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

The conflict of interest between shareholders and managers is a classic example of a principal–agent relationship. The owners of a joint-stock company (principals) delegate the management work to executives (agents). Usually, the shareholders know less about the state of the business, managerial actions and firm opportunities than the executives do. This information advantage opens the possibility for the managers to maximise their own income, instead of that of the shareholders. If the principals are aware of this problem, they might design incentive compatible remuneration schemes – e.g. rewarding a profit share – for the agents. This article addresses the question whether and how the principal– agent problem was recognised, understanded and solved by nineteenth-century principals. Especially, the paper shows that principals quickly started to close incentive-related working contracts with agents and that these contracts became more complicated during the later decades of the nineteenth century. In Germany, the first joint-stock companies with limited liability and separation of management and ownership were founded during the nineteenth century. The economic influence of joint-stock companies rose significantly during the 1850s and especially after the liberalisation of the joint-stock companies act in 1870. In the field of banking, the first joint-stock Kreditbank was the Schaaffhausensche Bankverein, founded 1848 in Cologne. During the 1850s, several banks followed, in particular the Bank für Handel und Industrie, established 1853 in Darmstadt. The large German banks of today (Deutsche Bank, Dresdner Bank, Commerzbank) were founded in the years 1870–73. No study investigating the pay–performance link has been undertaken in German business history. Some related information has been published in contemporary or modern studies of the nineteenth-century banking sector, but this is not sufficient to establish a formal link between firm performance and executive remuneration. For example, Georg Siemens, the CEO of Deutsche Bank from 1870 to 1900, received an annual basic salary of 4,500 marks (M); later, it was increased to 12,000 M. In the beginning, the profit share or performance pay element was low. His income seems very low compared with other employees at Deutsche Bank: the directors of the branch in Bremen, von der Heyde and Krüger, received an annual basic salary of 9,000 M and profit shares of 11,000 M (1878)