Executive Compensation, Corporate Governance and Corporate Performance: Evidence from the UK

While there has been extensive empirical investigation of pay-performance sensitivity, the perspective of performance-pay has received less attention to date. While the executive compensation is sensitive to the firm performance, the firm performance would be enhanced by providing prospective reward scheme to board members. Adopting multiple theoretical perspectives, the authors examine whether executive compensation has greater influence on firm performance or the latter has greater influence on compensation. The authors employ a set of simultaneous equations modelling to jointly investigate the mutual influence of executive compensation and firm performance. Using data of a five-year period (2010-2014) for FTSE 350 companies, the authors find strong evidence on the existence of dual positive associations between executive compensation and firm performance; however, executive compensation has the greater influence. The study results provide evidence that using the tournament perspective as a guide for deciding the executive compensations help in achieving better performance.