Determinants of Executive Compensation – Empirical Evidence from German Prime Standard Firms (Determinanten der Vorstandsvergütung – Eine empirische Untersuchung der deutschen Prime-Standard-Unternehmen)

Using a novel, hand-collected data set covering all German non-financial firms listed in the Prime Standard of FWB (Frankfurt Stock Exchange), we examine determinants of executive compensation in German listed firms. We distinguish three potential determinants: firm characteristics, firm performance, and corporate governance characteristics. While we find that simple firm characteristics like size and industry affiliation together with time effects explain more than 60% of variation in overall compensation, performance characteristics are economically inconsequential for the explanation of compensation levels. When we distinguish between widely held firms and firms with a large blockholder, we find that the latter grant compensation packages that are smaller, less sensitive to the firm's stock market performance but more sensitive to the firm's operating performance. Finally, we confirm that supervisory board characteristics also affect the level of executive compensation in German firms. Overall, our findings suggest that although the corporate governance environment in Germany has changed dramatically during the last decade, German listed firms are still exposed to high agency costs