Financial leverage and managerial compensation: Evidence from the UK

Using the data on a panel of quoted UK firms over the period 1995–2002, this paper studies the effects of financial leverage on managerial compensation. The change in the investors’ expectations that caused the recent collapse of the stock market tech bubble has been used as a source of plausibly exogenous variation in the firm’s debt. We find that pay-for-performance sensitivity is increasing in financial leverage, with the exception of the 10% most levered firms