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Abstract:
While in the US stock-based incentives are commonly used since the 50s of the last century, in Germany they were invented only some ten years ago. Even in 1996 firms faced considerable regulatory difficulties when willing to grant such incentives. In the meantime the legal environment has changed significantly and today even the German Corporate Governance Code encourages firms to grant stock-based long-term incentives. However, examining a hand-collected unique data-set we find that even only 37% of all German Prime Standard firms have used stock-based long-term incentives in 2006. In these firms stock-based long-term incentives account for less that 23% of the overall compensation to members of the management board. Our empirical analysis reveals that in particular large firms with high RnD expenditures, substantial opaqueness and high free-float are likely to grant stock-based long-term incentives. Furthermore, we find that high inside ownership and large blockholders are negatively correlated with the probability of granting stock-based long-term incentives. Finally, we find that an externally hired CEO increases the likelihood of stock-based incentives, in particularly if the chairman of the supervisory board is a former executive of the firm. In sum, our evidence is consistent with the view that shareholders use stock-based incentives as a governance mechanism to mitigate the agency problem in complex firms with high information asymmetry.

Executive compensation, incentives, corporate governance, Germany

Abstract:
There is a heated debate about executive remuneration in Germany. However, so far there is little more than anecdotic evidence about the structure and size of compensation packages for executives in Germany. In this paper, we provide evidence on remuneration practices in the average German Prime Standard firm. In particular, we show that only analyzing DAX blue chips produces biased results, since there are substantial size effects.

Executive compensation, remuneration, Germany

Abstract:
We present selective results of an analysis of compensation practices in German Prime Standard firms in the period between 2005 and 2007. Four results emerge. First, analyses based on DAX30 firms lead to a biased view, since the amount as well as the structure of the executive compensation is characterized by substantial size effects. Second, despite the very positive market environment during the analysed time period, more than 50% of an average executive's remuneration is determined by the fixed salary. Third, the relevance of stock based compensation (both with respect to the prevalence as well as the relative weight) is commonly overestimated. Finally, deficits reveal concerning the transparency of reporting, with regard to performance measures to evaluate the bonus or the information shown in the fair value of stock based compensation.

Executive compensation, remuneration, Germany

Abstract:
We analyze the role of agency costs and corporate governance on the existence and relative weight of stock-based incentives in large European firms. Using a unique, manually-collected set of data covering all non-financial firms listed in the MSCI Europe, we are able to distinguish between internal governance mechanisms and external governance structures. In line with the hypothesis of governance substitution, we find that firm size and complexity foster the application of stock-based incentives, while strong stakeholders such as large block-holders and employee representatives on the board of directors decrease the likelihood of their existence. Examining institutional differences, we find that that the origin of law affects the probability of stock-based incentives and that high standards of transparency are a prerequisite for the application of stock-based incentives. Overall, our results indicate that firms use stock-based incentives to better align the interests of management and shareholders thereby taking into account the institutional environment.

Stock-Based Incentives, Executive Compensation, Corporate Governance, Europe

Abstract:
We examine performance implications of stock-based incentive programs. While agency theory makes a strong case for stock-based incentives, empirical evidence of the effect on firm performance so far is mixed. Using a novel hand-collected data-set of German Prime Standard firms, we also find that on average stock-based long-term incentives do not improve firm performance. However, when we take a closer look at the design of the incentive structures, we find that ill-designed programs go along with poor post performance, while ambitious programs boosts firm performance. We confirm these findings by using different performance measures, addressing endogenity concerns, and controlling for various governance mechanisms like ownership and board structures, as well as other design dimensions of the stock-based incentive plans.

Incentives, management compensation, stock-based compensation, corporate governance

Abstract:
Building on a unique panel data set of German Prime Standard companies for the period 2005-2008, this paper investigates the influencing factors of both director compensation levels and structure, i.e. the probability of performance-based compensation. Drawing on agency theory arguments and previous literature, we analyze a comprehensive group of determinants, including detailed corporate performance, ownership and board characteristics. While controlling for unobserved heterogeneity, we find director compensation to be set in ways consistent with optimal contracting theory. I.e. compensation is systematically structured to mitigate agency conflicts and to encourage effective monitoring. Thus, our results indicate that similar types of agency conflicts exist in the German two-tier setting.

Director Compensation, Corporate Governance, Outside Directors, Two-tier System, Agency Costs