The Managerial Labor Market and the Governance Role of Shareholder Control Structures in the UK

L.D.R. Renneboog, G. Trojanowski

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Abstract

We simultaneously analyze two mechanisms of the managerial labor market: CEO turnover and monetary remuneration schemes.Sample selection models and hazard analyses applied to a random sample of 250 firms listed on the London Stock Exchange over a six-year pre-Cadbury period show that managerial remuneration and the termination of labor contracts play an important role in mitigating agency problems between managers and shareholders.We find that both the CEO's industry-adjusted monetary compensation and their replacement are strongly performance-sensitive.Top executive turnover is shown to serve as a disciplinary mechanism for corporate underperformance, whereas the level of monetary compensation rewards good performance.We also investigate whether specific corporate governance mechanisms (different types of blockholders or of boards of directors) have an impact on managerial disciplining or on the pay-for-performance contracts.There is little evidence of outside shareholder monitoring and CEOs with strong voting power successfully resisting replacement irrespective of corporate performance.This case of strong managerial entrenchment is even exacerbated when the CEO also holds the position of chairman of the board.In firms with large outside shareholdings, CEO compensation is lower, but outside shareholder do not impose a stricter performance-related incentive remuneration scheme.When insiders have strong voting power, the CEOs remuneration is lower except when the stock price performance is poor: it seems that when the CEOs wealth resulting from their investment goes down due to decreasing stock prices, the CEOs cash compensation is higher.The presence of a remuneration committee has no impact on remuneration.Finally, we find strong support for the incentive effect-hypothesis of remuneration: CEOs with higher levels of monetary compensation attain better subsequent accounting and stock price-based measures of corporate performance.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages42
Volume2002-68
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-68

Fingerprint

Governance
Chief executive officer
Managerial labor markets
Shareholders
Remuneration
Stock prices
Voting power
Replacement
Corporate performance
Blockholders
Corporate governance mechanisms
Industry
Sample selection model
Stock price performance
Underperformance
CEO compensation
Wealth
Managers
Pay-for-performance
Managerial entrenchment

Keywords

  • labour turnover
  • agency theory
  • labour market
  • managers
  • corporate governance
  • shareholders
  • corporate ownership

Cite this

Renneboog, L. D. R., & Trojanowski, G. (2002). The Managerial Labor Market and the Governance Role of Shareholder Control Structures in the UK. (CentER Discussion Paper; Vol. 2002-68). Tilburg: Finance.
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Renneboog, LDR & Trojanowski, G 2002 'The Managerial Labor Market and the Governance Role of Shareholder Control Structures in the UK' CentER Discussion Paper, vol. 2002-68, Finance, Tilburg.

The Managerial Labor Market and the Governance Role of Shareholder Control Structures in the UK. / Renneboog, L.D.R.; Trojanowski, G.

Tilburg : Finance, 2002. (CentER Discussion Paper; Vol. 2002-68).

Research output: Working paperDiscussion paperOther research output

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