Regulation of Compensation Anya Kleymenova* [email protected]University of Chicago Booth School of Business İrem Tuna* [email protected]London Business School This version: March 2017 Abstract This paper studies the consequences of regulating executive compensation at financial institutions using the setting of the introduction of the UK Remuneration Code and the EU bonus cap regulation. Our analysis indicates that while the initial reaction to the Remuneration Code was positive, the stock market reacted negatively to the EU bonus cap regulation, suggesting that equity market investors perceive at least some costs from regulating executive compensation. In line with the intent of regulation, we also find that UK banks defer more bonuses and reduce risk. However, when compared to their US counterparts and other UK firms, UK banks also experience higher CEO turnover. Finally, we find that UK banks' compensation contracts become more complex after the regulation. Therefore, while regulation may have had the desired effect in terms of risk-taking, it may also have given rise to some unintended costs. JEL classification: G28, G34, G38 Keywords: Executive compensation; financial institutions; regulation; EU bonus caps; UK Remuneration Code. *Anya Kleymenova gratefully acknowledges the financial support of the Accounting Research Center at Chicago Booth, the Harry W. Kirchheimer and the Centel Foundation/Robert P. Reuss Faculty Research Funds at the University of Chicago Booth School of Business, the University of Chicago Booth School of Business, the Economic & Social Research Council, and London Business School. İrem Tuna gratefully acknowledges the financial support of the European Research Council (Grant ERC-2010- 263525). We thank Christopher Armstrong, Eli Bartov, Phil Berger, Thomas Bourveau (discussant), Francois Brochet (discussant), Robert Bushman, Hans Christensen, Johanna Cowan, Yiwei Dou, Fabrizio Ferri, Pingyang Gao, Bjorn Jorgensen, Kinda Hachem, Sam Harrington, Mirko Heinle, Lord King of Lothbury, Ningzhong Li, Xiumin Martin, Mehir Mehta, Joshua Ronen, Stephen Ryan, Haresh Sapra, Ron Shalev, Douglas Skinner, Eddie Riedl, Tjomme Rusticus, Marshall Vance (discussant), Martin Walker (discussant), Christopher Williams, Anastasia Zakolyukina, Luigi Zingales, and the participants at the Manchester Business School Executive Compensation conference, the 2013 EAA conference, the 2015 GW Cherry Blossom Conference, the 2015 UCLA Accounting Conference, the 2015 GIA Conference, NYU Stern accounting seminar, the 2016 FARS Midyear meeting, the 2016 AAA annual meeting, the 2016 CMU Accounting Mini-conference, Rochester, Simon School accounting seminar, 2016 HKUST Accounting Symposium and HBS A&M seminar for their helpful comments and suggestions. We are grateful to Claudia Imperatore, Jacky Jiang, Marcel Tuijin and Yina Yang for excellent research assistance.
69
Embed
Regulation of CompensationRegulation of Compensation Anya Kleymenova* [email protected] University of Chicago Booth School of Business İrem Tuna* [email protected] London
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
The level and structure of executive compensation has been a frequently debated topic among
politicians, CEOs, and academics since the financial crisis of 2007-2009. Critiques of
compensation practices at financial service companies often attribute the crisis at least in part to
incentive pay that purportedly encourages excessive risk taking. Regulators in Europe and the
US have proposed, and in some cases even implemented, regulation that monitors or modifies
the level and the structure of executive compensation in the financial services industry. Our
objective in this paper is to examine the consequences of regulating executive compensation
using the evidence from its first implementation in the UK and comparing the results to samples
of financial institutions in Europe and the United States.
We first study the capital market reaction to the UK Remuneration Code and the
European Union’s cap on bonuses using equity and the credit default swap (CDS) markets. The
UK was the first to implement its Remuneration Code, which required deferral of bonus
compensation initially for large banks and then for all financial institutions.1 In August 2009,
after a consultation period and having considered the recommendations of the Turner Review
(Turner [2009]) and Walker Review (Walker [2009a and 2009b], the then FSA published the UK
Remuneration Code.2 This was widely seen as a response to the financial crisis and an effort to
curtail the pay practices that allegedly contributed to the crisis. The objective of the
1 Throughout the paper, we use the terms “banks” , “BIPRU firms” and “firms in the financial services sector (or
industry)” interchangeably. All references are used to refer to firms that fall under the FSA/FCA Remuneration
Code in the UK. BIPRU refers to firms covered by chapter 12 of the Prudential Sourcebook for Banks, Building
Societies and Investment Firms. 2 On April 1, 2013, FSA was abolished and became two separate regulatory authorities: the Prudential Regulation
Authority (PRA) as part of the Bank of England and the Financial Conduct Authority (FCA). The Remuneration
Code remains in effect. FCA oversees most of the Remuneration Code for BIPRU firms; PRA jointly oversees the
implementation of the Remuneration Code together with FCA for financial institutions subject to the EU Capital
Directive IV. For consistency we continue referring to the FSA as the main regulator behind the Remunera tion Code
throughout this paper.
2
Remuneration Code was to decrease short-termism among executives by requiring them to defer
a larger portion of their bonus compensation and introducing performance vesting conditions for
these bonuses to increase pay-performance sensitivity and curb risk-taking behavior. In February
2013, the UK Remuneration Code was followed by the EU-wide bonus caps for all banks in the
European Union. In the United States, the US Security and Exchange Commission together with
the Federal Reserve and other financial sector regulators jointly issued a proposal in April of
2011 to require large and systemically important financial institutions (with total assets of more
than $50bln) to defer at least 50% of compensation as incentives-based pay as part of the Dodd-
Frank Act requirements (section 956). The agencies re-issued a revised regulation for
consultation in April 2016 with applicability to a wider set of financial institutions.
Implementation of the revised regulation is expected to take place later in 2017. The revised
proposed regulation for US financial institutions is similar in spirit to the UK’s: it requires
deferral and vesting of performance-based compensation to decrease risk-taking incentives. This
section of the Dodd-Frank Act has not been implemented yet, however.3
Interestingly, the announcement of the UK Remuneration Code was accompanied by a
positive market reaction, with BIPRU firms experiencing cumulative abnormal returns of 5.04%
in a three-day window around the announcement date. Our more extensive study of 18 event
dates shows that while the UK Remuneration Code was perceived positively by the capital
market, potentially because the restrictions were not as strict as prior expectations, EU bonus cap
proposal was perceived negatively. Our analysis indicates that BIPRU firms experienced
3 We find that the banks subject to section 956 experience positive, statistically significant cumulative abnormal
returns of 0.28% over a three-day window around the announcement of the initial regulation and positive and
statistically significant cumulative abnormal returns of 4.12% around the announcement of the updated regulation in
April 2016. The updated rules were largely unexpected, although the Obama administration foreshadowed an
increase in regulatory oversight during President Obama’s speech on March 7, 2016. The market reaction to that
event was negative and statistically significant cumulative abnormal returns of 1.08% around the date of the speech
(see “Obama Defends His Record on Financial Regulation,” The Wall Street Journal, March 7, 2016).
3
statistically significant 2.25% negative cumulative abnormal returns around the three-day
window surrounding the announcement of the European Union proposal to cap executive
bonuses. Similarly, other EU banks also experienced negative cumulative abnormal returns of -
0.26% over the same period. Our findings therefore are indicative of potential endogenous costs
of regulation.
We next study the economic consequences of the new regulation. We use the UK as our
setting for these analyses since the UK was the first to pass regulation on compensation
following the financial crisis therefore providing a longer time period to observe its effects. In
our tests, we compare UK banks to other UK firms, other banks of similar size in the European
Union and the US in order to isolate the effect of the regulation from that of the macroeconomic
environment at the time. Consistent with the mandate of the Remuneration Code, we observe that
changes in BIPRU firms’ compensation are concentrated in deferred bonuses. We find that these
firms defer more bonuses after the regulation became effective. However, we also observe that
pay-performance sensitivity of deferred bonus compensation decreases after the regulation. In
line with the intent of regulation, we also find some evidence of a decrease in measures of firm
risk in response to increased bonus deferrals by BIPRU firms post-2010. To evaluate the
concerns raised about potential unintended consequences of regulation, we examine whether
there is a change in executive turnover behavior after the regulation. We find that the likelihood
of unforced CEO turnover for BIPRU firms increases in the post-2010 period. This also holds
true when we compare BIPRU firms to US banks, suggesting that compared to US bank CEOs,
BIPRU CEOs in the UK are more likely to switch jobs following the introduction of regulation.
Finally, we find that following the introduction of the Remuneration Code, BIPRU CEOs’
4
compensation contracts become more complex in comparison to compensation contracts of
CEOs of other large UK firms.
Our paper contributes to the literature on the economic consequences of regulatory
changes in corporate governance and, in particular, executive compensation. Although there is
extensive literature on the consequences of regulation in other domains, studies of compensation
regulation have tended to focus on say-on-pay regulation (e.g., Cai and Walking [2011], Larcker,
Ormazabal, and Taylor [2011], Ferri and Maber [2013]). We complement these studies by
documenting some of the consequences of specific and mandatory constraints placed on
executive compensation contracts. However, we acknowledge that a potential limitation of our
study is that the consequences we document may not be generalizable to other firms, given the
economic and regulatory idiosyncrasies of the financial services sector. Although the regulation
we examine is unique to the financial services sector, this sector is a crucial part of the global
economy and regulatory intervention in this sector can have repercussions in the wider economy.
Despite focusing on the UK as the setting, our analyses provide an opportunity to inform the
ongoing regulation process, given international interest and effort in regulating compensation,
and our comparative results from the US and Europe.
The remainder of this paper is organized as follows. Section 2 discusses the evolution of
the Remuneration Code. Section 3 discusses our motivation and related research. Section 4
describes our data and research design. Section 5 presents our findings and section 6 concludes.
2 The UK Remuneration Code and EU Bonus Cap
Towards the end of the financial crisis, the UK government requested a review of banks’
corporate governance and the causes of the financial crisis with recommendations for changes in
5
regulation in order to improve the quality of the banking system. Lord Adair Turner, the
chairman of the FSA at the time, conducted the review of the causes of the financial crisis, while
Sir David Walker reviewed banks’ corporate governance. In addition to raising various other
concerns, both reviews recommended that compensation practices be changed.
Concurrent with the Turner and Walker reviews, the FSA issued a proposed remuneration
code on February 26, 2009. The code, which came into effect on January 1, 2010,4 requires
remuneration policies to be consistent with “effective risk management.”5 As anticipated at the
time of the adoption, the code was revised and the new version became effective on January 1,
2011. In 2010, the Remuneration Code applied to the 26 largest banks, building societies and
broker-dealers. Starting January 1, 2011, the Remuneration Code applies to all banks, building
societies, investment banks and firms covered by the Capital Adequacy Directive (UCITs, fund
managers, broker-dealers, asset management firms and some firms that engage in corporate
finance, venture capital, the provision of financial advice and stockbrokers). The FSA refers to
these firms collectively as “BIPRU” in the Remuneration Code. Approximately 2,750 firms fall
within the wider scope of the regulation.6
Not all BIPRU firms are affected in the same way as there are proportionality criteria. In
particular, the FSA defines three proportionality tiers: Tiers 1 and 2 contain credit institutions
and broker-dealers that engage in significant propriety trading and investment banking activities
and have assets in excess of £50 billion for Tier 1 and between £15 billion and £50 billion for
Tier 2. Tier 3 mainly consists of smaller banks and building societies (with total assets not
4 Chapter 19, entitled “The Remuneration Code”, was included in the Senior Management Arrangement, Systems
and Controls (SYSC) sourcebook. 5 Section 2.1 of the code states that “A firm must establish, implement, and maintain remuneration policies,
procedures and practices that are consistent with and promote effective risk management .” 6 For the full definition of the applicability of the code, see for example the FSA/FCA revised website at
than £500,000 per year in total compensation or participate in executive decision-making, data
limitations and UK disclosure requirements for remuneration reporting only allow us to capture
the information for CEOs or CFOs.
5.4 Additional analysis of compensation contract changes
Our final piece of analysis presents additional descriptive evidence for the structure of the
contractual changes of UK BIPRU firms after the introduction of the Remuneration Code
together with a discussion of untabulated multivariate results using contractual changes data for
the UK sample. Since we can only rely on the UK evidence for this analysis, we limit the
presentation of our results to simple univariate difference-in-difference comparisons of
individual contractual features using UK data for UK BIPRU and other FTSE350 firms.31 Table
7 presents these comparisons. Consistent with our results discussed earlier in the paper, salaries
and take-home pay for UK BIPRU are significantly higher in the pre- and post-period compared
to other UK firms; however the proportion of salary in total compensation decreases in the post-
2010 period while shares of incentive pay increase significantly. As mandated by regulation, the
percentage of deferred bonus in total compensation increases significantly for BIPRU firms.
Prior to the regulation, all BIPRU firms had a bonus scheme in place; however, it appears that
some firms have stopped paying bonuses after the Remuneration Code was put into place.32 All
BIPRU firms have a mandatory deferral policy in place in the post-2010 period in line with the
regulation, while only 72% of other large UK firms do. BIPRU firms decrease their live LTIP
31
We review financial and proxy statements for US and EU banks in our sample as well as ISS data for the US to
see if we can compare compensation packages across these samples as well. From our review of financial statements
and the ISS data for US banks, we find that the presentation of data for targets and vesting periods is different
enough that comparisons would be difficult. Furthermore, US banks defer bonus compensation entirely voluntarily
without any targets or vesting period requirements. We therefore, focus on the UK for this comparison where
presentation of compensation packages is comparable across firms. 32
We recognize that this might be an outcome of other confounding events such as the ongoing LIBOR scandal,
however.
33
schemes but not significantly differently from other UK firms. BIPRU firms increase the number
of option schemes and the shareholding requirements more than other UK firms post-2010.
An important aspect of the Remuneration Code is that deferred bonus compensation has
to be tied to future performance. Interestingly, Table 7 shows that the total number of unique
performance targets for BIPRU firms decreases on average compared to other firms and that this
decrease comes from the number of bonus targets. This is consistent with the argument that in
order to be able to evaluate performance and meet targets, the number of targets actually needs to
be manageable and consistent (Kole [1997]).
Finally, we compute Number of Contract Changes (weighted), which is defined as the
number of contractual features changing in a given component of compensation scaled by the
number of contractual features present in that component at the beginning of the year, summed
across the components with weights applied as the proportion that the corresponding
compensation component represents in total pay. This measure should capture the overall
changes (weighed by their importance in the total compensation) and therefore also provide an
indication of the change in the complexity of the compensation. We observe that prior to the
introduction of the Remuneration Code, BIPRU firms had fewer contractual changes than other
UK firms; however, this changes following the regulation. This suggests that the regulation
added a certain aspect of complexity and uncertainty to the contractual design of UK BIPRU
CEO’s compensation contracts.
In untabulated analyses, we investigate the impact of Number of Contract Changes
(weighted). Although for parsimony we do not tabulate these results, we discuss them in this
section in reference to all the models presented in the main analysis. Similar to the models
presented in Table 3, Panel A, we investigate the impact of the number of contractual changes on
34
levels of total compensation and find that although the extent of changes to the contract features
in the post-2010 period is associated with lower total compensation, these changes are not
statistically significant. However, the number of changes made to the contract features at BIPRU
firms seems to be associated with lower cash compensation. We also find that contract changes
in the post-2010 period are associated with lower CEO incentive grants and higher bonus
deferrals for BIPRU firms, which are consistent with changes being made subsequent to the
regulation.
In our analysis of pay-performance sensitivity changes observed in UK CEOs’
compensation, we observe that the sensitivity of compensation to performance at BIPRU firms
post-2010 is positively associated with the Number of Contract Changes (weighted), suggesting
that the changes implemented at these firms enhance pay-performance sensitivity.
We find that contractual changes are negatively and statistically significantly associated
with our risk measures, suggesting that changes in contracts potentially decrease BIPRU CEOs
risk-taking incentives. This finding is consistent with BIPRU firms making changes to their
contract features post-2010 to comply with the Remuneration Code, and that these changes are
affecting risk taking behavior.
Last but not least, we also find that the likelihood of executive turnover also increases
with increases in the number of contract changes in the post-2010 period for BIPRU firms. This
suggests that the Remuneration Code is associated with higher executive turnover for the
regulated firms that make changes to contractual features of compensation compared to other
large UK firms after the regulation has come into force.
35
6 Conclusion
The 2007-2009 financial crisis brought further attention to executive compensation in the
financial services industry. In the UK, the new Remuneration Code came into effect in 2010 as a
result of the allegation that misalignment of shareholders’ and executives’ incentives was at least
partly to blame for excessive risk-taking leading up to the financial crisis.
In this paper, we examine changes in compensation practices of UK financial institutions
(BIPRU firms) following changes in regulation and the resulting consequences. While the new
regulation specifically targeted bonus and their deferrals, we review all main aspects of
compensation to study whether compensation contracts overall were changed following
regulation. In order to estimate the effects of regulation, we construct three different sets of
comparison groups not directly affected by this regulatory change: other large UK firms, and US
and EU banks of similar size, profitability and business models. Comparing BIPRU firms with
EU and US banks allows us to create a group of control firms that are similar in size and their
operations, which experienced the financial crisis but were not exposed to the same regulatory
changes. This also allows us to disentangle the effects of the change due to the crisis from the
effect of the enactment of the Remuneration Code.
We begin our analysis with a series of event studies starting from the announcement of
the Remuneration Code and leading up to the introduction of the EU bonus caps, which allows
us to investigate the capital market perception of these changes. While we find that the initial
reaction to the Remuneration Code was perceived positively, the subsequent introduction of
bonus caps by the new set of EU rules was perceived negatively by the capital market investors.
We then study the changes in compensation contracts and find that following the
introduction of the Remuneration Code, BIPRU firms have significantly higher deferred bonuses
36
compared to US banks, as required by the new regulation. UK BIPRU also defer higher bonuses
than their EU counterparts and have lower other incentives-based pay. Furthermore, we find that
BIPRU firms become less risky and exhibit higher pay-performance sensitivity, in line with the
intended purpose of the regulation. However, we also find higher turnover among BIPRU firms
post-2010 compared to both other UK firms and US banks, potentially due to changes in
regulation or changes in job opportunities in the financial services sector. Finally, we also find
some evidence of increased complexity of BIPRU CEO compensation contracts following the
introduction of the Remuneration Code.
Our paper contributes to the literature on executive compensation, and in particular its
regulation. Given the potential similarities of CEO pay in the UK, EU, and US (e.g., Conyon,
Core, and Guay [2011]), and to the extent that the existing institutions and enforcement are
similar across the countries currently in the process of proposing regulation of compensation, our
findings from the UK as well as our comparative results from the US and EU should be of
international interest to the parties engaged in the compensation debate. As we have shown in
this paper, while some of the regulatory changes might have had positive consequences, there are
also potential endogenous costs to regulating executive pay. As the European Banking Authority
(EBA [2015]) recently stated, mutual funds under the scope of the Capital Requirements
Directive will also be subject to the same executive compensation bonus cap and deferral
requirements starting in 2017. Therefore, our evidence can be informative about the
consequences of regulating pay at a wider set of firms.
37
Appendix A. Variable Definitions
Variable Definition Source
% Cash bonus in total compensation Share of cash bonus in total compensation. Computed by
authors using IDS
data and Capital IQ
% Deferred bonus in total compensation Share of deferred bonus in total compensation. Computed by
authors using IDS
data and Capital IQ
% of Incentives in total compensation Share of options and LTIPs in total compensation. Computed by authors using IDS
data and Capital IQ
%LTIP in total plan Share of long-term incentive performance plans (LTIP) to total
compensation.
Computed by
authors using IDS
data and Capital IQ
% of Salary in total compensation Share of base salary in the CEO's total compensation. Computed by
authors using IDS
data and Capital IQ
% Options granted in total compensation Share of the value of options granted during the fiscal year in total compensation.
Computed by authors using IDS
data and Capital IQ
% Total bonus in total compensation Share of total bonus (cash and deferred) in total compensation. Computed by
authors using IDS
data and Capital IQ
Abnormal return Market-adjusted event day return. Computed by the
authors using
Datastream data and
Compustat Global data
Annual bonus deferral scheme Indicator variable which takes the value of 1 if a company has a deferral
policy in place for bonuses and 0 otherwise.
IDS, CIQ
Annual bonus scheme Indicator variable which takes the value of 1 if a company has an annual bonus scheme in place.
IDS, CIQ
Bonus > 2 x Salary indicator Indicator variable which takes the value of 1 for all companies that have
bonuses at least two times greater than the corresponding base salaries.
Computed by
authors using IDS
and CIQ data
Book to market Ratio of book value of assets to the sum of book value of liabilities plus market value of equity.
Datastream
C&I Loans as a proportion of total loans Ratio of commercial and industrial loans to average total loans for the
period
Bankscope
Cash bonus Cash bonus received in a given year (£thousands). IDS, CIQ
38
Variable Definition Source
Cash Bonus > 2 x Salary indicator Indicator variable which takes the value of 1 for all companies that have
bonuses equal
Computed by
authors using IDS
and CIQ data
CDS spread 5-year average annual credit default spread for senior secured debt Markit
CEO Cash compensation Cash component of total compensation computed as the sum of salary,
cash bonus and other annual cash compensation in a given year
(£thousands).
IDS, CIQ
CEO Deferred bonus Deferred portion of a bonus received in a given year. Typically subject to
performance conditions (£thousands).
IDS, CIQ
CEO Incentive grants Incentive pay computed as the sum of values of deferred bonus, options
granted and LTIPs granted.
IDS, CIQ
CEO Total compensation Total amount received by the CEO in a given year; consists of base salary, total bonus, option and LTIP incentives grants valued at the point
of grants and miscellaneous payments.
Computed by authors using IDS
and CIQ data
Deferral policy compulsory Indicator variable which takes the value of 1 if a company has a
compulsory bonus deferral policy in place.
IDS
Deferral policy voluntary Indicator variable which takes the value of 1 if a company has a voluntary bonus deferral policy in place.
IDS
Idiosyncratic risk Standard deviation of the residuals from a market model estimated daily
over the previous year (t-1).
Datastream
Leverage Ratio of book value of liabilities to market value of assets. Datastream
Leverage ratio Computed as Tier 1 regulatory capital divided by tangible assets adjusted
by derivative liabilities
Bankscope
Momentum Market adjusted return over 60 days prior to the event date Computed by the
authors using Datastream data
MV Market value at the start of the year (£thousands). Datastream,
Bankscope, Compustat Global
NPL as a proportion of total loans Ratio of non-performing loans (loans overdue by more than 90-days) to
average total loans for the period
Bankscope
Number of contract changes (weighted) Number of changes to a given compensation component weighted by the
importance of this component in total compensation and the number of other aspects of the contract that change at the same time.
Computed by the
authors using IDS data
Number of live LTIP schemes Number of live LTIP schemes. IDS
Number of live Option schemes Number of live Option schemes. IDS
Post 2010 Indicator Indicator variable which takes the value of 1 starting from the fiscal year
of 2010 to indicate changes in compensation policy.
Provisions as a proportion of Total
Loans
Provisions for non-performing loans as a proportion of average total loans
(banks only).
Bankscope
ROA Return on assets computed as the ratio of net income before extraordinary
items and average total assets.
Datastream
RWA as a proportion of total assets Ratio of risk-weighted assets to total assets (banks only). Bankscope
Salary CEO reported annual salary IDS, CIQ
Sales Sales or gross interest and other income for financial institutions
(measured in £thousands).
Datastream
39
Variable Definition Source
Shareholder return 1-year (2-year) One-year (two-year) total return to shareholders. Datastream,
Bankscope,
Compustat Global
Shareholding requirement Indicator variable which takes the value of one if a company has a shareholding requirement policy in place.
IDS, CIQ
Size Natural logarithm of market value. Datastream,
Bankscope,
Compustat Global
Tenure CEO's tenure measured as the number of year spent with a given firm. Computed by the authors using IDS,
CIQ data
Tier 1 Ratio Ratio of Tier 1 regulatory capital to risk-weighted assets (banks only). Bankscope
Total number of bonus targets per year Total number of performance targets relating to annual bonus payments. IDS
Total number of changes in a contract
per year
Total number of changes to the overall incentives contract. IDS
Total number of changes to bonus
targets
Total number of changes to the number of annual bonus performance
targets.
IDS
Total number of changes to LTIP targets Total number of changes to the number of annual LTIP performance targets.
IDS
Total number of changes to Option
targets
Total number of changes to the number of annual Options performance
targets.
IDS
Total number of LTIP targets per year Total number of performance targets relating to annual LTIP grants. IDS
Total number of Option targets per year Total number of performance targets relating to annual Option grants. IDS
Total number of unique performance
targets
Number of performance targets for each individual contract. Overlapping
targets, such as for example TSR for bonus targets and TSR for LTIP
performance targets were counted as one, indicating that an individual
needs to meet only one performance target to satisfy performance
conditions.
Computed by the
authors using IDS
Total volatility Standard deviation of returns estimated daily over the previous year (t-1). Datastream
Turnover Indicator variable which takes the value of 1 if there is a change of CEO
in a given year.
Computed by the
authors using IDS and CIQ data
UK BIPRU Indicator variable which takes the value of 1 if the company is a UK-
based financial institution subject to the FSA Remuneration Code
regulation and 0 otherwise.
FSA
UK BIPRU x Post 2010 interaction Interaction variable between the indicator variable for UK financial
institutions and post-2010 period.
Z-score Proxy for default risk measuring proximity of firm default based on the
value of its liabilities and the volatility of its returns. Computed as
ln((ROA+Leverage)/std(Returns)), where Leverage is defined as a ratio of book equity to total assets (based on Laeven and Levine [2009].
Computed by the
authors using
Datastream, CIQ, Bankscope,
Compustat Global
data
40
Appendix B. Summary of main compensation regulation events in the EU and UK affecting financial institutions
(2009-2014)
Event Date Legislative or regulatory
event Application
Country of
application
Expected
market
reaction
Multivariate regression
results:
BIPRU
Multivariate
regression results:
BIPRU x
Affected by
EU bonus
cap
EU Banks
1 2/26/2009 FSA proposes its
Remuneration Code
Potentially applicable to 40
BIPRUs UK +/-
positive,
statistically
significant
negative,
insignificant
2 8/12/2009 FSA publishes its final version
of the Remuneration Code
Appears to apply to the top 26
BIPRUs UK +/-
negative,
statistically
significant
for the wider definition of
BIPRU
positive,
insignificant
3 1/1/2010
Remuneration Code becomes
effective (retroactively applies
to all compensation granted in
2010 that relates to 2009
performance)
Appears to apply to the top 26
BIPRUs UK +/-
positive,
statistically
significant
positive,
insignificant
4 6/30/2010
EU proposes to introduce tougher regulations for
financial institutions'
employees compensation
Appears more restrictive than the UK Remuneration Code;
has wider applicability to all
firms subject to the CRD
EU - negative,
statistically
significant
negative,
insignificant
5 7/29/2010
FSA publishes revised version
of the Remuneration Code
with wider application to more than 2,500 financial
institutions
Applies to more than 2,500 financial institutions
UK -
negative
reaction for
non UK
Banks firms and positive
for UK
BIPRU firms
positive, insignificant
6 10/8/2010
CEBS introduces guidelines
that are tougher than the
Remuneration Code and require deferral of up to 60%
of variable pay
Appears more restrictive than
the UK Remuneration Code; has wider applicability
EU -
positive,
statistically significant
positive,
insignificant
7 12/10/2010 EU proposes to introduce
tougher regulations
Appears more restrictive than
the UK Remuneration Code; EU -
positive,
statistically
negative,
significant
41
Event Date Legislative or regulatory
event Application
Country of
application
Expected
market
reaction
Multivariate
regression
results: BIPRU
Multivariate
regression
results:
BIPRU x
Affected by EU bonus
cap
EU Banks
has wider applicability significant
8 12/17/2010
FSA publishes revised version
of the Remuneration Code
with wider application to more than 2,500 financial
institutions
Much wider applicability than
the 2010 version of the Code UK +/-
negative,
statistically significant
positive,
insignificant
9 1/1/2011
Revised Remuneration Code
becomes effective (applies to
compensation relating to 2010
performance)
Applies to more than 2,500
financial institutions UK +/-
positive,
statistically
significant
positive,
insignificant
10 5/15/2012 EU proposals for bonus caps Applies to all EAA financial
institutions subject to the CRD EU -
negative,
insignificant
positive,
insignificant
11 2/27/2013
EU announces the decision to
cap bonuses at 1x salary (with 2x max variable component if
approved by the supermajority
of shareholders)
Applies to all EAA financial institutions subject to the CRD
IV
EU - negative, statically
significant
positive, insignificant
negative, statistically
significant
12 9/25/2013 UK appeals the bonus cap
decision
Applies to all EAA financial
institutions subject to the CRD
IV
UK +
no
significant
reaction
no
significant
reaction
13 6/12/2013
UK Parliamentary
Commission on Banking Supervision standards
proposes stricter rules
Applies to all FSA regulated banks
UK -
negative,
statically significant
positive,
statistically significant
14 10/24/2013
FSA announcement of
proposals to implement the
UK Parliamentary
Commission recommendations
Applies to all FSA regulated
banks UK +/-
no
significant
reaction
no
significant
reaction
15 1/1/2014 Bonus caps are in effect
Applies to all EAA financial
institutions subject to the CRD
IV
EU +/-
positive,
statistically
significant
negative,
insignificant
16 3/25/2014 UK proposals for bonus clawbacks (more restrictive
than EU)
Applies to all FSA regulated banks
UK - positive,
statistically
significant
negative, significant
17 11/20/2014 UK drops appeal against
bonus caps
Applies to all EAA financial
institutions subject to the CRD UK -
negative,
statistically
negative,
statistically
42
Event Date Legislative or regulatory
event Application
Country of
application
Expected
market
reaction
Multivariate
regression
results: BIPRU
Multivariate
regression
results:
BIPRU x
Affected by EU bonus
cap
EU Banks
IV significant significant
18 03/02/2011 SEC publishes proposed rules for Dodd-Frank Section 956
implementation
Applies to large and
systemically important
financial institutions in the United States (joined proposal
by the SEC, Federal Reserve
Board, US Department of the
Treasury, FDIC, NCUA and
FHFA)
US +/- insignificant insignificant negative,
statistically
significant
19 04/21/2016
Regulatory agencies publish
new proposed rules for Dodd-
Frank Section 956
implementation
Applies to large and
systemically important financial institutions in the
United States (joined proposal
by the SEC, Federal Reserve
Board, US Department of the
Treasury, FDIC, NCUA and FHFA). Replaces previous
proposal from 2011
US +/- insignificant insignificant insignificant
43
References
AYADI, R., E. ARBAK, and W. P. DE GROEN. “Executive Compensation and Risk Taking in European Banking” in Research Handbook on International Banking and Governance, edited by J. R. Barth, C. Lin, and C. G. Wihlborg. Cheltenham, UK: Edward Elgar Publishing, 2012.
BEBCHUK, L., and H. SPAMANN. “Regulating Bankers’ Pay.” Georgetown Law Journal 98
(2010): 247-287.
BENITO, A., and M. CONYON. “The Governance of Directors’ Pay: Evidence from UK Companies.” Journal of Management and Governance 3 (1999): 117–136.
BERNARD, V. “Cross-Sectional Dependence and Problems in Inference in Market-Based
Accounting Research.” Journal of Accounting Research 25 (1987): 1-48.
BHAGAT, S., and R. ROMANO. “Reforming Executive Compensation: Simplicity, Transparency and Committing to the Long-term.” European Company and Financial Law
Review 7 (2010): 273-296.
CAI, J., and R. WALKING. “Shareholders’ Say on Pay: Does It Create Value?” Journal of Financial and Quantitative Analysis 46 (2011): 299-339.
CONYON, M. “Corporate Governance and Executive Compensation.” International Journal of
Industrial Organisation 15 (1997): 493–509.
CONYON, M., J. CORE, and W. GUAY. “Are U.S. CEOs Paid More Than U.K. CEOs? Inferences from Risk-adjusted Pay.” Review of Financial Studies 24 (2011): 403-438.
CONYON, M., P. GREGG, and S. MACHIN. “Taking Care of Business: Executive
Compensation in the United Kingdom.” Economic Journal 105 (1995): 704–714.
CONYON, M., and K. MURPHY. “The Prince and The Pauper? CEO Pay in the United States and United Kingdom.” Economic Journal 110 (2000): 640–671.
CORE, J., and W. GUAY. “The Use of Equity Grants to Manage Optimal Equity Incentive Levels.” Journal of Accounting and Economics 28 (1999): 151-184.
CORE, J., and W. GUAY. “Estimating the Value of Employee Stock Option Portfolios and Their
Sensitivities to Price and Volatility.” Journal of Accounting Research 40 (2002): 613-630.
CORE, J., and W. GUAY. “Is There a Case for Regulating Pay in the Financial Services Industry?” in After the Crash: The Future of Finance, edited by Y. Fuchita, R. J. Herring, and R.
E. Litan. Washington, DC: Brookings Institution Press, 2010; 115-140.
CRAWFORD, A., J. EZZELL, and J. MILES. “Bank CEO Pay-Performance Relations and the Effects of Deregulation.” Journal of Business 68 (1995): 231-256.
44
DEMSETZ, H. “Why Regulate Utilities?” The Journal of Law and Economics 11 (1968): 55-65.
DEMSETZ, H., and K. LEHN. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy 93 (1985): 1155-1177.
EUROPEAN BANKING AUTHORITY. “Guidelines on sound remuneration policies under Articles 74(3) and 75(2) of Directive 2013/36/EU and disclosures under Article 450 of Regulation (EU) No 575/2013”, December 21, 2015.
FERNANDES, N., M. A. FERREIRA, P. MATOS, and K. J. MURPHY. “Are US CEOs Paid
More? New International Evidence.” Review of Financial Studies 26 (2013): 323-367.
FERRARINI, G., and M. UNGUREANU. “Bankers’ Pay after the 2008 Crisis: Regulatory Reforms in the US and the EU.” Zeitschrift fur Bankrecht und Bankwirtschaft 6 (2011): 418-430.
FERRI, F., and D. MABER. “Say on Pay Votes and CEO Compensation: Evidence from the
UK.” Review of Finance 17 (2013): 527-563.
FINANCIAL SERVICES AUTHORITY. “Reforming Remuneration Practices in Financial Services.” Consultation Paper 09/10, March, 2009a.
FINANCIAL SERVICES AUTHORITY. “Reforming Remuneration Practices in Financial
Services: Feedback on CP09/10 and Final Rules.” Policy Statement 09/15, August, 2009b.
FINANCIAL SERVICES AUTHORITY. “Revising the Remuneration Code: Feedback on CP10/19 and Final Rules.” Policy Statement 10/20, December, 2010.
GREGG, P., S. JEWELL, and I. TONKS. “Executive Pay and Performance: Did Bankers’
Bonuses Cause the Crisis?” International Review of Finance 12 (2012): 89-122.
JOHN, K., H. MEHRAN, and Y. QIAN. “Outside Monitoring and CEO Compensation in the Banking Industry.” Journal of Corporate Finance 16 (2010): 383-399.
KOLE, S. “The Complexity of Compensation Contracts.” Journal of Financial Economics 43 (1997): 79-104.
LARCKER, D., G. ORMAZABAL, and D. TAYLOR. “The Market Reaction to Corporate Governance Regulations.” Journal of Financial Economics 101 (2011): 431-448.
LAEVEN, L., and R. LEVINE. “Bank Governance, Regulation and Risk Taking.” Journal of Financial Economics 93 (2009): 259-275.
LO, K. “Economic Consequences of Regulated Changes in Disclosure: The Case of Executive
Compensation.” Journal of Accounting and Economics 35 (2003): 285-314.
45
MURPHY, K. “Regulating Banking Bonuses in the European Union: A Case Study in Unintended Consequences.” European Financial Management 19 (2013): 631-657.
POSNER, R. “Theories of Economic Regulation.” The Bell Journal of Economics and
Management Science 5 (1974): 335-358.
STIGLER, G. “The Theory of Economic Regulation.” The Bell Journal of Economics and Management Science 2 (1971): 3-21.
SUNTHEIM, F. “Managerial Compensation in the Financial Service Industry,” Working Paper,
Bocconi University, 2011. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1592163.
THANASSOULIS, J. “The Case for Intervening in Bankers’ Pay.” The Journal of Finance 67
(2012): 849-895.
TURNER, A. “A Regulatory Response to the Global Banking Crisis.” Financial Services Authority, March, 2009.
WALKER, D. “A Review of Corporate Governance in UK Banks and Other Financial Industry
WALKER, D. “A Review of Corporate Governance in UK Banks and Other Financial Industry Entities: Final Recommendations.” Financial Services Authority, November, 2009b.
This table presents the descriptive statistics for CEO compensation and its determinants for the BIPRU firms subject to the
Remuneration Code (BIPRU) and the largest UK companies (constituents of FTSE350, excluding BIPRU), and matched UK and
US financial institutions. All values are in real, 2012 thousands of pound sterling (£thousands) unless otherwise indicated. Panel
A presents the summary statistics data for UK BIPRU firms and Panel B shows summary statistics for other UK institutions.
Panel A also shows whether means of the variables are significantly different from the corresponding variables of Panel B using the difference in means test. Panel C and Panel D show the descriptive statistics for the matched sample of US and EU banks.
Similar to Panel A, both panels also show whether these banks are significantly different from each other using a difference in
means test. To mitigate the effects of extreme observations all continuous variables are winsorized at the 1% and 99% tails of
their respective distributions in each sample year. All variables are defined in Appendix A. ***, **, * designate significance at
1%, 5% and 10% levels respectively.
Panel A: UK BIPRU firms
Variable N Mean Std dev Min Median Max
Total compensation 110 3,949.58*** 4,151 49.95 3,086 36,530
Take home pay 110 2,078.99*** 1,610 95.63 1,607 8,650
% Salary in total comp. 110 0.39*** 0.32 0.01 0.34 1.00
% Cash bonus in total comp. 110 0.21 0.21 0.00 0.18 0.92
% Incentives pay in total comp. 110 0.04 0.14 0.00 0.00 0.78
% Deferred bonus in total comp. 110 0.23*** 0.24 0.00 0.17 0.92
Table 2: Market reaction tests to UK and EU compensation regulation
This table presents the results from estimating the market reaction to the 17 regulatory events concerning executive compensation
for financial institutions in the UK and the EU and events 18 and 19 showing the reaction to the announcement of the proposal of
the implementation of section 956 of the Dodd-Frank Act by the US regulators. Details of each event date as well as a summary
of multivariate results for each could be found in Appendix B. Panel A presents cumulative abnormal returns, in which the
abnormal return is computed relative to the UK FTSE All-share value-weighted market index (UK sample). Panel B also includes the market reaction of EU and US banks relative to the value-weighted MSCI Europe excluding UK index (EU sample) and
value-weighted MSCI US index (US sample). The results are insensitive to the choice of the reference market index measure as
well as to the usage of a global index. EU and US banks market reaction is estimated using corresponding market indices . Panel
C presents results from a regression of cumulative abnormal returns surrounding the main regulatory events on the variables of
interest and control variables. Panel D presents results from a regression of cumulative abnormal returns surrounding event 1 controlling for voluntary deferral, its percentage and amount. Panel E presents results from a regression of cumulative abnormal
returns surrounding event 1 controlling for compulsory deferral, its percentage and amount. Event 1 is the proposal of the
Remuneration Code by the FSA, Event 2 is the publication of the Remuneration Code, Event 11 is the proposal of the EU bonus
caps and Event 17 is the date when the UK government dropped the appeal against EU bonus caps. Total Bonus refers to the
aggregate bonus a CEO received in the corresponding year with the indicator variable capturing whether this amount was greater than two-times the corresponding base salary. Cash bonus refers to the cash proportion of the total bonus received by the CEO
compared to the base salary. Affected is equal to one when either Bonus is greater than two times the salary or Cash Bonus is
greater than two times the salary. Size is the natural logarithm of market value, Book to market is the ratio of book value to
market value and Momentum is the market adjusted return for a given stock in the sample over the prior sixty days. All variables
are defined in Appendix A. The events are summarized in Appendix B. Values of t-statistics (reported in parentheses) are computed based on robust standard errors. ***, **, * designate significance at 1%, 5% and 10% levels respectively.
Panel A: Cumulative abnormal returns (-1,+1) for UK regulatory events
Events Date Legislative or regulatory event All UK BIPRU All UK without BIPRU
1 26/02/2009 FSA proposes its Remuneration Code 0.0230*** 0.0504*** 0.0211***
2 12/08/2009 FSA publishes its final version of the Remuneration Code
0.0006 -0.011*** 0.0011
3 01/01/2010
Remuneration Code becomes effective
(retroactively applies to all compensation granted in 2010 that relates to 2009 performance)
0.0039*** 0.0138*** 0.0031***
4 30/06/2010
EU proposes to introduce tougher
regulations for financial institutions' employees compensation
-0.0155 -0.0041 -0.0167
5 29/07/2010
FSA publishes revised version of the Remuneration Code with wider
application to more than 2,500 financial institutions
-0.0216* 0.0096*** -0.0243*
6 08/10/2010
CEBS introduces guidelines that are
tougher than the Remuneration Code and require deferral of up to 60% of variable pay
0.0009 0.0083*** 0.0000
7 10/12/2010 EU proposes to introduce tougher
regulations 0.0036*** -0.0051 0.0037***
8 17/12/2010
FSA publishes revised version of the Remuneration Code with wider application to more than 2,500
financial institutions
0.0037*** -0.0092*** 0.0043***
9 01/01/2011 Revised Remuneration Code becomes effective (applies to compensation relating to 2010 performance)
0.0023*** 0.0037*** 0.0025***
10 15/05/2012 EU proposals for bonus caps 0.0008 -0.0009 0.0013*
11 27/02/2013
EU announces the decision to cap bonuses at 1x salary (with 2x max
variable component if approved by the supermajority of shareholders)
-0.0017*** -0.0225*** -0.0003
12 25/09/2013 UK appeals the bonus cap decision 0.0001 -0.0009 0.0000
Panel D: Cross-sectional variation of the reaction to event 1 based on voluntary bonus deferrals already in place
(UK BIPRU vs. UK Firms)
(1) (2) (3)
Intercept 0.0182 0.0004 0.0197
(0.958) (0.023) (1.015)
UK BIPRU 0.0195*** 0.0192*** 0.0197***
(2.786) (3.2) (2.814)
Voluntary bonus deferral -0.0174***
(-2.9)
UK BIPRU x Voluntary deferral -0.006
(0.415)
% Voluntary bonus deferral -0.034
(-1.489)
UK BIPRU x % Voluntary deferral 0.031
(0.962)
Amount of voluntary deferral
-0.000129*
(-1.675)
UK BIPRU x Amount of voluntary deferral
0.000
(-0.017)
Size 0.000 0.001 0.000
(-0.231) (0.029) (-3.415)
Book to market 0.00268*** 0.00249*** 0.00274***
(3.109) (2.621) (3.171)
Momentum -8.196*** -7.811*** -8.171***
(-13.706) (-11.353) (-13.618)
Observations 1,512 1,512 1,512
R-squared 0.269 0.256 0.267
53
Panel E: Cross-sectional variation of the reaction to event 1 based on mandatory bonus deferrals already in place
(UK BIPRU vs. UK Firms)
(1) (2) (3)
Intercept -0.0022 -0.0025 0.0181
(-0.123) (-0.14) (0.938)
UK BIPRU 0.0158** 0.0171*** 0.0160**
(2.3795) (2.668) (2.292)
Mandatory deferral (0.001)
(0.234)
UK BIPRU x Mandatory deferral 0.0297**
(2.106)
% Mandatory bonus deferral 0.0084
(0.532)
UK BIPRU x % Mandatory deferral 0.0470**
(2.166)
Amount of mandatory deferral 0.0000
(-0.396)
UK BIPRU x Amount of mandatory deferral 0.0660***
(3.385)
Size 0.0011 0.0011 -0.0003
(0.883) (0.892) (-0.258)
Book to market 0.00251*** 0.00252*** 0.00277***
(2.639) (2.647) (3.199)
Momentum -7.805*** -7.825*** -8.174***
(-11.378) (-11.357) (-13.692)
Observations 1,512 1,512 1,512
R-squared 0.256 0.256 0.267
54
Table 3: Determinants of CEO compensation
This table presents the results of OLS regression estimation of the determinants of CEO compensation for CEOs of the largest UK BIPRU and non-BIPRU firms in Panel A. Panel
B and Panel C present the same estimation using the propensity -score matched samples of US and EU banks respectively. Log CEO Total Compensation is the natural logarithm of
CEOs’ total compensation computed as the sum of basic salary, total bonus, other benefits, options granted valued using the Black Scholes method and LTIPs valued as options,
restricted stock or cash depending on their respective category. Log CEO Salary is the natural logarithm of CEOs’ base salary. Log CEO Incentives Grants is the natural logarithm
of CEOs’ incentive pay computed as the sum of values of deferred bonus, options granted and LTIPs granted. Log CEO Deferred Bonus is the natural logarithm of CEO’s total deferred bonus in a given year. UK BIPRU is equal to one for BIPRU firms subject to the FSA Remuneration Code. Post 2010 takes the value of 1 for years starting from 2010. All
other variables are defined in Appendix A. The sample period is 2006-2012. To mitigate the effects of extreme observations all continuous variables are winsorized at the 1% and
99% tails of their respective distributions in each sample year. Values of t-statistics (reported in parentheses) are computed based on robust standard errors clustered at the industry
level (Panel A) and robust standard errors (Panels B and C). ***, **, * designate significance at 1%, 5% and 10% levels respectively.
Panel A: UK BIPRU vs. UK Firms
Log CEO Total Compensation Log CEO Salary Log CEO Incentive Grants Log CEO Deferred Bonus
Table 4: Effect of new regulation on pay-performance sensitivity for UK CEOs
This table presents the results of OLS regressions to estimate CEO’s pay sensitivity to performance. Panel A presents the results for UK BIPRU firm and the largest UK non-
financial firms. Panel B and Panel C present the same estimation using the propensity -score matched samples of US and EU banks respectively. Log CEO Total Compensation is
defined as the sum of salary, bonus, other benefits, value of options and LTIPs. Log CEO Incentive Grants is the natural logarithm of CEOs’ incentive pay computed as the sum of
values of deferred bonus, options granted and LTIPs granted. Log CEO Deferred Bonus is the natural logarithm of CEO’s total deferred bonus in a given year. UK BIPRU is equal
to one for BIPRU firms subject to the FSA Remuneration Code. Shareholder return 1-year (2-year) is the one-year (two-year) total return to shareholders. All other variables are defined in Appendix A. To mitigate the effects of extreme observations all continuous variables are winsorized at the 1% and 99% tails of their respective distributions in each
sample year. Values of t-statistics (reported in parentheses) are computed based on robust standard errors clustered at the industry level (Panel A) and robust standard errors
(Panels B and C). ***, **, * designate significance at 1%, 5% and 10% levels respectively.
Panel A: UK BIPRU vs. UK Firms Log CEO Total Compensation Log CEO Cash Bonus Log CEO Incentives Log CEO Deferred Bonus
(1) (2) (3) (4) (5) (6) (7) (8)
UK BIPRU 0.45*** 0.40*** 0.14 -0.35*** 0.45*** 0.46*** 0.12 -0.80***
This table presents the results of OLS regressions to estimate the effect of new regulation on risk. Panel A presents results using the idiosyncratic measure of volatility
(Idiosyncratic risk) computed from the market model, Total Volatility, Leverage, Z-score (as a measure of default risk) and CDS spread (5-year average annual credit default
spread) for the UK sample. Panel B and Panel C presents bank-specific measures of risk and compare UK BIPRU financial institutions to US and EU banks respectively . Leverage
ratio (for banks only) is Tier 1 regulatory capital divided by tangible assets adjusted by derivative liabilities. Tier 1 Ratio is the ratio of Tier 1 regulatory capital to risk-weighted
assets. Provisions as a Proportion of Total Loans is a ratio of annual provisions to average total loans for the period. C&I Loans as Proportion of Total Loans is a ratio of commercial and industrial loans to average total loans for the period. NPL as a Proportion of Total Loans is a ratio of non-performing loans (loans overdue by more than 90-days)
to average total loans for the period. UK BIPRU is equal to one for BIPRU firms subject to the FSA Remuneration Code. Post 2010 takes the value of 1 for years following 2010.
Deferred bonus is the share of deferred bonus in total compensation in given year. All other variables are defined in Appendix A. The sample period is 2006-2012. To mitigate the
effects of extreme observations all continuous variables are winsorized at the 1% and 99% tails of their respective distribut ions in each sample year. Values of t-statistics (reported
in parentheses) are computed based on robust standard errors clustered at the industry level (Panel A) and robust standard errors (Panels B and C). ***, **, * designate significance
at 1%, 5% and 10% levels respectively.
Panel A: UK BIPRU vs. UK Firms (General risk)
Idiosyncratic Risk Total Volatility Leverage Z-Score CDS spread
This table presents conditional logistic (Panel A) and logistic regressions (Panels B and C) to estimate the effect of new
regulation on the likelihood of CEO turnover. Deferred bonus is the share of deferred bonus in total compensation in given year.
All variables are defined in Appendix A. The sample period is 2007-2012. To mitigate the effects of extreme observations all
continuous variables are winsorized at the 1% and 99% tails of their respective distributions in each sample year. Values of z-
statistics (reported in parentheses) are computed based on robust standard errors. ***, **, * designate significance at 1%, 5% and 10% levels respectively.
Panel A: UK BIPRU vs. UK Firms
(1) (2)
UK BIPRU 0.25*** 0.47***
(3.479) (6.062)
Post 2010 -0.18 -0.09
(-1.044) (-0.498)
UK BIPRU x Post 2010 0.40** 0.52***
(2.405) (2.873)
% Deferred bonus 1.26**
(2.044)
% Deferred bonus x Post 2010 -1.10
(-1.438)
UK BIPRU x % Deferred bonus -1.73***
(-2.744)
UK BIPRU x % Deferred bonus x Post 2010 0.56
(0.751)
Shareholder return t 0.12 0.12
(1.170) (1.081)
ROA t-1 -2.01*** -1.96***
(-3.766) (-3.574)
Book to market t-1 0.29*** 0.30***
(3.482) (3.651)
Log(Tenure) t-1 -0.36** -0.35**
(-2.315) (-2.263)
Industry Indicators Yes Yes
Observations 1,535 1,535
Pseudo R-squared 0.0249 0.0284
66
Panel B: UK BIPRU vs. US Banks
(1) (2)
UK BIPRU 0.00 0.35
(0.006) (0.765)
Post 2010 -0.82** -0.98**
(-2.184) (-2.030)
UK BIPRU x Post 2010 1.07* 1.46*
(1.891) (1.927)
% Deferred bonus 0.77
(0.783)
% Deferred bonus x Post 2010 1.66
(0.888)
UK BIPRU x % Deferred bonus -2.01
(-1.166)
UK BIPRU x % Deferred bonus x Post 2010 -2.17
(-0.799)
Shareholder return t 0.20 0.30
(0.851) (1.188)
ROA t-1 -2.81 -2.93
(-1.427) (-1.480)
Book to market t-1 0.18 0.16
(1.050) (0.939)
Log(Tenure) t-1 0.12 0.16
(0.857) (1.063)
Intercept -1.44*** -1.62***
(-4.213) (-3.974)
Observations 335 306
Pseudo R-squared 0.0356 0.0511
67
Panel C: UK BIPRU vs. EU Banks
(1) (2)
UK BIPRU 0.48 0.17
(1.126) (0.308)
Post 2010 0.51 -0.41
(1.204) (-0.648)
UK BIPRU x Post 2010 -0.26 0.92
(-0.436) (1.078)
% Deferred bonus -3.36
(-1.197)
% Deferred bonus x Post 2010 4.75
(1.410)
UK BIPRU x % Deferred bonus 2.16
(0.687)
UK BIPRU x % Deferred bonus x Post 2010 -5.46
(-1.409)
Shareholder return t 0.18 0.14
(0.641) (0.466)
ROA t-1 0.79 -0.32
(0.414) (-0.166)
Book to market t-1 0.14 0.18
(0.821) (1.054)
Log(Tenure) t-1 0.12 0.22
(0.739) (1.263)
Intercept -1.99*** -1.66***
(-4.697) (-2.934)
Observations 260 239
Pseudo R-squared 0.0185 0.0448
68
Table 7: Compensation contract changes
This table presents the univariate differences of CEO compensation contracts in the UK and the complexity of the underlying compensation contracts for UK firms subject to the
Remuneration Code (BIPRU) and the largest UK companies (constituents of FTSE350, excluding BIPRU). All values are in real, 2012 thousands of pound sterling (£thousands)
unless otherwise indicated. UK BIPRU firms are compared to other UK FTISE350 constituents before and after the introduction of the Remuneration Code. This table also shows
the complexity of UK CEO compensation contracts in relation to the number of targets and corresponding changes. To mitigate the effects of extreme observations all continuous
variables are winsorized at the 1% and 99% tails of their respective distributions in each sample year. All variables are defined in Appendix A. ***, **, * designate significance at 1%, 5% and 10% levels respectively .
Before FSA Regulation in 2010 After FSA Regulation in 2010 Difference - in - Differences