Executive Bonus and Firm Performance in the UK

Abstract

As part of good corporate governance in general, executive bonuses are supposed to motivate senior managers to raise shareholder value; successive governance reforms since the 1995 Greenbury Report have tried to support remuneration committees to that end in the design of executive pay packages. However, well-intentioned regulations calling for the attachment of ‘challenging and stretching’ performance conditions to executive pay can work both ways. Yes, they can strengthen pay/performance relations, but attempts to make performance conditions stretching or ‘hard’ can also involve more bureaucracy and ‘camouflage’ opportunities for executives effectively to guarantee themselves higher incomes through ‘soft’ conditions. This paper addresses these possibilities, and reports on an analysis of executive bonuses in the UK from 2001 to 2003 that focuses on the question of whether the aggregate value and transparency of bonus schemes are associated with higher total shareholder returns. Bonus scheme complexity turns out to be the only dimension of bonus transparency that is associated with bonus pay-outs, tending to increase the value of pay-outs but without any associated increase in shareholder returns.