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A Corporate Governance Reform as a Natural Experiment for Incentive Contracts

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Author Info
Christian Bayer
Carsten Burhop

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Abstract

We use a major shift in the legal and institutional environment to identify contractual incentives from the correlation of executive pay and performance. We take the reform of the German stock companies act in 1884 as such a major shift, and estimate the sensitivity of pay to performance between 1870 and 1910 for executives of nine large banks. the reform substantially enhanced corporate control and strengthened monitoring incentives. Accordingly, we find the pay-performance sensitivity decreases significantly after the reform. Executives received a bonus of M29 per M1,000, increasing profits before 1884, but after the reform the sensitivity decreased by two-thirds.

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Publisher Info
Article provided by LMU Munich School of Management in its journal Schmalenbach Business Review.

Volume (Year): 60 (2008)
Issue (Month): 4 (October)
Pages: 378-399
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Handle: RePEc:sbr:abstra:v:60:y:2008:i:4:p:378-399

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Related research
Keywords: Corporate Governance; Legal Reform; Natural Experiment; Pay-Performance Sensitivity;

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Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

References listed on IDEAS
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  3. Kato, Takao, 1997. "Chief executive compensation and corporate groups in Japan: New evidence from micro data," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 455-467, July. [Downloadable!] (restricted)
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  4. Rajesh Aggarwal & Andrew A. Samwick, 1998. "The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation," NBER Working Papers 6634, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. John E. Core & Wayne R. Guay & David F. Larcker, 2003. "Executive equity compensation and incentives: a survey," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 27-50. [Downloadable!]
  6. Paul L. Joskow & Nancy L. Rose & Catherine Wolfram, 1996. "Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 165-182, Spring. [Downloadable!] (restricted)
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  7. Lazear, Edward P., 2003. "Output-Based Pay: Incentives, Retention or Sorting?," IZA Discussion Papers 761, Institute for the Study of Labor (IZA). [Downloadable!]
  8. Conyon, Martin J., 1997. "Corporate governance and executive compensation," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 493-509, July. [Downloadable!] (restricted)
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  10. Holmstrom, Bengt, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 169-82, January. [Downloadable!] (restricted)
  11. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March. [Downloadable!] (restricted)
  13. Lazear, Edward P, 1986. "Salaries and Piece Rates," Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July. [Downloadable!] (restricted)
  14. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Bayer & Carsten Burhop, 2005. "If only I could sack you! Management turnover and performance in large German Banks between 1874 and 1913," Economic History 0502006, EconWPA. [Downloadable!]
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