What Explains the Rise in Executive Pay in Germany? A Panel Data Analysis for 1977–2009

• DOI: http://doi.org/10.1111/sjoe.12141
• Author: Francesca Fabbri,Dalia Marin
• Published date: 01 April 2016
• Date: 01 April 2016

Scand. J. of Economics 118(2), 235–263, 2016

DOI: 10.1111/sjoe.12141

What Explains the Rise in Executive Pay

in Germany? A Panel Data Analysis for

1977–2009∗

Francesca Fabbri

ffabbri@me.com

Dalia Marin

Ludwig Maximilian University of Munich, DE-80539 Munich, Germany

dalia.marin@econ.lmu.de

Abstract

Executive compensation in Germany has become highly controversial since Vodafone’s hostile

takeover of Mannesmann in 2000. It has again been in the spotlight since the outbreak of

the 2008–2009 global financial crisis. Using a unique panel dataset of the 500 largest firms

in Germany in the period 1977–2009, we find that executives tend to be rewarded when the

sector is doing well rather than the firm they work for. Furthermore, we find that CEO pay

and the demand for managers increases in Germany in difficult times when the typical firm

size shrinks. Finally, domestic and global competition for managers appear to contribute to

the rise in executive pay.

Keywords: Competition for talent; efficient pay; executive compensation; manager power

JEL classification:F23; J3; M12; M52

I. Introduction

Compensation of executive board members in Germany has become a

highly controversial topic since Vodafone’s hostile takeover of Germany’s

∗This paper was produced as part of the project “Science, Innovation, Firms, and Markets in

a Globalised World”, a collaborative project funded by the European Commission’s Seventh

Research Framework Programme, Contract number SSH7-CT-2008-217436. Francesca Fabbri

is currently Economic Adviser at the UK Cabinet Office and contributed to this paper while

working at the University of Munich and the University of East Anglia. The views expressed

here are those of the authors and do not necessarily represent those of the UK Cabinet Office

or UK Government policy. They also do not necessarily represent the European Commission

or the European Commission policy. We also gratefully acknowledge financial support from

the Deutsche Forschungsgemeinschaft through SFB/TR 15. We would like to thank Dirk

Jenter and G´

abor K˝

or¨

osi for helpful comments, and Carola Frydman for providing us with

the US data on executive pay. We also benefited from comments from presentations at the

University of Linz and the SCIFI-GLOW Meeting, Budapest.

CThe editors of The Scandinavian Journal of Economics 2015.

236 What explains the rise in executive pay in Germany?

Mannesmann in 2000. Mannesmann’s supervisory board, chaired by Josef

Ackermann, approved nearly 60 million euros in bonuses and severance

pay to Mannesmann’s executive Klaus Esser and other top executives. Ex-

ecutive compensation has again been in the spotlight since the outbreak

of the global financial crisis of 2008–2009, as executives in the financial

industry are seen to have been taking excessive risks in the pursuit of large

profit gains at the expense of the long-run performance of the f irm. The

anger over bonuses continued when troubled financial institutions such as

HypoRealEstate, Bayerische Landesbank, WestLB, and Dresdner Bank paid

out large bonuses, despite facing bankruptcy and being saved by taxpayers’

money. In March 2009, Germany’s federal finance minister called for a

return of Dresdner Bank’s 2008 “obscene bonuses”. In response to pub-

lic outrage, car-maker BMW announced that their executive remuneration

will be linked to blue-collar salaries.1In 2009, the German and French

governments announced new rules limiting banking bonuses. The president

of France, Nicolas Sarkozy, urged leaders of the world’s top 20 developed

nations (G20) to follow suit.2

Due to lack of data, the debate on executive pay in Germany has re-

mained anecdotal and has not been based on robust evidence. With this

paper, we aim to fill this gap. Based on panel data evidence from the 500

largest firms in Germany in the period from 1977 to 2009, we document

the basic stylized facts of executive pay in Germany and its determinants

in the last three decades. We then examine the following issues. First,

is executive pay in financial institutions systematically different from the

rest of the economy? Second, were executives in the recent financial cri-

sis compensated differently than in previous recessions? Finally, we test

three hypotheses that have recently gained importance in the literature on

executive pay.

1. Are managers rewarded for performance? It is often argued that exec-

utives are self-interested, and are able to influence the level of their

own compensation packages, often at the expense of shareholders. Ac-

cording to this view, the level and composition of pay are determined

not by competitive market forces but rather by captive board members

catering to entrenched, rent-seeking executives (Bebchuk and Fried,

2003). However, executive pay can be used to alleviate the agency

1See the article by C. Lawton, “Fair Play Equals Fair Pay: BMW Links Executive Pay to

That of its Line Workers”, Spiegel Online, October 26, 2009.

2See “Call for Dresdner Execs to Return Bonuses Get Mixed Response”, Banking Newslink,

March 31, 2009; “German BaFin Clamps Down On Bank Risk Mgmt, Bonuses”, Dow Jones

International News, August 14, 2009; “France Announces Bank Bonus Crackdown and Urges

G20 Nations to Follow Suit”, The Guardian, August 26, 2009.

CThe editors of The Scandinavian Journal of Economics 2015.