Executive pay and UK privatization: The demise of 'one country, two systems'

Controversy abounds in the UK about increased executive compensation in pri vatized firms. This study examines the executive pay systems in state-owned and privatized firms against the backdrop of compensation systems in publi cly traded firms. We hypothesize the existence of two separate markets for top management in state-owned and! comparable publicly traded firms from 19 70 to 1981 and the subsequent merging of these markets after privatization from 1982 to 1994. Consistent with our hypotheses, we document that prior t o privatization, top management in state-owned enterprises received half th e compensation of their publicly traded counterparts, and the determinants of the level of pay were move bureaucratic: there was no pay for performanc e, little variation across executives and firms, and systematic age-related pay increases. After privatization, we find a convergence in the level of executive compensation, the intensity of pay for performance, and the varia tion and determinants of pay across executives and firms. (C) 1999 Elsevier Science Inc. All rights reserved.