UK Executive Compensation Practices: New Economy vs. Old Economy

Abstract

This paper examines the executive compensation practices of listed UK retailing companies. We compare New Economy retailers (e-commerce and 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 552 CEOs, other executives and non-executives in 72 listed UK 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 the composition of the remuneration committee. The contract features we examine are the time to maturity of the executive stock options, whether options were granted in-, at- or out of the money, and the leverage of the compensation package (in terms of the director's wealth gains through increases in the value of stock options and LTIPs relative to the director's cash pay). In stark contrast to US findings and to UK corporate governance guidelines, we find evidence that a large proportion of sample firms, particularly in the New Economy, issue executive stock options in-the-money, and that the composition of the remuneration committee has a significant impact on the moneyness of stock options.

Keywords: Managerial Compensation, Remuneration Committee, Executive Stock Options, New Economy

JEL Classification: G30, G35, J33