Abstract

We empirically examine the level and structure of director compensation in a two-tier setting using a novel data set covering German Prime Standard firms for the period 2005–2008. The descriptive analysis reveals that the average compensation per director is rather low at some €38,000 and only 61.2% of firms use performance-based compensation elements. In our regression analysis, we distinguish four types of determinants: firm characteristics, corporate performance, ownership structure and board characteristics. Using panel data analysis allowing for unobserved heterogeneity, we find strong support for an optimal contracting view: compensation of directors is structured in a way that provides incentives to monitor executives, particularly in firms with otherwise weak governance mechanisms.

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