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

Which Pay for what Performance? Evidence from Executive
Compensation in Germany and the United States
for the German sample. In the U.S. sample only 4 percent of the observations show
zero long-term compensation. Since this is a small fraction of the data, we continue
to use a panel specification.
Column 1 of Table 2.10 shows the results for the German executives when we
only include firm performance from the previous fiscal year as explanatory variables.
Only stock returns have significant explanatory power for long-term compensation
for the period 2005-2009. The negative sign suggests that the lower the stock return
in the fiscal year, the higher was the amount of long-term compensation executives
received. For U.S. executives (column 3 of Table 2.10) we find very similar results.
Stock returns have a significantly negative impact on long-term compensation, but
there is no explanatory power of other performance measures. This negative relation
between stock returns and long-term compensation explains the negative stock
return coefficients we found for total compensation (Tables 2.4, 2.5 and 2.6).
Although a negative relation between stock returns and long-term compensation
seems strange at first, we explain this as follows. When the stock of a company
declined during a fiscal year, companies may want to motivate executives to increase
the stock price in subsequent years. Granting more long-term compensation can
provide additional incentives for executives to generate positive stock returns. This
may lead firms to grant more long-term compensation as an incentive to increase
the stock price after a year with a declining stock price.
Whereas in most annual reports it is explicitly stated that cash bonuses are
paid for performance in the preceding fiscal year, this is not true for long-term
compensation. We now include lags of our performance measures to see whether
long-term compensation is determined by performance over a longer time horizon.
Columns 2 and 4 of Table 2.10 show the results for German and U.S. executives,
respectively. Stock returns in the previous fiscal year have no explanatory power
for long-term compensation in both samples. Stock returns in the four preceding
fiscal years have a significantly positive impact on long-term compensation for U.S.
executives, whereas in the German sample this only holds for the stock return up
to three years ago. EBIT is insignificant in both samples 53 . Lagged sales growth
has a weakly significant and negative impact on long-term compensation in the U.S.
53 EBIT is correlated over time. Dividing EBIT by total assets decreases this correlation considerably,
but does not change our results.
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