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.