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This paper argues that the rise in directors’ remuneration in the UK over recent years has been, to a large extent, an unintended consequence of institutional change in the governance arrangements of UK companies. The increase in disclosure regarding the detail of what directors are paid and the adoption of transparent processes by which directors’ remuneration is determined have combined to produce an outcome whereby the top management teams of large publicly held companies are able to command an ever increasing portion of the quasirent (surplus after running costs) earned by those companies. It is also true that a shift in shareholder attitudes has brought about an increased emphasis on shareholder value which, in turn, has encouraged the uptake of payment-by-results arrangements for the remuneration of directors. These have made the reward stream more ‘risky’ as far as the individual director is concerned and, in recognition of this and to compensate for risk aversion, the actuarial value of remuneration has increased. In a more general setting, runaway labour costs would be expected to be held in check by competitive forces in the product market or, in the face of diminishing profitability, by the market for corporate control, whereby underperforming companies are vulnerable to takeover. But while remuneration payouts to directors are large by many measures, they do not present a significant issue for the UK’s larger companies. For reasons explored below, the upward pressure on directors’ remuneration can be expected to continue. Some of the less desirable features of this trend (pay without performance, etc.) could in part, be remedied by a move to Career Shares – long term incentives which cannot be cashed out on vesting but must be held until some considerable time after the director has demitted office. The following section of the paper attempts to flesh out this argument, starting with an examination of Chief Executive Officer (CEO) pay trends in the FTSE-350.
|Place of Publication||Edinburgh|
|Publisher||The David Hume Institute|
|Publication status||Published - Jun 2011|
|Name||Hume Occasional Paper|
|Publisher||David Hume Institute|
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