Study On Incentive And Constrained Mechanisms Of State-owned Enterprise Executive Based On Equity Incentive

As we all known, the original intention of China's State-owned enterprise reform is tosettle the problem of its low efficiency. After more than 20 years' effort, State-ownedenterprise reform has made a compelling success, but this problem has not been thoroughlysettled. As China's economic system reform is deepening and the system of modernenterprise is establishing, people gradually realized that the important reason resulting suchsituation is that there is no effective incentive mechanism and constrained mechanism forthe executives of State-owned enterprise. So the subject of this dissertation is educed.We firstly review correlative literature of this subject in chapter two. Based on this, wesummarize the traditional incentive and constrained mechanisms of entrepreneur,respectively analyze the function principle of each one and the correlation of them. For onething, we consent that there are complementary or substitute relationships among them; foranother thing, we put forward our own standpoint: the compensation mechanism is thebasal and primary one in the whole system, especially to the actual conditions ofState-owned enterprises. Then we establish an integrative analysis mode with regard to therelationship between the incentive and constrained mechanisms of entrepreneur andcorporation's performance.In chapter three and chapter four, we expound the external marketable system andinternal corporate governance. We in-depth analyze the problems in these two mechanismsof China's State-owned enterprise. Neither marketable system nor corporate governancehas fully exerted its function, so it is necessary to strengthen them together in order tocontrol the manager's control caused by multi-agent relationship in State-owned enterprise.By searching for the reasons of the failure of these two mechanisms, we find that the originis the unreasonable stockholders' structure. So how to optimize the stockholders' structurebecomes the emphasis of the system engineering of improving corporate governance'sefficiency. The empirical research proves this viewpoint.The function of above mechanisms will finally reflect on the executive's rewards. Inchapter five we discuss the executive's compensation mechanism. We analyze thecompensation structure and draw the conclusion that fixed income only has health-carefunction while variable income has incentive function. So the proper compensationstructure is combining them together. But which variable income will be best? A consistentconclusion from western economists is equity incentive. In fact, it is the most effectivemethod to settle the problem caused by owner default in China. We search academicfoundation and practice evidence for this standpoint, which demonstrate the strongincentive founction of equity incentive. Evaluating the operating performance is the basicand important step to design an incentive mechanism. Whether the index is proper will have a direct effect on the effectiveness of this mechanism. So we respectively explain themerits and defects of three kinds of indexes in use, analyze the superiority of EVA, aninnovative index, and discuss the enlightenment of EVA for China's State-owned enterpriseas well as the suitability in our country at present.In order to understand the present situation of senior management's monetary rewardand shareholding's proportion in our listed companies, and the relevance between them andthe operating performance, we make an empirical research with the 2004 annual reportdata in chapter six. On the basis of such evidences, we conclude that the direction of thesalary system reform of the management in State-owned enterprises should be: furtherenhancing managers' monetary compensation, promoting the annual salary system andincreasing managers' shareholding proportion to create a pluralistic compensation systemand to achieve the effective integration of short-and long-term incentive.Despite building up a pluralistic compensation system is the direction of futurecompensation system reform, but now we should focus on increasing the number ofexecutives' stockholding, actively promoting equity incentive. In chapter seven, we reviewthe present situation and the practice effect of equity incentive in our country. We find thatequity incentive overall does motivate executives to improve operating performance, butsuch inspiration varies with different conditions. After analyzing the feasibility ofpracticing equity incentive in our country, we propose some corresponding improvementmeasures and make some advices about how to design the equity incentive programs.Based on previous theoretical analysis and empirical research, we present the viewpointin chapter eight that China's State-owned enterprises should establish an incentive andconstrained mechanisms based on equity incentive. In this direction, we give an overallidea and basic principles for designing the effective incentive and constrained mechanisms,and list different sets of state-owned executives' compensation reform programs to thedifferent types of State-owned enterprises for reference.In chapter nine, we point out each mechanism has a collective action on exectivetogether. Though we emphasize compensation mechanism in the whole system, it mustcooperate with other mechanisms in order to exert its avail better. Furthermore, in thesystem engineering of State-owned enterprise reform, the erecting and improvement ofincentive and contrained mechanisms of entrepreneur can't depart from the big backgroundof China's economic system reform. Otherwise we can't achieve the prospective purpose.