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

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Executive Compensation and Firm Performance in Germany the result that pay is linked to accounting performance and that pay-performance sensitivities decrease in firm risk (not tabulated). Although replacing EBIT with return on assets also mitigates the problem of correlation between EBIT and total assets, we also run a regression in which we orthogonalize EBIT with respect to total assets. We regress EBIT on total assets and use the residual of this auxiliary regression instead of EBIT to estimate pay-performance sensitivities. The results for the pay-performance sensitivities are identical to the results where we include EBIT without orthogonalization. Kennedy (1982) and Pearce and Reiter (1985) show that the estimated coefficient of the residual is the same as the coefficient of EBIT in the original specification. Only the coefficient of total assets changes. Total assets now have significant explanatory power when we use orthogonalized EBIT. As a further robustness test we measure stock performance relative to a peer group. Executive compensation contracts may include firm performance evaluation relative to a firm’s peer group. The obvious goal of applying peer-group related performance measures is to make sure managers are not paid for running the company during good times (pay for luck) but for truly outperforming the market. We lack the information whether firms pay managers for outperforming a peer group and how such peer groups are defined. Anecdotal evidence from annual reports suggests that peer groups consist of firms that are of similar size and/or belong to the same industry. We use a simple benchmarking approach to investigate relative performance evaluation. Most companies in the sample are a member of one of the major indices of the Frankfurt Stock Exchange. 49 As a proxy for peer group returns we use these index returns and compute a firm’s relative stock market return as the difference between its stock return and the corresponding index return. do not report our estimation results because benchmark stock returns also have no explanatory power for executive compensation. The next robustness test concerns the risk measure. We replace the rank of EBIT variance with the variance itself. This alternative specification yields qualitatively similar results (not reported) as the base specification. The estimates for the payperformance sensitivities are smaller compared to the base specification, but they 49 These indices are the DAX, MDAX, SDAX or TecDAX indices of the Frankfurt Stock Exchange. The DAX index includes the 30 largest German companies in terms of order book volume and market capitalization. The MDAX contains 50 companies that rank immediately below the DAX, excluding the technology sector. The SDAX contains the next 50 below the MDAX shares. TecDAX firms belong to the technology sector. The TecDAX consists of the 30 largest technology firms below those included in the DAX. We 37
Executive Compensation and Firm Performance in Germany are still economically meaningful. We also checked the robustness with respect to alternative fixed effects specifications. In the basic specification we use individual fixed effects for each executive. We expect much of the variation in compensation within the sample of executives to be due to individual characteristics. These could be age or work experience (observable but not part of our dataset) and also factors such as bargaining power (not observable). Executive fixed effects should capture such individual characteristics we cannot explicitly account for. In this robustness check we use firm-level and industry-level fixed effects instead of executive fixed effects. Apart from this the regressions remain unchanged. The coefficients of EBIT and the interaction term remain highly significant (results not tabulated). The estimates for the pay-performance sensitivities are of similar magnitude compared to the specification with individual fixed effects. Hence, the basic results with executive fixed effects are confirmed with alternative fixed effects. We also performed the robustness checks with alternative fixed effects and the risk measure for the specification with stock returns, but stock returns have no significant explanatory power for executive compensation. 1.6.2 Sub-Period Analysis Disclosure of executive compensation in Germany became mandatory for fiscal years starting after August 2005. Firms that published compensation data for the fiscal year 2005 did so voluntarily. This potentially introduces a selection bias to our sample. We exclude all observations for the fiscal year 2005 to test whether this selection bias influences our results. The regression based on the reduced sample yields estimates which are similar to the ones from the full sample (not tabulated). As a further robustness check we split the sample in a pre-crisis (2005-2007) and a crisis (2008-2009) sample and analyze the two periods separately. 50 Because of the short time spans, these regressions include industry fixed effects instead of executive fixed effects. 51 We found in previous robustness checks that both types of fixed effects yield qualitatively similar results. However, we cannot directly compare pay- 50 We cannot split the data for 2007, because executive compensation is based on whole fiscal years. We decided to include the year 2007 in the pre-crisis sample, because the crisis started only in August/September 2007. 51 We look at very short time spans and do not have many observations in the sub-samples. Hence, including executive fixed effects would leave almost no variation in these samples. 38
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Erklärung Ich versichere hiermit,
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