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A Correlation Between Firm Performance and Executive Compensation

Autor:   •  March 30, 2018  •  1,239 Words (5 Pages)  •  673 Views

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misalignment of shareholders’ and executives’ incentives was at least partly the cause of excessive risk-taking leading up to the financial crisis” […] .

CONCLUSION

Studies have shown that there is a certain relation between executive compensation and firm performance as well as between compensations and firm size, especially since the late 1970`s. However, the effects of incentives are quite complex and several studies indicate

that executives might not perform/act in the companies’ interest but only to increase their own wealth/payments which could potentially lead to crisis situations.

To sum up, further research and observation is necessary to show up clear structures and tendencies as well as gathering more data to provide evidence on our hypothesis.

3. ‘’’’’’’’’’’’’’’’’’’

As mentioned in the literature review this paper has its focus on the DAX30 companies and their related performance & executive compensation. To further develop our hypothesis that executive compensation stands in a positive correlation with firm performance this paper will also take a few global players from the USA into account (e.g. Goldmans Sachs, GM, IBM, Jhonson & Jhonson).

To clarify impacts of the financial crisis or the development in the recent years, we split up the analysed companies and sorted them into four different sectors: Banks & Insurances; Automotive Industry; Chemical & Pharmaceutical Industry; Engineering / Software / Technology Industry.

With the evaluated data from the Thomson One Banker Database this paper tries to evaluate and provide evidence that there is a positive correlation between executive compensation and firm performance and to start will go into detail about the respective performance of companies and their remuneration structure during/after the crisis.

3.1 Financial Crisis

In this paper, we also examine the impacts of the global financial crisis (2007-2009) on the firm performance and therefore also on the executive compensation of top managers. The effects of the crisis are monitored regarding our topic because the CEOs compensation is discussed heatedly since then by the public. The most discussed industry was the banking sector, due to the fact that they paid high bonuses although they received bailout funds to prevent insolvency. This became public in the case of AIG. This firm […] “received over € 122 billion of federal bailout funds” […] and paid their executives more than € 121 million as a retention bonus. Since 2009, there were many attempts to regulate the salaries, but especially the extra incentives of top executives. Many people did not understand the bonus payments managers received, even during the financial crisis when many people suffered from a financial perspective. The financial crisis was an effect of many failures that collapsed the global market in 2007/2008. The Financial Crisis Inquiry Commission concluded: […] “We conclude widespread failures in financial regulation and supervision […]. We concluded dramatic failure of corporate governance and risk management” […] . There were of course other reasons as well, like risky investments, a lack of mortgage securities and wrong credit ratings. Due to these aspects, it is important to know to which extent managers, who seem to be part of the reasons for the crisis, receive bonus payments and how they are reasoned.

Banks & Insurance

It is commonly known that especially banks and insurances had to suffer from the outcome of the financial crisis. Here, we will have a closer look on the firm data of five selected companies: Allianz, Commerzbank, Deutsche Bank, Goldman Sachs and Munich Re.

From our observations banks and insurance companies had to deal with significant losses in net income or at least a harsh reduction. In the figure below, this effect becomes visual. The largest German bank,

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