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Long Range Planning

33/4 August 2000

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Simon I. Peck and Martin J. Conyon Theme Editors

Executive Pay and Compensation

Martin J. Conyon, Simon I. Peck, Laura E. Read and Graham V. Sadler The Structure of Executive Compensation Contracts: UK Evidence
simon.peck@unisg.ch

    In this article we examine CEO stock option contracts using UK data for the 1997 fiscal year. We show how the portfolio of options varies with firm wealth; describe the structure of the contract (in terms of vesting criteria related to performance targets); and illustrate whether the option performance criteria is historically ‘demanding'. Finally, we show how the pay–performance term varies with the structure of the option contract. Our new evidence shows the complex structure of UK option contracts for CEOs. We augment this data with rich interview data to show the complexity of CEO compensation contracts and how they are set.

Martin J. Conyon and Joachim Schwalbach Executive Compensation: Evidence from the UK and Germany. h0625bhf@suncom.rz.hu-berlin.de

    This article concerns the determination of executive pay in the UK and Germany. These economies have very different corporate governance structures and we examine whether this has implications for executive pay outcomes. Our research shows that average pay in the UK was about £391,000 in 1994, compared to about £200,000 in Germany. Our data, however, have a time series dimension. Pay has increased in both economies over time, but the UK has had a faster rate of growth in the post-1980s period. Importantly, in our time period each economy had a different structure of pay: UK CEOs received stock options (which can contribute to the growth rate) whereas German executives — until recently — did not. The gap between CEO pay and that of other employees is higher in the UK than in Germany. Regression results reveal a positive and significant association between cash pay and company performance in both countries. However, we show that there is cross-section variation in the pay–performance relation, a result that many prior studies have overlooked.

Alain and Christine Alcouffe Executive Compensation Setting Practices in France. alain.alcouffe@univ-tlsel.fr

    The literature on executive compensation, in tandem with the literature on corporate governance, has largely concentrated on the US, the UK and Germany; relatively little has been published concerning these issues in France. Executive compensation is, of course, closely related to the structure of corporate governance, and this differs significantly in France from that in the US, the UK and Germany. Traditionally very little information has been made publicly available on executive compensation in France, but this practice is coming under pressure with increasing foreign investment in French companies. This article looks at the corporate governance structure in France and its relation to executive compensation practices. It presents and discusses the available data on executive compensation, in particular looking at the use of stock options and the like. This insight into executive compensation in France provides an interesting comparison with practices in other leading European countries such as the UK and Germany.

Tor Eriksson What Determines Managers Pay? Evidence from Denmark
tor@asb.dk

    The aim of this article is threefold. Firstly, to add to the small literature explaining managerial pay outside of the top 100 or 500 US and UK companies. Secondly, to explain firms' choices of the methods of pay for their managerial employees, and thirdly, to provide estimates of the effects of performance pay on individual earnings, at the same time distinguishing between selection and incentive effects. I use an unbalanced five-year panel data set of about 8,500 individual-year observations from a sample of Danish firms during the four-year period 1992 to 1995. I find pay differentials to be determined mainly by job positions and authority and performance-related pay to be more closely related to the characteristics of the firm than to those of the individual. Finally, the incentive and selection effects of performance pay are estimated to be 8 and 3 per cent, respectively.

Strategy

Aswin van Oijen and Stytse Douma Diversification Strategy and the Roles of the Centre. s.w.douma@kub.nl

    The corporate centre can perform many roles for its business units. Choosing the correct role or roles is essential for firm performance. The wrong choices could, for instance, lead to excessive overhead costs or undermine entrepreneurship in the business units. The right choices could result in a whole that is worth more than the sum of its parts. In this article, we argue that a firm's corporate strategy influences the choices for the roles. We propose certain links between the diversification strategy and the roles the corporate centre performs. Our subsequent empirical study of Dutch firms reveals some striking differences between high-performing and low-performing firms. In general, the high performers have a better fit between their diversification strategy and their corporate centre roles than do the low performers.

Marc Douma, Jan Bilderbeek, Peter J. Idenburg and Jan Kees Looise Strategic Alliances: Managing the Dynamics of Fit. marc.douma@nuon.com

    This article presents a framework for structuring and supporting the complex and dynamic process of alliance building. Fit is the key concept in this framework, which is based on an extensive literature study and in-depth case studies. The concept of ‘fit' is not new in itself. The added value of this article is, firstly, that it identifies different aspects of fit and their interrelationships, as well as providing an insight into the drivers for fit. Here, we focus on strategic and organisational fit in particular. Secondly, we make practical recommendations for alliance managers on how to actually manage fit.

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