Grzegorz Trojanowski

University of Exeter Business School

Luc Renneboog

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

Date Written: March 2003

Abstract

We simultaneously analyze two mechanisms of the managerial labor market: CEO turnover and monetary remuneration schemes. Sample selection models and hazard analyses applied to a random sample of 250 firms listed on the London Stock Exchange show that managerial remuneration and the termination of labor contracts play an important role in mitigating agency problems between managers and shareholders. We find that both the CEOs' industry-adjusted monetary compensation and their replacement are strongly performance-sensitive. We also investigate whether specific corporate governance mechanisms have an impact on managerial disciplining or on the pay-for-performance contracts. There is little evidence of outside shareholder monitoring whereas entrenched CEOs with strong voting power successfully resist replacement irrespective of corporate performance. CEO remuneration is more sensitive to stock price performance in firms with strong outside shareholders whereas remuneration in insider-dominated firms is more sensitive to measures of accounting returns. When stock prices decrease, CEOs seem to compensate disappointing stock performance by augmenting the cashbased compensation package. Finally, the presence of a remuneration committee has no significant impact on remuneration.

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

Trojanowski, Grzegorz and Renneboog, Luc, The Managerial Labor Market and the Governance Role of Shareholder Control Structures in the UK (March 2003). ECGI - Finance Working Paper No. 16/2003, Available at SSRN: https://ssrn.com/abstract=389002 or http://dx.doi.org/10.2139/ssrn.389002

Grzegorz Trojanowski

University of Exeter Business School

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

Luc Renneboog (Contact Author)

Tilburg University - Department of Finance ( email )

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

European Corporate Governance Institute (ECGI) ( email )

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

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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