Employment Change, Profits and Directors‘ Remuneration in Small and Closely‐held Uk Companies

This paper investigates the relationship between close company employment change, directors remuneration, and profitability. Employment changes are best explained by retained profits, and the relationship between directors remuneration and taxable profits suggests that remuneration levels are varied so as to minimize directors total tax liabilities. These results indicate that current U.K. public policies, which attempt to increase employment in small firms via increasing their taxable profits, may be ineffective. In the absence of fiscal policies designed to encourage retentions, a large proportion of any increase in taxable profits will be removed from the business without having any direct employment effects.