Does Codetermination Affect the Composition of Variable Versus Fixed Parts of Executive Compensation?

Contrary to previous literature we hypothesize that interests of labor may well – like that of shareholders – aim at securing the long-run survival of the firm. Consequently, employee representatives on the supervisory board could well have an interest in increasing incentive-based compensation to avoid excessive risk taking and short-run orientated decisions. We compile unique panel data on executive compensation over the periods 2006 to 2011 for 405 listed companies and use a Hausman-Taylor approach to estimate the effect of codetermination on the compensation design. Finally, codetermination has a significantly positive effect on performance-based components of compensation, which supports our hypothesis.

Dyballa, Katharina and Kornelius Kraft (2015), Does Codetermination Affect the Composition of Variable Versus Fixed Parts of Executive Compensation?, ZEW Discussion Paper No. 15-053, Mannheim.