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A Study on Executive Stock-Based Compensation in German Listed Companies

Author: GEISE Lukas
Tutor: WangJunQiu
School: East China University of Science and Technology
Course: Business Administration
Keywords: Corporate governance Executive stock-based compensation Germany
CLC: F276.6
Type: Master's thesis
Year: 2012
Downloads: 65
Quote: 0
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Abstract


In order to induce executives to align their interests with those of shareholders, stock-based compensation elements can be used. Available forms are stock options, stock appreciation rights, or restricted stock. To improve the situation of corporate governance in Germany, laws and regulations prescribing new guidelines on how to structure and determine executive compensation appropriately were enacted. The Act on the Appropriateness of Management Board Compensation (VorstAG) of 2009 prescribes the use of long-term oriented compensation plans for executives.A case study was conducted of the 30 largest, most actively traded and most strictly monitored companies represented on the German stock index DAX. It reveals that only 21 (or 70%) of the 30 DAX companies use stock-based compensation as revealed in their compensation reports for 2010, one year after the coming into force of the VorstAG. Out of these 21 companies,10 (46.7%) use stock appreciation rights,6 (28.6%) use stock options, and 5 (23.8%) use restricted stock to motivate their executives to increase profits, dividends and share prices continuously. The study also proves that the stock-based compensation plans are complicated and not disclosed in a standardized manner in the respective compensation reports, which makes it difficult for investors to inform themselves easily and sufficiently.Subsequently, a partial event study of actual stock price developments of five randomly selected DAX companies which use stock-based compensation plans was conducted. It reveals that in three out of the five cases, the share price rose in the months following the introduction or change of the compensation system. In one case, the share price declined, and in the other case, the share price developed with only minimal fluctuations.The final conclusion is that executive stock-based compensation is still in its infancy in Germany. Most plans have only been implemented recently, as a reaction to government intervention. The incentives for executives to align their interests with those of shareholders are low. Currently, the information offered and the stock-based compensation plans used by the 30 DAX companies cannot be described as appropriate and sufficient for investors. Convincing company structures and incentive mechanisms to support positive investment decisions do not dominate, and reliable investment returns cannot be expected on these grounds.

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