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

Which Pay for what Performance? Evidence from Executive
Compensation in Germany and the United States
samples the shares of fixed (not performance-related) compensation, short-term cash
bonuses and long-term incentive pay are fairly stable from 2005 to 2009. However,
we note that in 2009 for German executives the share of fixed compensation was a
few percentage points higher than in previous years (58 percent) while the share of
cash bonuses was somewhat lower (32 percent). We do not observe such a change
for U.S. executives.
2.3.2 Performance Data
To measure firm performance we start like previous studies with stock returns 32 , but
also extend the analysis to the accounting-based measures earnings before interest
and taxes (EBIT), net income (EBIT reduced by interest and tax expenses), and
sales growth. We extract all performance data from Thomson Reuters’ Datastream
database. Table 2.3 shows the distribution of these firm performance measures
over the period 2005-2009 for which we have 791 German and 5,103 U.S. firm-year
observations 33 . With an average annual stock return of 12.4 percent (median 5.0
percent), stock market performance of German firms was better than average stock
market performance of U.S. firms was with 7.1 percent (median 0.6 percent). There
is not much difference between sales growth in the two samples. However, in terms
of firm size (measured by total assets), firm earnings (EBIT) and net income (i.e.
performance measures related to firm size) the two samples differ widely. With 282
million Euro the median firm size in the German sample is much smaller than the
1,810 million U.S. Dollar median firm size in the U.S. sample, whereas the average
German firm is of similar size as the average U.S. firm in the sample (7,732 million
Euro and 6,714 million U.S. Dollar, respectively).
2.4 Research Design
Principal-agent theory suggests that shareholders (acting as principals) link the compensation
of the employed managers (the agents) to some measure of success which
32 Calculated as the stock market value at the end of the fiscal year divided by the stock market
value at the beginning of the fiscal year. Our results do not change when we calculate stock returns
based on stock prices instead of market values.
33 Table 2.3 contains the final sample of firm-year observations we use in our empirical analysis.
For each performance measure we excluded the top and bottom 0.5 percent of the original
distribution to account for outliers.
73