Firm-level drivers of stakeholder compensation

Abstract

This thesis empirically investigates three specific firm-level drivers of stakeholder compensation in Germany. The first chapter examines the impact of trade unions on executive remuneration. It takes into account the special features of German employee representation rights through the framework of parity codetermination, which grants trade unions a direct say in the determination of executive pay. The results indicate that trade unions have a reducing effect on total remuneration and fixed components in parity-codetermined firms, while the ratio of variable pay is higher in codetermined firms. This suggests that unions use their position on the supervisory board to reduce the level of executive pay while maintaining incentives for good performance. Moreover, the second chapter examines the impact of the COVID-19 pandemic as an exogeneous driver of stakeholders’ compensation. It investigates pay adjustment strategies to four groups of stakeholders (shareholders, executives, middle managers, other employees) in response to the COVID-19 crisis. The main results indicate that affected firms are more likely to cut payments for all stakeholder groups, whereby the likelihood of reductions in executive compensation is significantly higher than for other groups. Thus, compensation appears to be more aligned in times of crisis, suggesting that cost savings are not only made at the expense of the lowest hierarchical levels but rather tend to occur more frequently at higher hierarchical levels. Finally, the third chapter investigates the specific role of innovation as a driving force during the pandemic with respect to stakeholder payments. For this purpose, different pay adjustment strategies to stakeholders were observed in relation to the innovation status of the firm or industry during the pandemic. The main results show that innovation increases the probability of pay cuts, especially for shareholders and executives, suggesting that innovative firms pass on the implicit costs of the crisis mainly to the groups with the most financial leeway. Altogether, this dissertation provides evidence that employee participation, the COVID-19 crisis, and the role of innovation during the pandemic are reducing drivers of compensation.