The Managerial labor market and the governance role of shareholder control structures in the UK

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 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 CEOs' industry-adjusted monetary compensation and their replacement are strongly performance-sensitive. We also investigate whether specific corporate governance mechanisms have an impact on managerial disciplining or on the pay-for-performance contracts. There is little evidence of outside shareholder monitoring whereas entrenched CEOs with strong voting power successfully resist replacement irrespective of corporate performance. CEO remuneration is more sensitive to stock price performance in firms with strong outside shareholders whereas remuneration in insider-dominated firms is more sensitive to measures of accounting returns. When stock prices decrease, CEOs seem to compensate disappointing stock performance by augmenting the cashbased compensation package. Finally, the presence of a remuneration committee has no significant impact on remuneration.