Three Essays on Executive Compensation - KOPS - Universität ...

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Summary tion 1 . Hence we combine our self-collected German dataset with U.S. compensation data to analyze and compare compensation practices during the same time period and based on the same research methodology. In particular, we compare the use of performance measures and pay-performance sensitivities in German and U.S. corporations during 2005-2009. We estimate the impact of stock returns and various accounting-based measures of firm performance on total annual compensation and on compensation components, such as cash bonuses and long-term compensation. We find that only firm earnings but not stock returns explain total executive compensation in both samples. However, there are differences for individual compensation components. Cash bonus payments of German executives are determined by firm earnings and not by stock returns, while U.S. bonuses are also determined by stock returns. Firm risk and firm size influence the pay-performance sensitivity of cash bonuses in both countries. We also provide evidence that firms choose performance measures which are less volatile than alternative measures. Moreover, our results show that the level of pay-performance sensitivities based on firm earnings does not differ significantly between the two countries, but U.S. executives face additional financial incentives tied to stock performance. Finally, we have no robust explanation how long-term compensation is granted in either country. There is only weak evidence for a correlation between this compensation type and firm performance in prior years. Chapter 3, Profit Sharing with Executives, is motivated by the observation that not only the level of executive compensation has grown, but the ratio of executive compensation to income of U.S. firms has doubled between the early-1990s and the beginning of the new century 2 . Based on U.S. data, I document that the fraction of earnings firms spent on executive compensation varies substantially between firms and industries. So far the literature has not analyzed this cross-sectional variation. In particular, I calculate the fraction of operating cash flow paid to the top management in U.S. firms and show that the variation in this fraction is related to several firm characteristics. I find that the top management’s cash-flow share is lower in larger firms and in firms spending more on investment, interest and dividends (all relative to firm size). It is also lower in more profitable firms, but positively related to stock returns and the dividend payout ratio. I also find evidence that the 1 E.g. Fahlenbrach (2009). 2 See the study by Bebchuk and Grinstein (2005). 3
Summary top management’s cash-flow share and ownership-providing long-term compensation are substitutes to align the interests of shareholders and managers. Finally, two measures of managerial entrenchment and CEO power are positively related to the fraction of cash flow paid as bonuses to the top management. Hence a high fraction of firm earnings captured by the top management may be a sign for agency problems and managerial rent extraction. 4
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Erklärung Ich versichere hiermit,
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