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

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Chapter 1 Executive Compensation and Firm Performance in Germany 1.1 Introduction In 2008 only 6 percent of the German corporations listed in the Prime Standard segment of the Frankfurt Stock Exchange generated positive shareholder value, but 90 percent of the executives in these firms received bonus payments. 1 This is surprising because bonus payments are supposed to reflect managerial performance. Bonus payments without shareholder value creation raise the question whether compensation is related to firm performance at all. We collect compensation data from German annual reports and study the relationship between firm performance and annual executive compensation, including bonus payments, during 2005-2009. Unlike previous studies, we use detailed information on the structure of executive compensation in Germany, which is available since 2005. We can identify which payments are predetermined and fixed (base salary) and which are meant to vary with performance (bonuses). We also have information about the grant-date values of stock and option grants. Based on this data we investigate how sensitive these annual payments or grants are to the firm’s stock market performance and accounting performance. 2 1 Own calculation from data in annual reports. 2 We do not analyze the relation between firm performance and executive wealth in the form of company stock or option holdings. Data on executive wealth is not readily available in Germany. However, the relation between direct annual compensation and firm performance is of particular interest in the political debate about executive compensation. Unlike changes in executive wealth, regulators can target this annual flow of compensation, because it is under the control of the board 9
Executive Compensation and Firm Performance in Germany In our analysis we control for firm risk which was shown to have an impact on payperformance sensitivity in U.S. firms (Aggarwal and Samwick, 1999). Moreover, we study two distinct characteristics of the German corporate governance system: Concentrated ownership and employee representation. We investigate whether Bertrand and Mullainathan’s (2000) finding for U.S. firms that the relation between firm risk and pay-performance sensitivity only holds for firms with a large shareholder also holds for Germany. Finally, we analyze whether German executive compensation is influenced by employee representation on the supervisory board. This board overlooks the executive board and has the final say on executive compensation. Since up to one half of the board members represent employee interests and not shareholder interests, supervisory board composition is a potentially important factor to explain executive compensation in Germany. 3 We are not the first to study executive compensation in Germany, but our study is the first to estimate pay-performance sensitivities for individual compensation components such as cash bonuses. Early studies on German executive compensation such as Schwalbach and Graßhoff (1997), Kraft and Niederprüm (1999) or Elston and Goldberg (2003) analyze aggregated compensation data. Most of these studies identify a positive relation between total executive compensation and some accounting-based measure of firm performance. For the recent time period 2005- 2007, however, Rapp and Wolff (2010) find a rather low sensitivity of total executive compensation to stock performance, and, unlike earlier studies, an insignificant or even negative relation between total executive compensation and accounting performance. Hence bonus payments without shareholder value creation in 2008 may be due to German executive compensation being linked to accounting rather than stock performance, as suggested by evidence from earlier studies. On the other hand, the results of Rapp and Wolff (2010) suggest that German executive compensation has become less related to accounting performance in recent years. This conflicting evidence motivates us to analyze the individual compensation components separately to clearly identify whether bonus payments in Germany are determined by accounting or stock performance or not related to firm performance at all. of directors or the firm’s compensation committee (Kaplan, 2012). Other studies that explicitly abstract from changes in executive wealth and study direct, annual or ”flow compensation” include Perry and Zenner (2001) and Aggarwal and Samwick (1999). 3 German codetermination law requires 33 percent employee representation on the supervisory board in corporations with more than 500 but less than 2,000 employees, and 50 percent employee representation in firms with more than 2,000 employees. 10
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Erklärung Ich versichere hiermit,
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