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Determinants of director compensation in two-tier systems: evidence from German panel data

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  • Andreas, Jörn Michael
  • Rapp, Marc Steffen
  • Wolff, Michael

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.

Suggested Citation

  • Andreas, Jörn Michael & Rapp, Marc Steffen & Wolff, Michael, 2010. "Determinants of director compensation in two-tier systems: evidence from German panel data," CEFS Working Paper Series 2010-06, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
  • Handle: RePEc:zbw:cefswp:201006
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    References listed on IDEAS

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    1. Baltagi, Badi H. & Bresson, Georges & Pirotte, Alain, 2003. "Fixed effects, random effects or Hausman-Taylor?: A pretest estimator," Economics Letters, Elsevier, vol. 79(3), pages 361-369, June.
    2. Arellano, Manuel, 1993. "On the testing of correlated effects with panel data," Journal of Econometrics, Elsevier, vol. 59(1-2), pages 87-97, September.
    3. Jay C. Hartzell & Laura T. Starks, 2003. "Institutional Investors and Executive Compensation," Journal of Finance, American Finance Association, vol. 58(6), pages 2351-2374, December.
    4. Maug, Ernst, 1997. "Boards of directors and capital structure: Alternative forms of corporate restructuring," Journal of Corporate Finance, Elsevier, vol. 3(2), pages 113-139, April.
    5. Jeremy Edwards & Wolfgang Eggert & Alfons Weichenrieder, 2009. "Corporate governance and pay for performance: evidence from Germany," Economics of Governance, Springer, vol. 10(1), pages 1-26, January.
    6. Eisenberg, Theodore & Sundgren, Stefan & Wells, Martin T., 1998. "Larger board size and decreasing firm value in small firms," Journal of Financial Economics, Elsevier, vol. 48(1), pages 35-54, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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