Executive Pay, Free Float, and Firm Performance: Evidence from Germany∗

In this paper we examine potential structural changes in the setup of executive payment schemes in Germany during the 1990 to 2002 period. Given substantial changes in corporate governance during this period, our initial hypothesis is that executive pay in later periods shows a stronger relation with firm performance than it was the case in the early 1990s. However, empirical evidence based on 1990 to 1993 versus 1998 to 2002 data does not support this hypothesis. Regression results based on a WLS-WITHIN estimator explain up to 90% of the variability of normalized executive pay while the relation with measures of firm performance rather weakens for the later period. Normalized executive pay significantly increases with free float. Also, a substantial increase in payments during the 1990s, which amounts to a 47% increase on average, is higher for companies with larger free float. We additionally find that German companies, which obtained a U.S. listing, show higher increases in normalized payments. Our overall evidence is consistent with the hypothesis that executive payment decisions may result under deficient mechanisms of corporate control.