Voluntary Disclosure and Political Sensitivity: The Case of Executive Remuneration

This study investigates the relation between firm political sensitivity and the quality and quantity of voluntary disclosures, with special reference to the case of executive remuneration disclosures. I study the relation between firm political sensitivity and the quality and quantity of annual bonus plan disclosures, applying two competing (but not mutually exclusive) theories: political cost theory and managerial power theory. Political sensitivity is proxied using the magnitude of the annual bonus rather than firm size, which while popular in existing literature, is not a perfect proxy for political sensitivity (Ball and Foster, 1982, Meek et al, 1995; Cormier et al, 2005). Results reveal a significant positive relation between disclosure quantity and political sensitivity measures, and a significant negative relation between disclosure quality and political sensitivity proxies. This indicates that managers who are more susceptible to political sanctions related to their remuneration tend to disclose higher volumes of lower quality information. Consistent with earlier studies, the results confirm that firm size is related to voluntary disclosure, and the results also reveal that the use of remuneration consultants have a significant positive effect on disclosure quantity but no impact on disclosure quality

How Difficult are Executive Remuneration Performance Targets?

This paper provides a descriptive analysis of the use of performance targets in executive remuneration plans and its difficulty and attainability relative to past, expected and realised performance. From 31 December 2002, UK firms are required under the Directors‟ Remuneration Report Regulations (DRRR) 2002 to disclose performance targets and benchmarks used in executive remuneration plans in the Remuneration Report. This study uses the first instance of the disclosure of the targets and benchmark from the financial year 2002/3 for a sample of 1269 plans from 440 largest UK firms. Results indicate that earnings per share (eps) and total shareholder return (TSR) are the two most popular performance measures used in long term remuneration plans, while most firms provide vague information regarding performance measures in short-term (annual bonus) plans. More firms are using long term incentive plans (LTIPs) in place of share option plans relative to observations made by Conyon et al (2000). Plans that use eps as a performance measure often benchmark against growth relative to the retail price index (RPI) while plans that use TSR often benchmark against a peer group. For a sub-sample of 291 plans using eps as a performance measure, target attainability is analysed relative to past, forecasted and realised eps growth. Results indicate that targets set in executive remuneration contracts are highly attainable, with targets being met six times out of ten. The use of lower and upper threshold targets help control attainability, but less than half of plans specify an upper threshold target

Executive remuneration consultancy in the UK: exploring a professional project through the lens of institutional work

This article responds to recent calls to examine the development of professionalism through the lens of institutional theory. We investigate the development of the new professional service of executive remuneration consultancy (ERC) in the UK through the lens of institutional work. Specifically, drawing upon Lawrence and Suddaby (2006) and Suddaby and Viale (2011), we explore the relationship between macro-scale occupational/organizational and micro-scale individual-level dynamics of the ERC professional project and situate its development in relation to the broader field of executive remuneration practices. We show that the institutional work of creating the new professional project is contested and that the ERC development may be better understood as part of broader efforts to create and maintain the institution of executive pay-setting practices. We argue that the institutional work lens has the potential to produce a more nuanced understanding of the internal dynamics of the ERC professionalization process and its role in reconfiguring broader institutional arrangements. By exploring the analytical purchase of the concept of institutional work, the article contributes to the emerging body of empirical evidence outlining the potential of (neo-) institutional approaches to offer a more productive understanding of contemporary professionalis

Performance measures, benchmarks and targets in executive remuneration contracts of UK firms

This paper is a descriptive analysis of performance measures, benchmarks and targets in remuneration contracts for a sample of 1269 plans from 440 UK firms for 2002/2003. Data were collected from the remuneration reports that became a mandatory disclosure following the Directors' Remuneration Report Regulations (2002). The descriptive analysis is divided into two main sections. In the first section, performance measures and benchmarks employed are examined. Consistent with earlier analyses of performance measures, earnings per share (eps) and total shareholder return (TSR) are the two most popular measures, with share option plans often employing the former and LTIPS the latter. However, it is also possible to observe a shift in the popularity of LTIPs over share options since 2002. When investigating the choice of performance measures used in plans, there is evidence that suggests underlying volatility in the performance measure can affect its being chosen, but this is overridden by instances of mimicry and institutional isomorphism. The second section provides a descriptive analysis of targets set in a sub-sample of plans that employ eps as a performance measure. Here, targets tended to cluster around levels that have been prescribed in guidelines, which again suggests that a certain degree of isomorphism is present. Also, plans tend to have targets lower than past and forecasted performance, and targets set were met six times out of ten. The use of lower and upper threshold targets helps control attainability, but less than half of plans specify an upper threshold target. Observations suggest that the remuneration setting process falls victim to institutional isomorphism in the absence of clear and concrete guidelines regarding what is considered acceptable

Three papers in executive remuneration

EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Informal institutions and managers' earnings management choices: evidence from IFRS-adopting countries

In this study, we investigate the role of informal institutions (religiosity and culture) in determining managers’ choices of earnings management methods (accruals vs. real activities), after controlling for formal institutions (investor protection, enforcement quality and equity market development). Using an ethical perspective, we find that managers tend to choose an earnings management strategy that meets the prevailing social (informal) norms of the environment where the firm is headquartered. Specifically, our analysis shows that firms domiciled in countries with strong religious adherence and high-power-distance cultures prefer to manage their earnings ‘upwards’ through real activities rather than accruals. Overall, our results suggest that informal institutions determine managers’ earnings management choices at least as strongly as formal institutions do. It would therefore be misleading to analyze managers’ choices in managing earnings solely from the formal rules perspective without considering the role of informal constraints or vice versa

Pay for no performance? Executive pay and performance in EU banks

Existing corporate governance structures mainly focus only on the relationship between managers and shareholders, with little emphasis on debt holders. While this reflects the nature of the capital structure for a majority of firms, banks operate differently and are highly leveraged. However, the different balance of risk bearing by the shareholders and debtholders for banks is not reflected in contemporary corporate governance in large corporations today. In this study, we examine the pay-performance relationship taking into consideration special governance structures in place in the banking sector, for a sample of 65 EU banks and bank holding companies between 2000 and 2010. The sample of EU banks also allows for the plurality of governance structures. Using a 3SLS estimation to cater for endogeneity problems that have plagued prior work, we find no evidence of a contemporaneous relationship between bank performance and pay, suggesting that bank executives are paid independent of past and expected future performance. Instead, we find the driving factors behind executive pay levels to be board size, managerial ownership, bank size, capital ratios and dividend status. The 3SLS estimation also allows us to shed light on the complementarity and substitution effects of different governance mechanisms in the banking sector, providing further evidence that governance relationships cannot be examined in isolation