Pay at the Top: A Study of the Sensitivity of Top Director Remuneration to Company Specific Shocks

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Abstract
This article considers the empirical determination of top directors' pay during the 1980s. In a sample of approximately 170 companies between 1985 and 1990 we find that director pay is significantly related to shareholder returns, but the estimated elasticity is small. In line with other research, sales growth is an inaportant predictor o f top pay. The current article is novel in that we study whether limits to managerial discretion and organisational restructuring are important in influencing top pay. Importantly, we find that company sales growth through acquiring other firms and increasing indebtedness significantly raise top directors' remuneration above that which can be achieved by internal or organic growth, Also relative performance evaluation in terms of sales growth, reducing union presence and whether or not the company is a subsidiary are all important influences on top pay. However, yardstick conzparisons appear not to apply to shareholder returns, yet under-performance post-acquisition is not punished in line with under-performance for other reasons. Overall though the after allowing for performance and such changes to the firms' operating environment top directors' remuneration the going rate still rose at a rate of 12 to 16 per cent per year between 1985 and 1990, In real terms this was approximately four times that of the average worker in the same sample of firms.

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