What Explains the Rise in CEO Pay in Germany? A Panel Data Analysis for 1977-2009

The compensation of executive board members in Germany has become a
highly controversial topic since Vodafone's hostile takeover of
Mannesmann in 2000 and it is again in the spotlight since the
outbreak of the financial crisis of 2009. Based on unique panel
data evidence of the 500 largest firms in Germany in the period
1977-2009 we test two prominent hypotheses in the literature on
executive pay: the manager power hypothesis and the efficient pay
hypothesis. We find support for the manager power hypothesis for
Germany as executives tend to be rewarded when the sector is doing
well rather than the firm they work for. We reject, however, the
efficient pay hypothesis as CEO pay and the demand for managers
increases in Germany in difficult times when the typical firm size
shrinks. We find further that domestic and global competition for
managers has contributed to the rise in executive pay in Germany.
Lastly, we show that CEOs in the banking sector are provided with
incentives for performance and that the great recession of 2009
acted as a disciplining devise on CEO pay in Germany.