Managerial Power, Discretionary Investment And Executive Compensation

Executive compensation is a controversial topic over the last few years.In recent years, CEO set a large part of his own compensation frequently found in the media,but Chinese scholars have rarely discussed this popular point of view.This paper based on the background of the China's Listed Companies,firstly followed the route of "Managerial Power-Discretionary Investment-Corporate Performance-Executive Compensation".By constructing several measure of managerial power to test the applicability of Optimal Contract Theory and Managerial Power Theory in China.I try to find out whether executive compensation becomes an agency problem? Whether and how top managers really set their own pay by power and discretionary investment? I hope this study will provide empirical evidences on improving the incentive mechanism of the listed companies in china.By using the 2840 samples over 3 years from 2005 to 2007,the paper find a positive relation between executive pay and firm performance.But managers can set their own pay by power,whose compensation is more sensitive to profits than its losses,the correlation between compensation and performance in some companies is weak or even not significantly. Furthermore,the executive can achieve high compensation by dividend to cater for the shareholder,which support the catering view of dividends,the founder CEOs can set their own pay,but they also trade-off the wealth between pay and dividend.M&A is a effective way for executive to restructure power and set their own compensation. Exectutive compensation can be increased after an acquisition even post-acquisition performance is poor.The pay is significantly asymmetric to post-acquisition performance, powerful CEO compensation is positive to power and is not relative to acquisition and post-acquisition performance,but the others' pay is positive to the acquisition and decrease for poor post-acquisition performance.So acquiring executives who is without power would be penalized for poor post-acquisition performance.Following the code of compensation bring into effect,the relation between executive compensation and intangible investment is from negative to positive,R&D spending are strongly positively associated with CEOs compensation,but powerful CEOs compensation are not relative to R&D spending,they can mitigate the R&D restriction and decrease the sensitivity of executives' pay to performance when investing R&D.In conclusion,the codes about performance assessment and compensation management have worked in recent years.The compensation contract in Chinese listed companies has certain validity,but the interpretabe power of performance to pay is low,the compensation increased strikingly.This paper also find that executives can affect compensation or even determine theirselves with great power and discretionary investment such as M&A and R&D spending,which make the compensation contract is inefficient and make the compensation incentive as a part of the agency problem.It is suggested that we should pay attention to the agency problem may be caused by managerial power and discretionary investment;improving incentive system;guiding and assessing investment;improving corporate governance; strengthen the disclosure of compensation information etc.