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

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Which Pay for what Performance? Evidence from Executive Compensation in Germany and the United States Generally, our analysis is related to two major strands of the executive compensation literature. As Murphy (1999) describes in a survey, both financial economists and accountants have studied executive compensation. Whereas financial economists have mainly focused on the link between compensation and performance, accountants have studied the use of accounting-based versus stock market-based performance measures. Surprisingly, however, the two disciplines remain fairly separated. Our study combines elements from both research areas. Related to earlier studies by financial economists such as Jensen and Murphy (1990) or Aggarwal and Samwick (1999), we investigate the association between executive compensation and firm performance and calculate pay-performance sensitivities. Related to earlier accounting studies such as Lambert and Larcker (1987) or Sloan (1993), we analyze the use of accounting-based versus market-based performance measures. Finally, our work contributes to the small literature that compares executive compensation across countries with different forms of corporate control. Our findings are as follows. First, total compensation of both German and U.S. executives is related to firm earnings, but there is no robust link between total compensation and stock market performance. Other measures of firm performance such as sales growth play a minor role for total compensation. Second, cash bonuses are related to firm earnings in both countries, but only cash bonuses of U.S. executives are also determined by stock market returns. Moreover, the sensitivity of cash bonuses to firm performance is decreasing in firm risk. We also find evidence that firms choose performance measures for cash bonus compensation which are less volatile than alternative measures. Third, our results indicate that the level of pay-performance sensitivities based on firm earnings does not differ significantly between the U.S. and Germany, but U.S. executives face additional financial incentives tied to stock market performance. Finally, there is no robust explanation for what determines long-term variable compensation. In both countries there is only weak evidence for a correlation between long-term compensation and firm performance in prior fiscal years. Hence, contrary to the perception in the public debate, we find a positive link between executive compensation and firm performance. In Germany, cash bonuses are determined by accounting performance, but not by stock market performance, whereas cash bonuses in the U.S. are linked to both stock market and accounting performance. We have two explanations for this observed difference. By establishing 61
Which Pay for what Performance? Evidence from Executive Compensation in Germany and the United States a link between bonus payments and stock market performance, U.S. shareholders provide financial incentives to make sure managerial action is beneficial to shareholder value. German shareholders may be able to control managerial action more explicitly, because of the institutionalized supervisory body within the firm 4 . Second, employee representatives on this supervisory body are probably less concerned about shareholder value than shareholder representatives, and may not vote for a strong link between executive compensation and shareholder returns in Germany. The paper is organized as follows. In section 2.2 we present findings from related studies on executive compensation. In sections 2.3 and 2.4, respectively, we describe our data and the analytical approach of our empirical study. Section 2.5 presents the regression results. After some robustness checks in section 2.6, we conclude in section 2.7. 2.2 Related Literature This study is connected to the existing compensation literature along different dimensions. First, our work is related to previous work by financial economists and accountants. We investigate the association between executive compensation and performance and calculate pay-performance sensitivities similar to other studies in financial economics. We measure firm performance by various market- and accounting-based figures as did other accounting studies. Second, our work can be classified within the existing compensation literature along the geographical dimension. Most of the empirical literature is based on U.S. data. Few studies investigate executive compensation outside the U.S.. Even fewer studies compare compensation practices between countries. This lack of evidence is due to the limited availability of non-U.S. compensation data. Studies on executive pay in countries other than the U.S. are usually based on hand-collected data from annual reports and filings with national authorities, or data from compensation consultancies. In this short literature review we first present related literature on the payperformance link and the choice of performance measures which is based on U.S. data. We then discuss the relevant literature on executive compensation in Ger- 4 This argument is closely related to the ’substitution hypothesis’ by Fahlenbrach (2009). 62
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Erklärung Ich versichere hiermit,
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