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Executive Pay, Tournaments and Corporate Performance in UK Firms

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>06/2001
<mark>Journal</mark>International Journal of Management Reviews
Issue number2
Number of pages28
Pages (from-to)141-168
Publication StatusPublished
<mark>Original language</mark>English


This paper explores the relationship between executive pay and corporate performance. First, we focus on the pay-for-performance sensitivity (PPS), review recent evidence (mainly UK) and outline a methodology for calculating the PPS itself. Secondly, we review the evidence on tournament theory. Tournament models predict that career concerns generate incentives for executives and can explain observed variations in pay outcomes in the boardroom. Thirdly, we provide evidence on the distribution of the PPS for 532 executives within 100 large UK stock market companies for 1997. Unlike prior work, we include non-CEO executives in the analysis. We show that the PPS increases through organizational levels. Also the statistic is not constant across firms. Finally, we consider the relationship between corporate performance and incentives. We show, consistent with prior evidence, that there is a positive relationship between firm performance and the effective ownership of stock-based compensation by management.