What is the relation between top executive
remuneration and the performance of companies,
listed on the stock market, in The Netherlands and
Germany?
University of Groningen
Faculty of Economics and Business
MSc - International Business and Management
© van der Reest, R. 2012. All rights reserved.
Keywords: executive remuneration, CEO compensation, performance, pay for performance, The Netherlands, Germany.
Rudy van der Reest (S2040824), R.van.der.Reest@student.rug.nl
August 2012
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Abstract
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Preface
This research is conducted as the final conclusion of the Master of Science (MSc) - International Business & Management (IB&M) at the University of Groningen. Throughout the last five months I have researched the relationship between top executive remuneration and company performance.
I would like to thank several persons who have been supporting me and been giving advise during this period. First, I would like to thank my supervisor Drs. A. Visscher for his valuable feedback, based on his experience and knowledge in research. Second, I would like to thank Ms. F. Jansma – also working on her final conclusion of the MSc IB&M at the University of Groningen – for her belief and support during this research.
Groningen, August 2012
Page 4 of 50 Table of Contents List of Figures (5) List of Tables (5) 1. Introduction (6) 2. Literature Review (8) 2.1 Agency Theory (9)
2.2 Managerial Power Theory (10) 2.3 Customer-driven Capitalism (11)
2.4 Corporate Governance System in The Netherlands and Germany (12) 2.5 Top Executive Remuneration (13)
2.6 Literature Methodology (16) 2.7 Conceptual Model (18) 3. Methodology (21) 3.1 Data Sources (21) 3.2 Sample Selection (22) 3.2.1 Industry Classification (24)
3.3 Measuring the components of top executive remuneration and company performance (25) 3.3.1 Independent Variable (26) 3.3.2 Dependent Variable (27) 3.3.3 Control Variables (28) 4. Results (29) 4.1 Sample characteristics (29) 4.2 Empirical results (30) 4.3 Qualitative results (32)
5. Discussion & Conclusion (36) References (38)
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List of Figures
Figure 1 - Conceptual Model
Figure 2 – Sample Selection
List of Tables
Table 1 – Top executive remuneration and performance of Dutch companies (AEX, AMX and AScX).
Table 2 – Top executive remuneration and performance of German companies (DAX).
Table 3 – Means and standard deviation of Dutch companies.
Table 4 – Means and standard deviation of German companies.
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1. Introduction
Tirole (2001: 4) defines corporate governance as “the design of institutions that induce or force management to internalize the welfare of stakeholders”. Corporate governance systems are aiming at reducing agency conflicts between the management and shareholders of a company (Tirole, 2001). Executive compensation is one of the elements where corporate governance is dealing with. Managers can engage in self-interest behavior that will be harmful to shareholders wealth maximization. In this way shareholders may use a wide range of corporate governance mechanisms that align the interest of executives and shareholders and therefore, decrease the agency conflict (Filstotchev & Allcock, 2010).
In the last few years the literature on top executive remuneration has grown very rapidly (Bruce, Buck & Main, 2005). In June 2012 The Financial Times – who is leading in the financial world - published a story about the excessive CEO pay (Financial Times, accessed 24-06-2012). This article provide background information about the discussion in the media during this research. My main interest refers to the field of corporate governance with emphasis on the influence of top executive remuneration on company performance. Previous literature has attempted to understand top executive remuneration regarding the agency theory and explored links among different forms of top executive remuneration and company performance (Filatotchev & Allcock, 2010). Widespread surveys are available in Gomez-Meija & Wiseman (1997), Murphy (1999), and Core, Guay & Larcker (2003). Barkema and Gomez-Meija (1998: 135) has gone a step further and claim that ‘the failure to identify a robust relationship between top management compensation and company performance has led scholars into a blind alley’. One important consensus is lacking in literature, which is the relationship between top executive remuneration and corporate performance (Bruce, Buck & Main, 2005).
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This raises the question about the differences between pay practices within the local institutional environment, which is also recognized by Bruce (2005). Research on executive remuneration and company performance, including long-term research, is scarce in The Netherlands (Van der Laan, van Ees & Witteloostuijn, 2010). This research will fill the gap of long-term research. Therefore the biggest seventy-five organizations, listed on the Dutch stock market, will be used in order to contribute and shed light on the ongoing debate about the relationship between executive remuneration and corporate performance. Five companies from the German stock market will be added in this research in order to include institutional differences between both countries.
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2. Literature Review
There are several theories that explain and influence top executive remuneration. These theories are the agency theory, equity theory, information-processing theory, managerial discretion theory, managerial productivity theory, resource dependence theory and the social comparison theory (Barkema & Gomez-Mejia, 1998). Despite the fact that top executive remuneration can be explained by many different types of theories, the main theories in this research will be the agency theory and the managerial power theory. The agency theory explains the conflict of interest between shareholders and executives within a company. The managerial power theory is a special case and an extension of an agency problem (Bruce, Buck & Main, 2005). Both theories have been chosen in this research because they are dominant in literature and explain top executive remuneration.
Page 9 of 50 2.1 Agency Theory
Before the empirical evidence in this research will be presented, it is important to distinguish the underlying mechanisms that determine the level of top executive remuneration. In research the standard economic theory of top executive remuneration is the principal-agent (or CEO / manager – shareholder) model. This model claims that companies try to design the most efficient top executive remuneration package in order to attract, keep and stimulate the executive managers (Laffont & Martimort, 2002).
Page 10 of 50 2.2 Managerial Power Theory
The managerial power theory is an extension of the agency theory and can explain parts of the remuneration practices of top executives (Bebchuk & Fried, 2003). On the one hand, the managerial power theory can be seen as an instrument to solve the agency problem. On the other hand, the managerial power theory is an agency problem itself. The agency theory and the managerial power theory share the same underlying assumption that the separation between ownership and control can lead to different interests between executives and shareholders. As the name of the managerial power theory suggest, executives have power to influence their remuneration packages. This can lead to higher compensation if the power of managers will increase (Bebchuk, Fried & Walker, 2002).
Page 11 of 50 2.3 Customer-driven Capitalism
The first managerial capitalism began in 1932 with the published work ‘The modern corporation and private property’ from the authors Berle & Means in 1932. According to their view management should be separated from ownership. In this way companies would be run by hired executives which was a new class of professional top executives. In 1976, Jensen and Meckling recognized that hired executives were increasing their own financial welfare, instead of the shareholders. Both authors stated that not only the corporate resources where wasted but also societal resources in order to increase the welfare of hired top executives.
Page 12 of 50 2.4 Corporate Governance System in The Netherlands and Germany
Recently, the media have acknowledged that The Netherlands and Germany are reorganizing their own corporate governance. The Dutch and German model is developing more to the Anglo-American style of corporate governance (De Jong, Röell & Westerhuis, 2010). In general, boards face three interrelated roles. First, the board is monitoring executives, including selecting and deselecting top executives, evaluating the performance, designing remuneration packages and supervising internal and external audits. Second, the board is concerned with defining, selecting and implementing the corporate strategy. Third and last, the board is connecting the company the their external environment (Ruigrok, Peck & Keller, 2006).
Page 13 of 50 2.5 Top Executive Remuneration
Top executives of listed companies need to be rewarded for their performance. However, this is a complicated process. In this research the compensation packages, which is supported by Filstotchev & Allcock (2010), will be divided into different elements: cash pay (base salary & performance payment), long-term incentives (stock options), and perquisites (pension). The different elements, that contribute to the total executive remuneration package, differ in terms of risk (stationary or variable), payout type (in cash or shares / stock options) and timing (directly or long-term payout) (Jensen & Murphy, 2004). In this research the three different elements will be tested individually in order to see whether or not there is a relationship with company performance. In the end, the three elements will be put together and a regression analysis will be performed in order to see whether or not there is a relationship between executive remuneration and company performance.
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On the other hand, cash pay (performance payment) is still the foundation in most European executive remuneration packages in spite of the fact that The Netherlands and Germany is shifting to American remuneration packages (Oxelheim & Randøy, 2006).
A very weak relationship between executive remuneration and company performance was found in the UK (Buck, Bruce, Main & Udueni 2003; Conyon & Murphy, 2000). Haid & Yurtoglu (2006) found a very weak relationship between executive remuneration and company performance in Germany. Zhou (2000) performed this study in Canada and also found a weak relationship. Fernandes (2006) used listed companies from Portugal in order to test the relationship and did not find any link between executive remuneration and company performance. The authors Kato & Kubo (2006) found a positive relationship in their research of listed and non-listed companies in Japan. Tosi, Werner, Katz & Gomez-Mejia (2000) found in their research, where the authors compared 50 executive remuneration studies, that less than five percent of the studies explained variance of executive remuneration.
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First, the authors studied the relationship between executive remuneration and company performance in a non-US institutional context, which is The Netherlands. Second, to include a large amount of detail, mainly non-CEO executives and the changes in value of stock options and share portfolios held by executives in order to measure the performance sensitivity. Third, stock options and share grants are, quite often, made under the condition of the achievement of performance targets and this will be taken in to account in this research. Fourth and last, include performance measures that are different from total shareholders return. Results show that executive remuneration is weakly related to company performance. However, a generally positive relationship can be found between relative total shareholders return and long-term remuneration packages.
The inconclusive evidence of a significant positive relationship between executive remuneration and company performance has led many to question the role of executive remuneration within the agency problem (Duffhues & Kabir, 2008). It has been argued that remuneration an ingredient of the agency problem is because executives can influence, according to the managerial power theory, their own remuneration packages (Bebchuk & Fried, 2003). Additional systematic evidence is needed to see whether or not there is a relationship between executive remuneration and company performance (Van der Laan, Van Ees & Van Witteloostuijn 2010).
Based on the literature mentioned above and following the reasoning of Brick, Palmon & Wald (2006) that long-term incentives (stock options) is seen as an efficient way of tying the executive remuneration to the performance of a company and not cash pay (base salary & performance payment), the following three hypothesis are developed:
H1 - There is no relationship between cash pay (base salary & performance payment) and
company performance, listed on the stock market, in The Netherlands and Germany.
H2 - There is a positive relationship between long-term incentives (stock options) company
performance, listed on the stock market, in The Netherlands and Germany.
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In this research the pension value will be separated from the cash pay (base salary & performance payment) because the value is stated separately from the cash elements in the annual report. In this research the same literature about cash pay (base salary & performance payment) will be used in order to formulate the hypothesis. In this way it is possible to see whether or not this will change the relationship.
H3 - There is a no relationship between perquisites (pension) and company performance,
listed on the stock market, in The Netherlands and Germany.
2.6 Literature Methodology
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Firm size (defined as the natural logarithm of market value of equity), capital structure (defined as the ratio of total debt to total assets), industry affiliation (dummy variable) and time period (dummy variable) is used to control for the potential impact of other factors that might influence the relationship between executive remuneration and company performance. In their research, no systematic evidence have been found that executive remuneration of Dutch companies is positively related to the performance of companies. In particular, their results show a statistically significant negative relationship between executive remuneration and company performance.
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Stock options are the right, given to the executive, to buy shares in the company at a – most of the time – pre-specified exercise price. The stock options, in general, cannot be exercised for three years (called: vesting period), and normally in the two years from then on. They made use of the binomial model valuations and made use of six input variables during their research. The exercise price, number of options granted, expected life of the options, the volatility of the share price, the stock price at valuation date, and the dividend yield was calculated. Each year the value of the stock options were calculated when the stock options were not exercised or lapsed. A more detailed description about the calculation of the stock options can be found in the research of Van der Laan, Van Ees & Witteloostuijn, 2010: 132-133). The independent variable – company performance – is measured with the use revenues, profit (operating income divided by total assets), relative total shareholder return (share price appreciation and dividends relative to a peer group) and earnings per share (defined as deviation of companies total shareholders return from the cluster mean). Firm size (number of employees) is included as a control variable. Traditionally the firm size explains a large share of the variance in executive pay (Tosi, Werner, Katz & Gomez-Mejia, 2000). As well, director dummies has been added in order to capture the individual skill differences between executives. In their research the total compensation that is given to top executives is weakly related to the performance of a company. A combined effect of the four performance criteria has not been found during this research. For other executives the remuneration and performance relationship is much stronger. In general a positive relationship is found between total shareholder return and the different long-term remuneration elements.
2.7 Conceptual Model
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In this research the shareholders are at the start of this conceptual model, which is explained and determined by different types of the agency theory (Bruce, Buck & Main, 2005). The shareholders can use different techniques (cash pay, long-term incentives, and perquisites) to guide managers to the interest of the shareholders. The overall term for those three different techniques is executive remuneration.
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Figure 1 - Conceptual Model
NR = No Relationship
H1 (NR) (+-)
H2 (+)
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3. Methodology
3.1 Data Sources
In order to shed light on the failure to identify a robust relationship between executive compensation and company performance, the biggest seventy-five Dutch companies from the Amsterdam Exchange Index (AEX), Amsterdam Midcap Index (AMX), and the Amsterdam Small Cap Index (AScX) will be used over a time-span of ten years (2002-2011). The AEX, AMX and AScX are stock market indexes composed of companies from The Netherlands that trade on Euronext Amsterdam. Five companies from Germany, who trade on the stock market DAX, will be added in order to compare the institutional environment over a time-span of six years (2006-2011) with The Netherlands.
The AEX (Wikipedia (1 AEX), accessed 07-03-2012) is a stock market index and exist of the biggest twenty-five Dutch companies that trade on Euronext Amsterdam. The AMX (Wikipedia (2 AMX), accessed 07-03-2012) is a stock market index and exist of the biggest twenty-six to fifty Dutch companies that trade on the Euronext Amsterdam. The AScX (Wikipedia (3AScX), accessed 07-03-2012) is a stock market index and exist of the biggest fifty-one to seventy-five Dutch companies that trade on Euronext Amsterdam. All the companies on the AEX, AMX, and AScX have the biggest share turnover (in EUR) in The Netherlands and will be measured two to four times each year in order to identify the biggest seventy-five companies in The Netherlands. The Deutscher Aktienindex (DAX) (Wikipedia (4 DAX), accessed 21-06-2012) is a stock market index and contains the biggest thirty companies in Germany with the biggest share turnover (in EUR).
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Relevant for this research are the annual reports of the selected organizations, which can be referred to as organizational documents. The organizational documents will be used in order to determine the cash pay (base salary and performance payment), long-term incentives (stock options) and perquisites (pension). The annual reports have the advantage that they are directly available and low in costs. In this longitudinal research (ten years) it is relatively easy to obtain a large amount of annual reports (Thomas, 2004). Existing documents, with the time span of this research in mind, form a good base for conducting this research.
3.2 Sample Selection
To measure the relationship between executive remuneration and company performance, all companies from The Netherlands were selected. Eventually a suitable sample has been selected, as presented in Figure 2.
Figure 2 – Sample Selection
The Netherlands Germany
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Unlisted companies, most often than not, do not publish / provide all the information in their annual report which is important in this research. Second, the research need to be longitudinal and therefore the last decade will be investigated. The year 2012 is left out because the annual reports will be published in 2013. Third, all companies on the AEX, AMX, AScX and DAX were selected because those stock markets contain the biggest Dutch and German companies. Fourth, companies who publish all annual reports between 2002 and 2011 are selected in order to investigate the differences in cash pay (base salary and performance payment), long-term incentives (options), and perquisites (pension), compared with their rate (EBIT / total assets) respectively. In April 2004 the decision has been made that companies in The Netherlands are forced, by law, to make public the amount of remuneration paid to top executives and other directors. The only medium to communicate the remuneration information is the annual report of each company respectively.
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Three incidents occurred during the collection of the annual reports about companies listed on the AMX. The annual reports over the year 2002 and 2003 of AMG Advanced Metallurgical Group N.V. are not present because the company was not a publicly listed company in 2002 and the company refused to send them by email. The other annual reports over 2004 to 2011 of AMG Advanced Metallurgical Group N.V. will not be added to this research. Wavin Group is active since 2006 on the AMX. The company did not publish any reports over the years 2002, 2003 and 2004 and refused to send the annual reports by email. Therefore the decision has been made to delete Wavin from this research. In the end, AMG, ASMI, BinckBank, Brunel, Eurocomm Prop, Heijmans, Logica, and Nieuw Steen has been deleted because information, year(s) or part of year(s), was not available about those companies.
One company (Amsterdam Molecular Therapeutics (AMT)) from the AScX announced on the 17th of April 2012 that they were in their liquidation process and therefore deleted from this research (UniQure, accessed 07-05-2012). Antonov Plc did not publish an annual report over the year 2002 and refused to send it by email (Antonov, accessed 16-05-2012). The company will publish the annual report over 2011 later this year and therefore the annual reports over 2003 to 2010 will not be added to this research. Xeikon did not publish an annual report over the year 2002. The annual reports over 2003 to 2011 will also not be added to this research. In the end, Arseus, Dockwise, Kardan, Kendrion, LBI International, and Qurius has been deleted from this research because of a lack of information.
In appendix A the list of companies on the AEX are shown in alphabetical order. In appendix B and C the list of companies on the AMX and AScX are presented in alphabetical order. Last, Appendix D provide the list of companies on the DAX in alphabetical order.
3.2.1 Industry classification
Page - 25 - of 50 3.3 Measuring the components of top executive remuneration and company performance
In the research of Duffhues & Kabir (2008) and Van der Laan, Van Ees & Van Witteloostuijn (2010) the results shows, overall, that there is no relationship between executive remuneration and company performance and some regressions show a statistically negative relationship. The extensive research (dynamic measurement) by Van der Laan, Van Ees & Van Witteloostuijn (2010) shows that stock options differ in value a lot during the years. The authors point out that there is no study which is taking care for the possibility that not all options will be exercised at the end of the vesting period. Therefore, this research will make use of a static measurement, which means that the actual exercised options will be added to this research. Duffhues & Kabir point out that future research should include more companies over a longer period. They also argue that other elements (stock options and pension benefits) need to be added in future research in order to investigate the executive remuneration and company performance relationship.
Empirically there is not much guidance as to which measures are frequently used in order to determine the performance of a company ( Van der Laan, Van Ees & Witteloostuijn, 2010). In this analysis, the industry (INDUSTRY) and company size (SIZE) – measured by the total number of employees – are included as control variables. However, the control variable industry has been removed from the overall regression analysis. Companies were not spread even over the ten different industries. In this way it is impossible to compare companies within their industry. The spread of companies over the different industries can be found in appendix F.
The following standard regression model, which is often used in literature on top executive remuneration, is used in order to test the relationship between executive remuneration (cash pay, long-term incentives and perquisites) and company performance:
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Y = company performance (EBIT / total assets) X1 = cash payment (base salary)
X2 = cash payment (performance payment)
X3 = long-term incentives (stock options)
X4 = perquisites (pension)
3.3.1 Independent Variable
The independent variables outlined in the conceptual model refer to executive remuneration (X). Executive remuneration is the compensation that the company is given in return to the top executive. The compensation is defined as the actual income of the top executive. The total income of an executive exist of cash pay (base salary and performance payment), long-term incentives (stock options) and perquisites (pension). This consist of four individual factors: (1) cash pay (base salary) (X1); (2) cash pay (performance payment) (X2); (3) long-term incentives (stock options) (X3), and (4) perquisites (pension) (X4). Information about the value of the four individual factors needs to be collected. The value of cash pay (base salary and performance payment), long-term incentives (stock options) (exercised during the year) and perquisites (pension) can be found in the annual reports of the companies respectively. Special payments (Appendix G) have been left out from this research.
X1 - Cash pay (base salary). All executives received a fixed salary from the company. If the top executive left the organization during the year, the general base salary of the executive will be used in this research. The base salary are thus recorded annually. In some annual reports the value was stated in US Dollars or UK pounds sterling and has been translated to the Euros with the use of the conversion rates € = $0.796 (Dollarkoers, accessed 25-5-2012) and £ = €1.247 (Wisselkoers , accessed 10-05-2012). In most cases the amount paid for using a company car was added in the base salary and in some cases this was mentioned in the perquisites. For this research the amount paid for a company car is added to the base salary. X2 - Cash pay (performance payment). European countries tend to use performance payments to reward the top executive. It is also possible that top executives will be rewarded for individual performances which is not observable from corporate operations.
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Long-term incentives are the right, for executives, to buy shares in the company at a pre-specified exercise price. In this sample 30 out of the 49 companies have granted stock options to the top executive in at least one year. In total, 117 out of the 490 annual years companies have granted long-term incentives to their top executive. These options, normally, cannot be exercised for three years and can be exercised two years thereafter. When needed the conversion to Euros has been made. X4 - Perquisites (pension). Almost all companies contributed a certain amount to the pension of the top executive. This measurement has not been used in earlier academic literature in The Netherlands. Conversions to Euros has been made when necessary. The amount paid for a company car has been added to the cash pay (base salary).
3.3.2 Dependent Variable
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4. Results
4.1 Sample characteristics
Table 1 shows the descriptive statistics about the top executive remuneration packages from 49 Dutch companies over the years 2002-2011. Companies from the AEX pay an average compensation of €1.627.351,-, the AMX and AScX compensate their top executive with €833.958,- and €487.235 respectively. The average performance of these company, which is expressed in a rate (EBIT / total assets), is 9.80%, 7.91% and 10.38% respectively (AEX, AMX and AScX).
Table 1 – Top executive remuneration and performance of Dutch companies over 2002-2011 (AEX, AMX and AScX)
Index Employees Cash Pay (base salary) Cash Pay (performance payment) Long-term Incentives (options) Perquisites (Pension) Rate AEX Companies (18) 53.023 € 920.128 € 857.507 € 226.642 € 223.074 9,8% AMX Companies (16) 11.908 € 443.591 € 216.183 € 59.416 € 114.768 7,9% AScX (15) 2.448 € 299.954 € 124.241 € 58.278 € 74.762 10,4% Avarage Total (49) 22.460 € 554.558 € 399.310 € 114.779 € 137.535 9,4%
Table 2 shows the descriptive statistics about the top executive remuneration from 5 German companies over the year 2006-2011. Companies listed on the DAX pay an average compensation of € 3.102.815. The average performance of these companies is 7,37% and is measured by EBIT / total assets.
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Table 1 and Table 2, without performing the regression analysis, indicate that the total employees (measured with the average number of full-time equivalent employees, including agents, during the year) is related to the total remuneration that is paid to top executives. However, German companies do not exceed the rate of Dutch companies, which is quite remarkable.
4.2 Quantitative Results
First, in Table 3, the means and standard deviation is presented from the dependent, independent and control variable of forty-nine Dutch companies over 490 years.
Table 3 – Means and standard deviation of Dutch companies
Mean Std. Deviation N Cash Total1 € 1.012.201,00 € 909.583,00 490 Long-term Incentives1 € 124.947,00 € 347.740,00 490 Pension1 € 145.017,00 € 196.914,00 490 Number of employees3 25.463 45.647 490 Rate2 9,5% 8,2% 490
1 Independent variable, 2 Dependent variable, 3 Control variable.
The average Dutch company is paying €1.012.201 for base salary and performance payment, €124.947 for stock options and €145.017 for pension. The average companies are paying towards their top executives is €1.282.165 with an average performance rate of 9,5%. The high standard deviation indicates that the data values are spread out over a relative large range of values.
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Table 4 – Means and standard deviation of German companies
1 Independent variable, 2 Dependent variable, 3 Control variable.
Companies from Germany pay an average of €.2717.775 for base salary and performance salary, €0 for stock options and €385.039 for pension. A total of €3.102.814 is paid on average towards the top executive with a performance rate of 7,4%. The high standard deviation indicates that the data values are spread out over a relative large range of values.
First, in order to find a relationship between top executive remuneration and company performance in The Netherlands the significance level need to be 0.050 or smaller. In this case the individual elements, including the overall significance level of 0.200, is higher than 0.050. This means that the total remuneration package, including the individual elements, do not show any relationship with the performance of a company. The adjusted R-squared is 0.004 and indicate that a very small percentage (smaller than 1%) of the observations is explaining the relationship between executive remuneration and company performance. The F Change is 1.504 and is lower than 4.696. In this way there is no significant relationship between top executive remuneration and company performance in The Netherlands with (F (4,485)=1,504; P<0.05). Also note that the long-term incentive and pension include zero observation because some companies did not pay an amount to those elements. This is due to the fact that since 2005 share plans have become more popular in The Netherlands. These results can indicate that the supervisory board – who is responsible for designing the top executive remuneration package – is not able to design the remuneration package properly. The absence of a relationship is not surprisingly because the agency theory suggest that top executive can put their self-interests above the interest of shareholders.
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This means that the total remuneration package shows a significant relationship with the performance of a company. The adjusted R-squared is 0.485 and indicate that slightly less than half of the observations explain the relationship between top executive remuneration and company performance. The F Change is 10,112 and is higher than 7,357. In this way there is a significant relationship between top executive remuneration and company performance in Germany with (F (3,26)=10,112; P<0.001). However three side notes have to be made concerning this result. First, long-term incentives (stock options) are deleted because no company pay a certain amount towards this element of the top executive remuneration package. Second, pension includes some “zero” observation(s). Some companies did not pay any amount to this element of the top executive remuneration package. Third, the sample size of five companies make it impossible to generalize the results. Further research is necessary in order to determine whether or not there is a relationship between top executive remuneration and company performance in Germany. Overall, this result is in line with the research of Haid & Yurtoglu (2006) who found a weak relationship between executive remuneration and company performance in Germany. Further research is desirable in order to provide a final conclusion about the pay-performance relationship in Germany.
Several outliers have been found in the regression analyses of Dutch companies and can be found in appendix H. In my opinion the biggest 49 companies in The Netherlands represent a good sample for this research in order to see whether or not there is a relationship between top executive remuneration and company performance. Therefore, deleting the outliers in order to increase the results is changing the reality and in my opinion not acceptable. However, deleting the outliers did not change the results.
4.3 Qualitative Results
Changes between top executives do not occur very often during the ten years (2002-2011) of research. If changes occur some interesting facts will come in to daylight. Reed Elsevier (13th on the AEX) changed their top executive between 2008 and 2009 because the existing one stepped down. In this way, the amount pay to cash payment (base), cash pay (performance) and perquisites dropped. The amount pay to long-term incentives (stock options) remained equal (€0,-). SBM Offshore (15th
Page - 33 - of 50 VastNed Retail (31st on the AMX) terminated their agreement in 2010 with VastNed Offices / Industrial. In this way the board of directors was reduced between 2010 and 2011 and The Chief Investment Officer was appointed in 2011 as the new top executive. This event lowered the amount paid to cash pay (base), cash pay (performance), and perquisites. The payments towards long-term incentives remained equal between 2010 and 2011 (€0,-). Vopak (32nd on the AMX) changed their top executive between 2009 and 2010 because the existing one wanted to pursue his career elsewhere. This event was probably the reason for the company to lower the amount paid to cash pay (base), cash pay (performance), and perquisites. The amount paid to long-term incentives remained equal (€0,-). Ballast Nedam (37th on the AScX) changed their top executive between 2006 and 2007 because the existing one retired. The amount paid to cash pay (base) and perquisites reduced, the long-term incentives remained equal (€0,-), and the cash pay (performance) increased in value. Ordina (46th
on the AScX) changed their top executive between 2010 and 2011 because both the company and the top executive wanted to part ways. Therefore, the amount paid to cash pay (base salary) decreased and the amount paid to cash pay (performance payment) and perquisites (pension) increased. The amount paid to long-term incentives (stock options) remained equal (€0,-).
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Table 5 – Changes in top executive remuneration package and performance of Dutch companies (AEX, AMX and AScX).
Overall the suggestion is made that companies will lower their executive remuneration package when there is a change in the position of top executive. Ordina is the only company who increased their total remuneration package. However, the company decreased the cash pay (base salary), but because of the relative good performance (rate), the total remuneration package increased.
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Discussion & Conclusion
This research is contributing to the growing literature worldwide and specifically aiming at companies in The Netherlands, and to a smaller extend Germany. The main purpose is to examine whether the amount of top executive remuneration of Dutch and German listed companies are related to the performance of the company.
The observation is made that the available theoretical framework and empirical studies do not provide a clear answer on the pay-performance relationship. The most widely and acknowledged agency theory stresses that executive remuneration is a major incentive in order to align the interest of managers with those of the shareholders. This theory is referring to the fact that companies reward top executives according to corporate performance. However, the managerial power theory proposes that top executives can influence their remuneration package and not necessarily reflect the pay-performance relationship.
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Companies from Germany provide a convincing result that top executive remuneration is related to company performance. However, the sample size is not large enough in order to generalize the results and provide an overall conclusion.
Although the results from this research seems to be intriguing it is in line with the research of Tosi, Werner, Katz & Gomez-Mejia (2000) about the fact that ninety-five percent of research is not showing a relationship between top executive remuneration and company performance. In the end, the conclusion can be made that (again) there is no relationship between top executive remuneration and company performance in The Netherlands. However, more research is needed in order to create a final conclusion about the pay-performance relationship for companies in Germany
Suggestions for further research are two-sided. First, an interesting question is the choice behind the different remuneration elements. Is it possible that the choice can be addressed to the institutional environment or are there more factors that is influencing this decision? Additional evidence is needed in order to understand the choice regarding the remuneration elements. Second, what is the effect of the different remuneration elements on the behavior of top executives? Possibly that answer will lead to the final conclusion in order to solve the agency theory.
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Appendices
Appendix A: The Netherlands - AEX companies (1st to 18th) May 2012
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Appendix B: The Netherlands - AMX Companies (19th to 34th) May 2012
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Appendix C: The Netherlands - AScX Companies (51st to 72nd) May 2012
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Appendix D: Germany – DAX Companies (1st to 5th) June 2012
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Appendix E: Industry Classification Benchmark (ICB) – Main industries (10)
1) 0001 – Oil & Gas 2) 1000 – Basic Materials 3) 2000 – Industrials 4) 3000 – Consumer Goods 5) 4000 – Health Care 6) 5000 - Consumer Services 7) 6000 – Telecommunications 8) 7000 – Utilities 9) 8000 – Financials 10) 9000 – Technology
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Appendix F: Industry classification (The Netherlands)
industry Mean Std. Deviation N
1 ,138030 ,0693554 10 1000 ,124130 ,0384163 10 2000 ,098661 ,0658958 150 3000 ,140777 ,0819429 90 4000 ,024285 ,1586372 20 5000 ,085108 ,0466679 40 6000 ,124520 ,0593477 10 8000 ,025488 ,0455605 80 9000 ,117921 ,0741179 80 Total ,095303 ,0815584 490
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Appendix G: Special payments
(11) Philips 2007 (119/262) – Special payment for the sale of the Semiconductors division is not included.
(28) Ten Cate 2010 (page 152/176) – Special payment of €51.000,- is not included.
(31) VastNed Retail 2008 (page 114/172) – Special payment of the bidding process on VastNed Retail of €51.000,- is not included.
(33) Wereldhave 2009 (page 97/122) – Special payment of €175.000,- because of exceptional services during 30 years is not included.
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Appendix H: Outliers companies from The Netherlands
Casewise Diagnosticsa
Case Number Std. Residual Rate Predicted Value Residual
42 3,058 ,3428 ,093945 ,2488550 361 -3,525 -,1949 ,091994 -,2868942 384 3,055 ,3418 ,093111 ,2486891 385 4,020 ,4200 ,092813 ,3271875 386 3,527 ,3805 ,093466 ,2870338 461 -8,298 -,5840 ,091364 -,6753644
