Research On Executive Compensation Regulation In SOE

In 2007, because the financial crisis caused by U.S. subprime crisis sweeps the globe, the economy has a depression state. The world's large commercial banks have been leading the verge of bankruptcy, and the survivors are also attributed to the unprecedented national emergency measures. In this case, the world economy was into a state of crisis and the level of unemployment skyrocketed. However, Wall Street senior executives of financial institutions still held astronomical salaries. According to incomplete statistics of New York, the domestic economy has been plunged into such a predicament, but the executives of financial institutions in the state received the dividend totaling 18.4 billion dollars in 2008, which are criticized by the whole society.The public voices around the world, who ask the Government to implement intervention on managers'compensation, are becoming stronger. There has nonetheless been an outpouring of regulatory responses to executive pay in the United States, United Kingdom and Australia.The American Recovery and Reinvestment Act of 2009 (ARRA), commonly referred to as the "stimulus bill", was signed into law on 17 February 2009. And the US stimulus bill limited bonus payments to no more than one third of the value of total annual compensation for companies receiving TARP funding. This restriction prevents the managers who rewarded greed without any regard to the integrity of corporate risk. Under guidelines released by the US Treasury in February 2009, US institutions receiving funds under "generally available" capital programs, and those requiring "exceptional assistance", are subject to a total annual compensation pay cap of US S500,000 for senior executives.In China, regulatory of executive compensation in SOE (state-owned enterprise) is not a new phenomenon. Because of various reasons, executive compensation in SOE has been always strictly regulated from the initial planned economy to the construction of market economy. Executive compensation in some SOE (especially in the financial sector) have so abnormally high payment that cause strong questioning and unsatisfactory from society in recent years. To achieve stability and appease public sentiment, government began to strengthen executives'compensation regulation since 2008. On the one hand, government set up the maximum compensation limit through legal ways; for example, in 2009, the ministry of finance documented executives'highest compensation in financial department of SOE should less than 2.8 million every year. On September 16, 2009, the Department of Human Resources and Social Security together with the Central Organization Department, Ministry of Supervision, Ministry of Finance, the Audit Commission, the SASAC and other units jointly issued the "Further Standard the Guidance of Compensation Management for Central Enterprise Responsible Persons", and it provides basic annual salary of central enterprise responsible persons which links to average wage of workers in the previous year.Limiting executive compensation, to some degree, narrowed the compensation gap between the rich and the poor. Contrast to cheering from society and media, some scholars worry about this policy effect. Western scholars have little research on the regulatory of executive compensation, however, there are different views on the economic consequences caused by the regulatory. Many results support the assumption of interest groups instead of the assumption of the public interests. Even if the regulator is out of good will, the regulatory effects often contrary to the intention of regulators.Based on the perspective of cost-benefit, this paper tests the economic consequences of ECR in SOE. By our study, we have discovered that, ECR indeed improves the agency costs, reduces the efficiency of enterprise agency, and reduces enterprise's performance. These reflected in the empirical results as follows:the higher relatively salaries, the lower agency costs; the higher agency efficiency, the more company's performance. We found weak evidence that the monopoly property control of will increase negative effects of ECR with high degree of regulatory. From the perspective of performance sensitivity and compensation incentive, this paper examines the economic consequence of ECR in SOE. Empirical results find that regulatory of compensation reduces the performance sensitivity and weakens the effects of compensation incentive. Empirical results also show that the performance sensitivity of SOE with high degree of ECR is lower 25% than the SOE with low degree of ECR, and the effects of compensation incentive reduce about 30%.According to research results of optimal contract theory, the status of performance must be outstanding in the compensation evaluation system. Based on increasing the value of the performance evaluation in state-owned listed companies, marker indicators combined EVA, cash flow return rates, etc. These promote the steady growth of corporate value and achieve the increasing value of the state-owned assets. We classify assessment mechanism to distinguish high-ranking managers between monopoly industry and competitive industry.According to research results of the management power, the role of shareholders must be highlighted in formulating the compensation contracts. Firstly, we must improve the speaking right of shareholder. China Securities Regulatory Commission provides that shareholders with more than 3% shares can propose bill, which seems high compared to 1% in the United States. Therefore, we should lower the threshold, and shareholders have the right to express their views for not optimal compensation contracts. Secondly, firms should provide convenient conditions for investor expressing their "outrage". Companies should reasonably guide investors to express their "outrage" at the right time. Meanwhile, we need to combine the relevant media organizations to give investors the place expressing their "outrage". Finally, firms should strengthen information disclosure to provide investors with the source of "outrage". Compared to "hard to find major defects of information disclosure system of listed companies in the United States", information disclosure system of China's listed companies is still quite weak. Currently, the China Securities regulatory authorities have required to disclose personal emoluments, but not required to disclose the concrete composition of executive compensation, relevant content of executive compensation programs, executive compensation and related benefits programs of high-ranking managers leaving in the year.According to the research results related to regulatory of executive compensation, we should introduce more efficient methods. For example, limits marginal income, limits the total amount of income. When executives exit costs too high, managers are always pursue the maximization of benefits under the existing constraints. Regulating the marginal benefit of executive compensation will encourage managers to pay more efforts to obtain the total revenue maximization. Therefore, we timely introduce quota system of compensation in the monopoly enterprises.The arrangements of the thesis are as follows:Chapter one: Introduction. It summarizes the background, significance and innovation of this research. It also expounds the basic ideas and the overall framework of this thesis. Meanwhile, it defines the important variables involved in this paper.Chapter two: In the first instance, this chapter reviews the two major theories of compensation:optimal contract theory and the theory of management power. Subsequently it introduces related research of the two basic theories and briefly evaluates the applicability of the two theories. Finally, it discusses the causes and economic consequences of ECR, and it briefly introduces a few themes of ECR around the world and important technology of ECR.Chapter three: Firstly, this chapter introduces the specificity of China's ECR and its institutional background. Secondly, it points out that imperfect compensation mechanism is the root cause of ECR in China's SOE. Finally, this chapter briefly describes the current status of ECR in SOE.Chapter four:This chapter researches the relationship between government control, the management power and regulatory of executive compensation. This can test the rationality of relative compensation as a ECR variable.Chapter five:Based on the perspective of cost-benefit, this chapter tests the impact of ECR on the effect of CEO performance sensitivity and compensation incentive in SOE.Chapter six:From the perspective of performance sensitivity and compensation incentive, this chapter examines the impact of ECR on the effect of CEO compensation incentive in SOE.Chapter seven:The chapter summarizes the conclusions and some research suggestions. Finally, author points out the shortcoming of this thesis and future research direction.The innovations of the thesis:(1) This thesis makes monopoly separate from the state-owned enterprises, and makes monopolistic gain divided into monopolistic profits and competitive benefits by its cause, and then test the impact of monopolistic gains which is caused by remuneration incentive.(2) Multi-angle tests the economic consequences of ECR. Firstly, from the perspective of cost-benefit, this thesis measuring the relation between the cost and return which is caused by ECR, is committed to search the ways to enhance the efficiency of ECR. Secondly, from the perspective of the sensitivity, this thesis tests the economic consequences of ECR. Finally, this thesis tests the impact of ECR on the effect of remuneration incentive.(3) This thesis puts remuneration system of SOE, Governance and corporate governance into the same framework. This thesis tests the impact of management agency problem on the effect of ECR efficiency and invisible incentives. Finally, this thesis provides new methods to improve remuneration system of SOE.The main limitations of this thesis:Firstly, the monopoly is limited to administrative monopoly of SOE. Secondly, because information disclosure mechanisms of executive compensation in our country, it is difficult to accurately measure the other control benefits of the management, such as expensive in-office, equity incentives. Therefore, this thesis does not include these control benefits. Finally, this thesis does not further investigate the impact of the management power on the effects of economic consequences of ECR.Further research:(1) Development research of the economic consequences of ECR;(2) The impact of the management power on the effects of the economic consequences of ECR;(3) The system of compensation consultant may be a complementary of compensation mechanism.