Executive incentive pay strategies in entrepreneurial UK initial public offering companies: an empirical study

Abstract

Purpose

The purpose of this paper is to use a sample of UK entrepreneurial initial public offering (IPO) companies to investigate whether they change their compensation strategies as they undertake the crucial transformation of the business from private to public status.

Design/methodology/approach

The paper uses the agency perspective to underpin an examination of the changes within the compensation packages of companies at the stage of the initial public offering, particularly with regard to the use of executive director incentive schemes, and compares this to “best practice” guidelines issued within the UK.

Findings

The paper discovers that even though incentive schemes are adopted, the majority are unconditional and requiring only an improvement in share price and the executive to remain employed in order for gains to be made. The general finding is that before IPO most companies did not have an incentive pay scheme in place, and those that did, operated unconditional option schemes. However, after IPO most companies introduced an incentive pay scheme, but the majority were unconditional rather than conditional (i.e. schemes requiring executives to meet pre‐determined performance criteria – as recommended by “best practice” guidelines).

Originality/value

The paper exposes that, contrary to “best practice” guidelines and regulations, many of these schemes reward executives unconditionally with the only factor being them remaining in employment over the vesting period. Despite “best practice” and regulations, firms still appear to be defensive and protect the executives from rigorous scrutiny by shareholders.

Citation

Allcock, D. and Pass, C. (2006), "Executive incentive pay strategies in entrepreneurial UK initial public offering companies: an empirical study", Corporate Governance, Vol. 6 No. 2, pp. 148-161. https://doi.org/10.1108/14720700610655150