The impact of research and development on relative performance evaluation in the UK

Purpose – The purpose of this paper is to investigate whether R&D spending influences the association between the cash compensation of boards of directors and relative performance evaluation (hereafter RPE). Design/methodology/approach Design/methodology/approach – The empirical modelling of directors' compensation focuses on the multiperiod compensation approach suggested by Lambert, Lambert and Larcker and Janairaman, Lambert, and Larcker. A panel sample of 586 UK non-financial public listed firms for the period 1990 to 1998 is employed to test for the existence of RPE in both R&D intensive and non/low R&D firms. Findings – The main results suggest that implicit RPE is used to determine directors' cash compensation before the institutional influences and self-regulation are likely to have taken effect. We find that the association between the cash compensation of directors and accounting measures of relative performance is lower in R&D intensive firms compared to firms with non/low R&D. It is possible that R&D intensive firms do not use accounting-related RPE at all. In comparison, a statistically significant relationship indicates that non/low R&D firms do use accounting-based RPE. The results also show that, in both intensive and non/low R&D firms, cash compensation is negatively related to own firm stock returns and industry average stock returns. Originality/value – This paper contributes to the limited RPE found in the existing UK compensation literature by establishing the implicit use of accounting-based RPE for non/low R&D firms in the UK.