1 Introduction
In recent years, the topic of gender diversity has found its way into business research and practice through numerous studies and debates. In the context of corporate governance, especially with the introduction of various legal amendments [e.g., the first Act on Equal Participation of Women and Men in Leadership Positions or the CSR-Directive], gender diversity in the top management levels of companies is the topic of heated disputes. The so-called
glass ceiling regularly comes up in this context (Bozhinov et al.
2019), which is now penetrated by so-called
quota women (Bozhinov et al.
2017). With the introduction of the Act on Equal Participation of Women and Men in Leadership Positions in 2015 in Germany, listed companies and companies subject to full co-determination must, on the one hand, consider a 30% quota for the underrepresented gender when filling new supervisory board positions (Section 96 [2] AktG). On the other hand, companies must publish targets and deadlines for the proportion of women on the supervisory and executive boards in the Corporate Governance Statement [Section 111 [5] AktG in conjunction with Section 289f [2] No. 4 German Commercial Code (GCC)]. In addition, the second Act on Equal Participation of Women and Men in Leadership Positions came into force in August 2021 (Section 76 [3a] of the German Stock Corporation Act). This requires listed companies and companies with co-determination to appoint at least one woman to the executive board if it consists of more than three members (BMFSFJ
2021).
Despite such social and political efforts, the proportion of women on the executive boards, the top management team (TMT), of German listed companies remains at a low 8% in 2019. Women hold the position of chairman in only 3% of companies. Their average length of service on the TMT is 4.3 years—two and a half years (≙ 34%) less than that of their male colleagues. Furthermore, female executive managers earn, on average, almost 200,000 euros (≙ 8.6%) less than male executive managers (based on the data set presented in Sect.
4.1). The low representation and the unadjusted pay gap suggest that women continue to experience lower board acceptance and are inhibited by the
glass ceiling (Bertrand and Hallock
2001; Hendrix
2011; Malhotra et al.
2021). Based on human capital theory, compensation research argues that lower pay is attributable to lower human capital (e.g., educational background and work experience). According to human capital theory, the lower average remuneration of female TMT members suggests that they have less human capital than their male colleagues. Systematic differences in human capital can rule out the existence of an adjusted and unexplained gender pay gap on the TMT of German listed companies (Holst and Busch
2009). Against this background, this paper explores whether personal or firm-specific characteristics can explain female executive managers' lower average compensation or whether an adjusted and unexplained gender pay gap exists that suggests persistent acceptance problems toward female executive managers. The study examines which individual and company-specific characteristics determine executive managers’ compensation and the extent to which these differ between female and male executive managers.
The underrepresentation of female leaders drives not only the social debate but also research in this field. For example, numerous studies have looked at the prevalence (Fehre and Spiegelhalder
2017), influence (Reguera-Alvarado et al.
2017; Manita et al.
2018), and determinants (Fehre et al.
2014; de Cabo et al.
2019; Kirsch and Wrohlich
2020) of gender diversity in control and governance processes. In addition, some studies examined the determinants of executive remuneration (Marchetti and Stefanelli
2009; Rapp and Wolff
2010; Andreas et al.
2012; Bugeja et al.
2016; Acero and Alcalde
2020). Few studies explicitly addressed gender pay gaps, revealing systematically lower compensation of female executive managers (Bell
2005; Elkinawy and Stater
2011; Maume et al.
2019). However, a more in-depth analysis of the extent to which the remuneration of female and male executive board members differs has so far only taken place in the context of the monistic board system—particular for U.S. companies. The monistic system, which combines management and control in the executive board, differs fundamentally from the German corporate governance system. The system is characterised by dualistic management and supervision by the executive and supervisory board. Due to the different organizational and social framework conditions, empirical results on the monistic system can only be transferred to the dualistic system to a limited extent (Handschumacher and Ceschinski
2020).
Based on the evidence of lower average remuneration of female executive board members in German listed companies, empirical evidence on the gender pay gap in boards of the monistic system and the differences between the one-tier and two-tier system, this paper addresses gender-specific differences in executive board compensation in the context of the dualistic corporate governance system and the question of whether an adjusted gender pay gap exists on the TMT of German listed companies. The low representation of female executive managers suggests that entry barriers still exist for women, hindering their advancement to the top management level. Building on this fact, I question whether women who have already been appointed to the executive board face further acceptance problems reflected in (unfounded) lower compensation. Therefore, I use three-stage multilevel models to analyse board members' compensation concerning personal and firm-specific determinants to uncover possible gender differences.
Gender-determined executive managers' compensation is estimated using an extensive hand-collected unbalanced longitudinal dataset comprising approximately 600 executive managers from 104 listed German companies for 2016–2019 (390 company years and 1655 executive manager years). Three-stage multilevel analyses are used to determine the relationship between executive compensation and the gender of a TMT member, controlling for personal and company-specific characteristics. The results initially indicate that male executive managers receive a systematically higher payment. Considering personal and company-specific criteria, empirical evidence reveals that these characteristics determine executive managers' remuneration and that individual and firm-specific characteristics of female and male executive managers differ.
The article is structured as below: Following the introduction, the second chapter presents the research context, the state of research and the research needs deriving from it. Based on the agency theory and human capital theory, the empirical analysis is theoretically stated in the third chapter, and the hypothesis is formulated. Chapter four explains the design of the empirical study presented in chapter five. The empirics' presentation begins with descriptive statistics, which are followed by the results of the multilevel analyses and robustness checks. Chapter six discusses the results. The paper ends with a conclusion and outlook.
2 Research context, state of research and research gap
For some years, national and international research has been increasingly interested in the topic of corporate governance in general and gender diversity in executive and supervisory bodies in particular (Kirsch
2018; Bozhinov et al.
2019). In this context, research has focused on the internationally established monistic board system and in particular on U.S. companies, while the dualistic system prevailing in Germany has received less attention (Handschumacher et al.
2018; Beck et al.
2020). The German corporate governance system, which is a prototype of dualistic systems (Andreas et al.
2012), differs from the monistic systems in several aspects. For this reason, research findings on corporate governance in general and executive compensation in particular can only be applied to the dualistic system to a limited extent. The main difference lies in the separation between the supervisory and management bodies. The supervisory board controls the executive board, appoints its members and determines their remuneration. The supervisory board of co-determined companies is composed of representatives of the shareholder and the employees (Elston and Goldstein
2003; Bottenberg et al.
2017). In addition, a statutory gender quota is prescribed for supervisory boards, which has led to an increase in the proportion of women on the supervisory body in recent years. In particular, when evaluating gender pay differences, the extent to which gender-diverse boards set the compensation is important (Shin
2012). Apart from the dissimilarities in the structure of the control and management bodies, German listed companies are characterized by a concentrated ownership structure. Institutional investors, family businesses and foundations regularly act as dominant shareholders and have a major influence on the company through stronger and long-term ties (Rapp et al.
2011; Winkler and Behrmann
2019; Beck et al.
2020). Finally, according to the Executive Compensation Disclosure Act and the recommendations of the German Corporate Governance Code (GCGC), German listed companies have to publish the compensation of their executive boards individually, which allows for more in-depth empirical research (Beck et al.
2020). In contrast, previous studies can or could only be examined based on the entire executive board or the average pay, as the publication of individual compensation was not mandatory and is still not mandatory everywhere (Acero and Alcalde
2020).
Several national and international studies have been published on executive remuneration and its determinants (Marchetti and Stefanelli
2009; Rapp and Wolff
2010; Andreas et al.
2012; Bugeja et al.
2016; Acero and Alcalde
2020; Beck et al.
2020). These publications reveal that board remuneration depends on company characteristics, such as size (Marchetti and Stefanelli
2009; Andreas et al.
2012; Bugeja et al.
2016; Acero and Alcalde
2020), leverage (Andreas et al.
2012), performance (Andreas et al.
2012), ownership structure (Rapp and Wolff
2010; Barontini and Bozzi
2011) and the company's industry (Andreas et al.
2012). Besides, individual characteristics of executive managers influence their remuneration. These characteristics include, for example, reputation (Bugeja et al.
2016) and the duration of the service on the board (Marchetti and Stefanelli
2009; Acero and Alcalde
2020; Beck et al.
2020). Acero and Alcalde (
2020) also indicate that the gender of executive managers is not a determinant of remuneration. Contrary, Marchetti and Stefanelli (
2009) postulate that executive manager remuneration and the degree of gender diversity in the executive board are positively associated.
In the context of the German corporate governance system, Beck et al. (
2020) investigate the structure and composition of executive board compensation of large, listed companies in Germany from 2006 to 2018 by compiling an extensive and up-to-date dataset. Furthermore, they look at the development, determinants and effects of compensation and discover that female executive board members of DAX and MDAX companies earn less than male board members. However, the effect is only detectable when controlling for firm fixed effects. According to these findings, women are more likely to work for companies that pay higher salaries. The results, though, are not the focus of this paper and therefore have not been further explored and explained. Further studies that examine gender-specific executive remuneration and go beyond descriptive statistics are rare in German research. Ernst and Young GmbH (
2020) regularly conducts a descriptive analysis of executive compensation of German companies listed in the DAX, MDAX, and SDAX. This investigation discloses that in 2019 female executive managers—excluding CEOs—receive higher remuneration than male executive managers. However, the descriptive study does not consider other factors influencing payment, revealing an unadjusted gender pay gap. Moreover, Hirsch (
2013) documents in an empirical study that the larger the share of women at the management level, the smaller the unexplained gender pay gap in the two management levels below. Furthermore, Bozhinov et al. (
2017) postulate that significant differences exist in the level of remuneration of female and male supervisory board members.
International studies also confirm that a gender pay gap exists in executive boards. A recently published paper by Schneider et al. (
2021) revealed a gender pay gap for the boards of major European companies and indicates that external recruitment of women to the board is significant to the extent of the pay gap. The authors attribute this to gender stereotyping and discrimination, which are more pronounced in the case of external appointments. Maume et al. (
2019) also look at European countries with and without statutory gender quotas and show that female managers earn significantly less than male managers whereby the differences are less pronounced in countries where a gender quota is mandatory. In the U.S. research context, where individual board compensation has been required to be disclosed for some years and (with exception) no gender quota is mandated, empirical evidence predominantly supports the existence of a gender pay gap. According to Carter et al. (
2017), female executives of the largest publicly traded U.S. companies earn lower salaries compared to male executives due to women's higher risk aversion. Furthermore, Perryman et al. (
2016) postulate that women on TMT are compensated significantly less than men. However, the compensation differences are smaller, with a higher proportion of women on the top management level. Similarly, Bell (
2005) affirms that female executives earn significantly less than male executives, controlling for firm-specific, industry-specific, and personal characteristics. The results depict that the pay differences are independent of the human capital (title, age, and tenure) of the board members. In this study, again, the gender pay gap is smaller, the higher the representation of women on the board or if the board is led by a female CEO. Several studies of U.S. companies confirmed these findings (Bertrand and Hallock
2001; Muñoz-Bullón
2010; Elkinawy and Stater
2011; Shin
2012). Contrary to those papers, Bugeja et al. (
2012) cannot empirically confirm a gender pay gap.
This paper builds on the studies above and closes the existing research gap regarding the following aspects: First, it contributes to current gender research. To this end, I analyse both the representation and remuneration of female executive managers in more depth and with comparison to the compensation of male executive managers. Thus, the study indicates the acceptance of women in executive positions. Secondly, the research is based on an up-to-date and comprehensive set of hand-collected data on female executives’ representation. The data’s actuality is essential in this context, as the proportion of women on executive boards has increased in recent years—due to social and legal developments—and older studies cannot provide empirical evidence due to low representation (Boerner et al.
2012). This is further relevant as previous studies postulate that the extent of the gender pay gap is related to women’s representation on the board (Bell
2005; Elkinawy and Stater
2011; Perryman et al.
2016). In addition, detailed and individualised remuneration data is often not available, as the disclosure is not required by law everywhere. German listed companies have been obliged to disclose individualised executive remuneration (Tröger and Walz
2019). This allows to draw on individual remuneration data and reveal internal company differences in managers' pay (Acero and Alcalde
2020). Third, I conduct multilevel estimations, which have rarely been used in this context, but allow for deeper insights and are in line with state-of-the-art research methodology (Acero and Alcalde
2020; Hair and Fávero
2019). Previously, Acero and Alcalde (
2020) examined executive pay determinants using a two-stage multilevel model. This paper goes further by integrating a third level, which considers time trends in compensation (Shin
2012). Fourth, this is the first time that such a study has been conducted in the context of the German dualistic corporate governance system. Research findings from other countries (especially with the monistic system) can only be transferred to a limited extent due to legal and institutional differences (Handschumacher and Ceschinski
2020; Beck et al.
2020) For this reason, it is of interest to find out how these differences, such as the supervisory board and its composition (in terms of co-determination and gender quota) or the ownership structure of the company, have an influence on the remuneration. The study thus closes the existing research gaps and contributes to corporate governance and gender diversity research.
3 Theories and hypothesis
Agency theory and human capital theory are regularly used in the literature to explain the amount and structure of executive remuneration. In this context, agency theory states how the remuneration system of a company should be organised depending on the company-specific framework conditions and how this system differs between companies. In contrast, human capital theory addresses the influence of individual characteristics on pay and how this can differ at the personal level.
In the German corporate governance system, the shareholders entrust the executive board with the management of the company. According to agency theory, this results in a separation of ownership and control, which, assuming diverging interests of the board members and shareholders, leads to agency costs at the expense of the shareholders (Jensen and Meckling
1976; Rapp and Wolff
2010). These costs are manifested, for example, in excessive compensation or low labour commitment of the executive board (Bebchuk and Fried
2003; Döscher
2014; Handschumacher and Ceschinski
2020). To reduce these agency costs, the supervisory board monitors the executive board on the shareholders' behalf. However, this also results in an agency relationship between the supervisory board and the shareholders. In addition, it is not possible to have complete control over the executives. Therefore, the supervisory board sets (monetary) incentives that lead to a congruence of interests between the management board and the shareholders (Friedl
2012; Döscher
2014). The more complex the control of the board, the more comprehensive the incentive system should be. The incentives are usually implemented through (performance-related) compensation for the executive board (Andreas et al.
2012). Against this background, the (variable) compensation of the executive board should depend on firm performance and on the extent to which the executive board can be monitored by the shareholders' control mechanism (Rapp and Wolff
2010; Andreas et al.
2012).
A suitable compensation system can encourage the members of the TMT to operate in the interests of the shareholders. The shareholders' interest lies in maximizing the long-term value of the company. If the compensation is linked to the value of the company, the managers have a personal interest in managing the company in line with the shareholder value (Döscher
2014). For this purpose, various options are used to set the variable compensation granted to board members based on different performance measures: Depending on the term of the assessment basis, the variable compensation can be classified into long-term and short-term compensation. The short-term variable compensation is based on key performance indicators for the current financial year. According to Böcking et al. (
2017), personal target agreements or company profit represent the most common assessment basis in German listed companies. In contrast, multi-year compensation is based on both the current year and previous fiscal years. Multi-year components can be paid either directly or deferred, with the latter payment often granted on a share-based basis (Böcking et al.
2017). Companies frequently use company profit, share price or return on shares to measure long-term variable compensation (Böcking et al.
2017). If there is a high proportion of performance-related compensation, this will increase (or decrease) in accordance with the firm performance. Nevertheless, empirical research does not find consistent results regarding the correlation between company performance and executive board compensation. This is partly due to the fact that different performance measures are used in practice and consequently also in empirical research. The results also depend on the key figures to which the established remuneration system is linked and the consideration of these in the analysis. A positive correlation can be assumed if variable remuneration components form the basis of the analysis (Winkler and Behrmann
2019). In this context, Elkinawy and Stater (
2011) as well as Rapp and Wolff (
2010) confirm that compensation is related to firm performance. Besides, compensation should depend on the degree of control exercised over the TMT. If there are extensive opportunities for control, the board's ability to pursue its own interests is reduced, and with it the agency costs for shareholders. Shareholders are therefore less dependent on incentivizing their board members with high compensation. The larger the company, the more difficult it is to monitor and review the strategies and actions of the manager. To prevent high agency costs, the focus in larger companies should be on the incentive component and thus the (variable) compensation of the board members. There is therefore a consensus in empirical research that larger firms pay their executive board members higher compensation (Muñoz-Bullón
2010; Rapp and Wolff
2010; Barontini and Bozzi
2011; Elkinawy and Stater
2011; Vieito and Khan
2012; PricewaterhouseCoopers GmbH
2020). In addition to the more complex control structures, higher compensation in larger companies can also be justified by the fact that the complexity of tasks and the demands placed on board members increase with the size of the company (Schwalbach and Graßhoff
1997). The demands in large companies require highly qualified board members who must be compensated accordingly (Fernandes
2008). Conversely, monetary incentives are less important when a company's ownership structure allows control over board members. Package or major shareholders, who usually have long-term ties to the company and board, can exercise greater control over managers (Winkler and Behrmann
2019) and, for example, have contact with the company's control and management bodies through private and informal channels (Sauerwald et al.
2016). On the one hand, the increased opportunities for control cause the TMT to exert less influence on their own remuneration (Elston and Goldberg
2003). On the other hand, revenues must have a lower incentive effect and set at a lower level (Boyd
1994; Rapp and Wolff
2010). Empirical research postulate that increasing shareholder concentration has a negative effect on the level of executives' revenue (Rapp and Wolff
2010). Furthermore, the compensation depends on the control of the supervisory board, which is responsible for the compensation of the executives. If the executive board has a great influence on the supervisory board or if the supervisory board demonstrates a low level of monitoring effectiveness, this results in excessive compensation for the managers (Handschumacher et al.
2019; Handschumacher and Ceschinski
2020). With recourse to the agency theory, it can be theoretically concluded that the compensation paid to the TMT depends on company-specific parameters. Accordingly, systematic differences in remuneration between companies are to be expected.
On individual basis, the human capital theory explains compensation differences due to differences in personal human capital (Mincer
1958; Hendrix
2011). Human capital represents the sum of individual skills, knowledge, and experience (Fehre and Spiegelhalder
2017). Individuals can decide to invest in personal human capital out of a benefit-cost-calculation and thus increase their career opportunities (Mincer
1958; Busch and Holst
2010). Individuals who have more comprehensive human capital have better career opportunities and receive higher pay (Strunk and Hermann
2009). The theory places education, work experience, and pay in a causal relationship (Hendrix
2011). Pay differences that can be attributed to differences in human capital are considered legitimate differences and are described by explained pay gaps (Holst and Busch
2009).
Concerning studies of individual characteristics of executive managers, some postulate that board members barely differ in their human capital. Due to the high barriers to enter the executive board, a selection has already taken place regarding the qualifications and experience of the managers (Perryman et al.
2016). A homogeneity in the human capital of board members is expected (Bell
2005; Holst and Busch
2009). However, it must be countered that although the capital of the TMT is at a high level among all members, board members have diverse academic and professional backgrounds and differ in terms of the extent of their professional experience. These qualifications should in turn, according to the human capital theory, determine the level of remuneration. Some studies can empirically prove a connection between an executive's level of education and professional expertise and his or her remuneration (Gray and Benson
2003; Vieito and Khan
2012; Acero and Alcalde
2020). In particular, the academic education and the extent of professional experience (in the current and previous company) should be rewarded with higher compensation. Furthermore, executive managers who hold a superior position on the board and thus bear greater responsibility are compensated accordingly. In line with the human capital theory, board chairs have enhanced skills and experience that qualify them for this position. These qualifications should, in turn, be reflected in remuneration (Field et al.
2017; Muñoz-Bullón
2010; Shin
2012). Drawing on human capital theory, it can be theoretically concluded that individual characteristics, in addition to firm-specific determinants, determine executive compensation. Accordingly, individual variations in remuneration can also be assumed within the executive board of a company.
Based on the theories, board members who have the same qualifications and operate under comparable conditions should receive an equivalent compensation. Nevertheless, previous studies have revealed a gap in executive compensation that cannot be related by individual and company-specific parameters (Bell
2005). It can be observed that these differences are gender-determined (e.g., Carter et al.
2017; Maume et al.
2019). In these cases, an unexplained gender pay gap occurs because discrepancies in the remuneration of male and female board members can be demonstrated despite comparable human capital and analogous framework conditions. This undeclared compensation differences may be attributable to discrimination and acceptance problems, which are manifest in an unexplained pay gap (Holst and Busch
2009; Hendrix
2011). Descriptive analysis depicts that the average compensation diverges for female and male board members. Unless this can be explained by differences in human capital and divergent framework conditions (adjusted gender pay gap), it suggests an unexplained gender pay gap, which has already been empirically revealed in previous studies, especially in the context of the monistic system (Elkinawy and Stater
2011; Perryman et al.
2016; Maume et al.
2019). According to the theory, the prior publications and the descriptive results, the research aims to answer the question whether there is a part in executive remuneration that cannot be explained by individual and firm-specific parameters, but by the gender of a board member. I examine the hypothesis accordingly:
6 Discussion of the results
Based on the multilevel estimation results, it cannot be confirmed that there is a significant association between gender and board compensation. Initially, the descriptive statistics and the empirical estimation of model 3, which do not contain any individual and company-specific control variables, suggest a relationship between the gender of executive managers and their compensation. Model 3, which consists of only the independent variable
Gender, reveals a difference in pay of female and male executive managers of 23%. However, the association between gender and executive pay is annihilated, with the addition of individual and firm-specific characteristics in models 4 and 5. These findings are confirmed by several robustness tests. Thus, the results are consistent with Bugeja et al. (
2012) and Alcalde and Acero (
2020). Nevertheless, the predominant research findings demonstrating an adjusted gender pay gap are not supported in the present context of the dualistic corporate governance system (Bell
2005; Elkinawy and Stater
2011; Perryman et al.
2016; Maume et al.
2019; Beck et al.
2020). Some of these studies postulate that if there is a higher representation of female executive managers, the pay gap will decline (Bell
2005; Elkinawy and Stater
2011; Perryman et al.
2016). Compared with the proportion of women in these prior studies (≈ 5%), the present dataset shows a higher representation of women on executive boards (≈ 10% in 2016–2019). Thus, the divergent results can be partly explained by the slightly higher representation of female executive managers in the present study. Country-specific differences and the divergent framework conditions of the monistic and dualistic board systems could be another reason for the diverging results. In Germany, the compensation of board members is determined by the supervisory boards. These are represented by a significantly higher proportion of women.
5 If unexplained pay differences are due to acceptance problems, the more women have a say in pay setting, the smaller the pay gap. The proportion of women on the supervisory board could have a moderating effect on the relationship between gender and executive board compensation. This hypothesis should be the subject of future research projects.
Furthermore, executive managers' individual characteristics influence their compensation. This includes above all the chairman's position, which is associated with around 65% higher payment than regular board members. In 2019, female executive managers have a probability of 7% and male executive managers a probability of 25% holding the chairman's position. In contrast, 66% of female members served on the executive board of another company prior to their appointment in 2019, while only 42% of male board members were externally appointed. This characteristic, in turn, increase compensation by about 10%. Furthermore, executive compensation increases by about 3% per year in tenure. Since women serve on the executive board for an average of almost two and a half years shorter than men, this is another driver of compensation that is indirectly attributable to the gender of the board member (Bertrand and Hallock
2001; Bell
2005). The results thus show that gender does not have a direct influence on executive board compensation. However, several factors can be identified that directly influence compensation and how female and male executive managers differ.
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