Directors’ Pay and the Separation of Ownership from Control in UK SMEs: an empirical analysis by

This paper examines directors’ pay for a sample of 629 UK SMEs from 1991 to 1995. Approximately half of the sample were closely-held (i.e., owner-managed) firms, which allowed empirical testing of a number of hypotheses regarding the relationships between directors pay and the separation of ownership from control. As with previous research findings relating to large firms, non-closely-held SME directors pay was significantly related to external pay comparisons and “unexpected” changes in profitability. Consistent with their minority-owner status and the need therefore to align shareholder and manager incentives, the statistically positive, but relatively small coefficient, indicates that these directors typically receive only a small proportion (less than 10%) of any unexpected profits. This contrasts with the empirical results for the closely-held firms where, consistent with their close company status and prior research, changes in directors pay appears to be highly sensitive to total (expected and unexpected) profits (of which they typically receive over 70%) and wholly unrelated to external market pay levels.