Executive Management Remuneration 1

Impact of Executive Management Remuneration on the Financial Performance of Banks in the

UK

Proposal
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Executive Management Remuneration 2

Table of Contents

1.1.

Research Background.......................................................................................................3

1.2.

Rationale of the Study.......................................................................................................3

1.3.

Aim and Objectives...........................................................................................................4

1.4.

Literature Review..............................................................................................................4

1.5.

Hypotheses........................................................................................................................5

1.6.

Methodology.....................................................................................................................6

1.7.

Research Timetable...........................................................................................................7

References....................................................................................................................................8

Executive Management Remuneration 3

1.1.

Research Background
Executive remuneration has become a controversial topic since the financial crisis, which

left its marks on the banking sector and also called into question the factors responsible for the
downslide in the organizational performance. According to some analysts (Clark & Edmonds,
2013), executive remuneration is one of these key factors. The scope and level of these
remunerations, its policy and decision makers, interests of the shareholders and the executives,
motivation and retention of highly experienced executives, are some of the aspects which have
been the topics of the debate on executive remuneration policies and their effectiveness. The
seminal study of Jensen & Murphy (1990) indicated that excessive executive compensation is
not as great an issue as the ways and policies through which it is paid. In most companies, they
highlight, this compensation is independent of performance (as cited in Gregg, Jewell& Tonks,
2012).

1.2.

Rationale of the Study

Given the challenges of the financial markets and the contested role of corporate

governance in the financial institutions, there is a need to understand and highlight the issues
underlying these challenges. One of the relatively less explored but actively a public and political
concern is the status of executive management remuneration and its significance in the
performance outcomes for an organization.A study conducted by Gregg, Jewell& Tonks (2012)
identified the relationship that exists between executive compensation and remunerations and
company performance and concluded that there are is a strong relationship between these
factors.The present study intends to present the understanding of remuneration policies and
structure and their impact of the financial status and performance of the organizations.These

Executive Management Remuneration 4

concerns include, among others, the agency problem (owner-manager conflict), disparity in
personal and organizational interests, the level and effectiveness of incentives, etc. This research
identifies the extent to which executive remunerations are justified and in what areas are they
susceptible to financial crisis or threatening to the profitability of the firm.

1.3.

Aim and Objectives

The aim of the research is to investigate the impact of executive management remuneration

on the financial performance of banks in the UK. With this aim, this study will pursue following
objectives:

To analyze the remuneration policies in the banking sector of the UK

To understand the relationship between executive management remuneration and the

performance of banks
To investigate the level of impact of remuneration on the financial status and performance

of banks
To assess the role of remuneration policies in the light of financial conditions of banks in
the UK

1.4.

Literature Review
The relationship between the executive management remuneration and organizational

performance is ambivalent. Amess & Drake (2003) found out (for the mutual firms) that the
relation between profitability and pay was strong for the top paid directors but not for the board
chairperson, whereas the relation between the executive remuneration and the total factor
productivity was found to be weak. Other researchers like Doucouliagos et al (2007) found
strong correlation between remuneration of CEOs and the previous year performance of the
bank. This relation is stronger in CEOs than in the directors, and it has increased over time in
case of the former.

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While Turner (2009) claimed that the skewed incentive structures encouraged the
behavior responsible for the financial crisis, Gregg et al. (2012) conclude that although the
remuneration in the financial sector is generally high, it is not likely to be responsible for
motivating the executives to emphasize on short-term profitability alone. His rationale is that
there must be greater pay-performance sensitivity in the financial sector before the crisis if the
focus on short-term profits is the culprit, which is not the case in the light of evidence. Hence,
even though the remunerations have increased dramatically over the last decade or so in the UK,
it had little to no impact on the pay-performance sensitivity which remained low in general
(Gregg et al. 2012).

1.5.

Hypotheses

H1a: There is a significant relationship between executive management remuneration and the
financial performance of banks in the UK.
H10: There is no relationship between executive management remuneration and the financial
performance of banks in the UK.
H2a: Executive management remuneration has a positive impact on the financial performance of
the banks in the UK.
H20: Executive management remuneration does nothave a positive impact on the financial
performance of the banks in the UK.
H3a: There is a significant relationship between executive management remuneration and ROA
of the banks in the UK.
H30: There is no significant relationship between executive management remuneration and ROA
of the banks in the UK.

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H4a: There is a significant relationship between executive management remuneration and ROE
of the banks in the UK.
H40: There is no significant relationship between executive management remuneration and ROE
of the banks in the UK.

1.6.

Methodology
This research will be based on the quantitative research design to find out the impact of

executive management remuneration on the financial performance of banks in the UK. Since this
study intends to measure the effect of one variable on another, and their relationship, quantitative
design is chosen to effectively quantify the results and to secure greater objectivity. The research
approach applicable in this study would be deductive because the study postulates hypotheses
beforehand that are to be accepted or rejected in light of the data. In essence, the research will
progress from general literature to specific data, corroborating the deductive approach.
Secondary data will be collected for literature review and analysis. A review of five banking
institutions of the UK will be considered to ensure diversity, scope and accuracy of the findings.
These banks are listed on the stock markets and have their management and financial
information publicly available; therefore, research is based on secondary data. This study will
primarily capitalize on that information for the comparative analysis. The selection of these
banks is based on non-probability sampling due to the limited and particular scope of this
research. The proposed research will also include a cross-sectional analysis of the data and
financial reports of the selected banks. Financial performance will be measured through the
variables of dividends, ROE, ROI, retained earnings, sales and volume, overall profitability, and
structure of corporate governance. As a research tool, the data analysis will be conducted by

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using SPSS to perform various statistical tests and analysis, particularly regression, significance
and correlation. Further, confidentiality, impartiality and autonomy will be preserved as key
ethical considerations, and accurate representation of data will be ensured to secure the
credibility and validity of the research and its findings.

1.7.

Research Timetable

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References
Clark, A. and Edmonds, T. (2015) Banking executives remuneration in the UK. House of
Commons Library, (06204), pp.34.
Conyon, M. and Murphy, K. (2000) The Prince and The Pauper? CEO Pay in The United States
and United Kingdom, Economic Journal, 110, 640-671.
Doucouliagos et al. (2007) Directors Remuneration and Performance in Australian Banking.
Corporate Governance: An International Review, 15(6). Available at:
http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8683.2007.00651.x/pdf. [Accessed: 7th
Aug, 2015].
Drake, L. & Amess, K. (2009) Executive Remuneration And Firm Performance: Evidence From
A Panel Of Mutual Organisations. , pp.134. Available at:
http://www.le.ac.uk/economics/research/discussion/papers2003.html. [Accessed: 7th Aug,
2015].
Fernandes, N., M. A. Ferreira, P. Matos, and K. J. Murphy (2010), The Pay Divide: (Why) Are
U.S. Top Executives Paid More?, ECGI Finance Working Paper N. 255/2009 (updated
December 2010).
Gregg, P., Jewell, S. & Tonks, I. (2012) Executive Pay and Performance: Did Bankers Bonuses
Cause the Crisis? International Review of Finance, 12(1), pp.89122.
Gregg, P., Jewell, S., & Tonks, I. (2012). Executive pay and performance: did bankers bonuses
cause the crisis?. International Review of Finance, 12(1), 89-122.

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Jensen, M.C. & Murphy, K.J. (1990). CEO Incentives Its Not How Much You Pay, But How.
Foundations of Organizational Strategy, (3), pp.138153.
Turnbull, N. (1999).Internal Control: Guidance for Directors on the Combined Code, (London
Stock Exchange).
Turner, A. (2009).A regulatory response to the global banking crisis, March (Financial Services
Authority).
Walker, D. (2009a).A review of corporate governance in UK banks and other financial industry
entities, (Financial Services Authority)