Executive Remuneration and Firm Performance: The Case of Large German Banks, 1854–1910

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Acknowledgments

Helpful comments were received from an anonymous referee, seminar participants at the Bonn Graduate School of Economics and at Dortmund University. I particularly thank Guntram Wolff and Christian Bayer for their suggestions. This article was written while I was research fellow at the Centre for Development Research, Bonn University. Financial support of that institute is gratefully acknowledged.

Notes

H. Wallich, ‘Aus der Frühgeschichte der Deutschen Bank’, in M. Pohl (ed.), Beiträge zu Wirtschafts- und Währungsfragen und zur Bankengeschichte (Mainz, 1984), p.407.

The basic salary did not change between 1871 and 1881. The profit shares are only given for the two years in the text. M. Pohl and A. Raab-Rebentisch, Die Deutsche Bank in Bremen 1871–1996 (Munich, 1996), p.27.

Pohl and Raab-Rebentisch, Bremen, p.28.

D. Krause, ‘Die Anfänge der Commerz- und Disconto-Bank in Hamburg’, Bankhistorisches Archiv, Vol.23 (1997), p.28. There is no information about profit shares given.

Calculated in accordance with information given in O. Glagau, Der Börsen- und Gründungsschwindel in Deutschland (Leipzig, 1877), p.523.

M. Reitmayer, Bankiers im Kaiserreich (Göttingen, 1999), p.114. Reitmayer explains that the managers received a base salary and a profit share, but he says nothing about the relative proportions of the two. He only mentions the income of some bank managers, acquired from tax office files. This source is useless for an examination of the pay–performance link, because other sources of income (e.g. interests, dividends, income from supervisory board mandates etc.) are included.

Own calculations. The data are taken from R. van der Borght, Statistische Studien über die Bewährung der Aktiengesellschaften (Jena, 1883), pp.290–323.

The relations in the other sectors are as follows: mining, 25 out of 46 companies, 5.2 per cent; heavy industry, 21 out of 28 companies, 11.0 per cent; food, 17 out of 21 companies, 11.3 per cent; transportation, 12 out of 14 companies, 5.6 per cent. An ongoing research project at the Institute for Economic and Social History (University of Münster) is investigating the pay–performance link for a sample of 50 industrial companies for the years 1880 to 1910.

O. Warschauer, Die Reorganisation des Aufsichtstratwesens in Deutschland (Berlin, 1902), pp. 37–61.

M.C. Jensen and K.J. Murphy, ‘Performance Pay and Top-Management Incentives’, Journal of Political Economy, Vol.98 (1990), pp.225–64.

J.F. Boschen and K.J. Smith, ‘You Can Pay Me Now and You Can Pay Me Later: The Dynamic Response of Executive Compensation to Firm Performance’, Journal of Business, Vol.68 (1995), pp.577–608.

J. Schwalbach and U. Graßhoff, ‘Managervergütung und Unternehmenserfolg’, Zeitschrift für Betriebswirtschaftslehre, Vol.67 (1997), pp.203–17.

K. Kraft and A. Niederprüm, ‘Ist die Vergütung von Managern im Zeitablauf flexibler geworden?’, Zeitschrift für betriebswirtschaftliche Forschung, Vol.51 (1999), pp.787–804.

A recent survey of the literature is K.J. Murphy, ‘Executive Compensation’, in O. Ashenfelter and D. Card, Handbook of Labor Economics, Vol.3B (Amsterdam, 1999), pp.2485–563. For a recent critique of the employed econometric tools see A. Börsch-Supan and J. Köke, ‘An Applied Econometrician's View of Empirical Corporate Governance Studies’, German Economic Review, Vol.3 (2002), pp.295–326. I abstract from the fact that the shareholders delegate work to the supervisory board and this body delegates management tasks to the board of directors.

B. Holmstrom and P. Milgrom, ‘Aggregation and Linearity in the Provision of Intertemporal Incentives’, Econometrica, Vol.55 (1987), pp.303–28.

The principals are assumed to be risk-neutral because they can diversify their investment portfolios, whereas the agents nearly entirely rely on their working incomes.

It is possible to employ more advanced econometric tools, such as dynamic panel estimators. C. Bayer and C. Burhop, ‘A Corporate Governance Reform as a Natural Experiment for Incentive Contracts’, Working Paper, University of Dortmund, using the Arrelano-Bond and Baltagi-Wu estimators, show that the results are not sensitive to the econometric method.

First differences remove unit-root properties from the data. Furthermore, all data are transformed to 1913 constant prices.

On the other hand, if each bank has certain characteristics, a fixed-effects model might be appropriate. In this case a dummy variable for each bank is added to equation 2. See, for example, Baltagi, Econometrics, p.307, on this.

A. Bosenick, Neudeutsche gemischte Bankwirtschaft – Ein Versuch zur Grundlegung des Bankwesens, Vol.1 (Munich, 1912).

Cologne City Record Office, 1073, 427 (hereafter CCRO).

In practice, the valuation of assets and liabilities was much more complex: see R. Hanf, ‘Veröffentlichte Jahresabschlüsse von Unternehmen im Deutschen Kaiserreich. Bedeutung und Aussagewert für die wirtschaftshistorische Analyse’, Zeitschrift für Unternehmensgeschichte, Vol.23 (1978), pp.145–72.

The history of the Bank für Handel und Industrie is described by F.-L. Knips, Entwicklung und Tätigkeit der Bank für Handel und Industrie (Leipzig, 1912).

CCRO, 1073, 434 and 435 contain the statutes of 1853, the revisions of 1857 and 1863, and the annual reports from the shareholder meetings 1854–78.

A discussion of the German banking business in the 1870s is provided in C. Burhop, ‘Die Kreditbanken in der Gründerzeit’ (unpublished Ph.D. thesis, University of Bonn, 2002).

Calculated in accordance with information given in W.G. Hoffmann, Das Wachstum der deutschen Wirtschaft seit der Mitte des 19. Jahrhunderts (Berlin, 1965), p.825.

CCRO, 1073, 427, pp.139, 141.

Ibid., p.255.

The south German states used the florin until 1873, when the new mark currency was introduced. I use here the later exchange rate of 1.714 M per florin.

I do not know how much was in fact paid to him. The figures are based on my own calculations, for which I used the balance sheet and the contract.

It should be mentioned that both received an additional income from the Bank für Süddeutschland. This was a private bank of issue, founded in 1856 by the same people who founded the Bank für Handel und Industrie. The boards of the two banks were identical, but I have no information about the payment structures at the Bank für Süddeutschland.

CCRO, 1073, 427, p.147.

Ibid., p.149.

Ibid., p.213.

Ibid., p.287.

Ibid., pp.241, 243.

See, for example, H. Kiesewetter, Industrielle Revolution in Deutschland 1815–1914 (Frankfurt am Main, 1989), pp.75, 286.

CCRO, 1073, 427, pp.321, 325.

Ibid., p.275.

Ibid., p.277.

The senate, under pressure of influential private bankers, had also prevented the establishment of the Bank für Handel und Industrie in Frankfurt itself. See Knips, Bank für Handel und Industrie, p.69.

CCRO, 1073, 427, p.225.

Ibid., p.255.

Working with time series of cross-sections brings two econometric problems: first, time series are autocorrelated; second, cross-sections are heteroskedastic. I removed the first problem by working with first differences of the original series. The second problem was solved by using White-Heteroskedasticity-consistent standard errors and covariances.

These values are very high. Murphy, ‘Executive’, p.2524, correlates the remuneration of US managers during the years 1970–96 with the stock-market return of the managed firm. The highest elasticity he reports is 0.49, and the highest R² is 0.19. The maximum sensitivity he reports is 0.17, and the highest R² is 0.15.

The results are available on request.

Murphy, ‘Executive’, p.2525.

Bayer and Burhop, Corporate Governance Reform, investigate this structural break hypothesis using recent econometric methods. This article shows that the influence of the 1884 legal reform was significant. On the other hand, C. Fohlin, ‘Regulation, Taxation and the Development of the German Universal Banking System, 1884–1913’, European Review of Economic History, Vol.6 (2002), pp.221–54, shows that the (minor) legal reforms of the years after 1884 had no influence on the behaviour of banks.

The balance sheet structure of German joint-stock banks is investigated by C. Burhop, ‘Die Entwicklung der deutschen Aktienkreditbanken von 1848 bis 1913: Quantifizierungsversuche’, Bankhistorisches Archiv (vol. 23 (2002), pp. 103–28.). In addition, C. Fohlin, ‘The Balancing Act of German Universal Banks and English Deposit Banks, 1880–1913’, Business History, Vol.43 (2001), pp.1–24, presents evidence for a stable asset–liability structure after the mid-1880s.