Abstract
This paper provides initial evidence on executive pay in small private limited liability firms in Germany. More than 80% of the firms report fewer than 50 employees. We find that executive pay increases with firm size and variable pay. We also find weak evidence that executive pay is lower in the presence of female executives, and increases with profitability. Surprisingly, variable pay is related in an inverted U-shape to total salary. Significant executive ownership (> 25%) is associated with higher compensation. Executive pay varies widely by region. Some, but not all results are in line with efficient contracting theory. In sum, we provide novel evidence on executive pay in small private firms outside the U.S.
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Data availability
The data that support the findings of this study are available from the corresponding author upon request.
Notes
Other studies on private firms have conducted surveys on larger U.S. entities controlled by private equity investors (Bengtsson and Hand 2011; Jackson 2013; Cronqvist and Fahlenbrach 2013). Wasserman (2006) analyzed a proprietary dataset of U.S. private technology firms provided by three consulting and audit firms. Ke et al. (1999) and Ke (2001) investigated chief executive officer (CEO) compensation with private U.S. insurance firms.
In our sample, 83% of the firms have fewer than 50 employees and median sales are €1.9 million. Cole and Mehran (2016) report mean sales of $1.9 million for the NSSBF sample in 2003. In Banghøj et al. (2010), mean sales were $169 million; in Watson et al. (1994) £12.3 million; in Conyon and Nicolitsas (1998), median sales amounted to £13.3 million. Gallego and Larrain (2012) reported median total assets of $840 million. Sample firms in Brunello et al. (2001) have 1,350 employees on average.
It also seems reasonable to assume that total pay is generally higher in more complex firms because it takes more effort to steer a more complex firm, generating higher opportunity costs for which the manager needs to be compensated.
Dafne is a database by Bureau van Dijk. It contains general, corporate governance, and financial accounting data of German publicly listed and private firms with up to ten years of history. It can be used to research individual companies or to search for companies with specific attributes.
Eight responses (4%) were sent by a non-managing shareholder. The remaining responses were from people who were neither an executive nor a shareholder.
To check how representative our sample is, we compared it to a “full Dafne sample,” which we assumed to reflect the population of German private firms. The “full Dafne sample” consists of all German, solvent, private limited liability companies with fewer than 500 employees and less than €50 million in sales (excluding firms from the finance sector) that are available in the Dafne database.
For each of the 16 German federal states, we determined the share of firms that are headquartered there – within the sample of our study as well as within the “full Dafne sample”. Then, we calculated the correlation of these shares per federal state between the two samples. The correlation with respect to industry distribution is calculated in a similar way.
In the survey, we ask for the share of fixed pay of the executive’s total compensation. The share of variable pay is 100% minus the share of fixed pay.
The rule of thumb is that this assumption usually causes only problems for small sample sizes with fewer than 50 observations. Even with the model in (1), we have 112 observations.
The literature on public firms suggests that pay-for-performance sensitivity increases with CEO shareholdings (e.g., Ntim et al. 2019). Even though variable pay is different to pay-for-performance sensitivity, our finding is not consistent with this evidence.
We are grateful to an anonymous reviewer for raising this point.
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JB contributed to the study conception and design. MK prepared the material and collected the data. AG mainly performed the analysis, partly also MK. The first draft of the manuscript was written by JB and all authors commented on previous versions of the manuscript. All authors read and approved the final manuscript.
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Bigus, J., Grahn, A. & Karakaya, M. Determinants of executive pay in small private firms–initial evidence from Germany. J Bus Econ 94, 41–73 (2024). https://doi.org/10.1007/s11573-023-01150-y
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DOI: https://doi.org/10.1007/s11573-023-01150-y