The Study Of The Effectiveness Of The Executive Pay Contract From The Perspective Of The Market

Since the restructuring of economic system in China, income distribution system has undergone series of reforms, from the egalitarianism resulting from the single distribution system under the traditional economy to the striving for exploring the new distribution system in keeping with the development of social market economy, therefore, It has been one of the important topics relating to the study of corporate governance how to establish an efficient incentive contract system suitable for the transformation of the national economy.With the rapid development of china capital market, more and more companies are listed and increased in scale. The executive pay of listed companies also increased rapidly and the gap between executive`s pay have been widened. At the same time, people are puzzling by such facts as some companies made huge losses, but the management got well-paid, some companies performance ranked former position, but the executive pay don't rank the compensation scorecard.(without attracting public attention);For some companies, the annual increase rate of compensation for the executive is far higher than the increase rate of its performance.Therefore what is the benchmark for the determination of the executive pay? The principal-agent theory assumes that the executive pay has incentive function. In the principal-agent relationship, the utility function of principal and agent are different, the principal pursues for the maximization of shareholder wealth, the agent strives for the maximum of personal salary and bonus, position-related consumption, leisure time and so on. The difference will necessarily result in the conflict between them. In order to compromise the conflict, the principal must design an optimum contract to make incentive to the agent. The studies indicate that the incentive contract is efficient from the viewpoint of protecting the interest of shareholders and investors, linking between the executive pay and corporate performance.Owing to the complexity and lack of transparency of the principles underlying the determination of the pay-performance incentive contracts, many factors, inside and outside the company will have influence, of which probably having positive effect on increasing the effectiveness, otherwise negative effect on decreasing the effectiveness, on the establishment of the pay-performance incentive contracts for the executives of which the final purpose is to increase corporate value, promote corporate performance.The former essay studied respectively the influences of corporate scale, risk, growth, industry and region, and corporate governance on the executive pay incentive contracts in sequence, but made less study of the effect of the government. This paper analyzed the effects on the effectiveness of the executive pay incentive contracts of the government from the macro viewpoint of regulating the law and legislations and from the micro viewpoint of real controller of company. This paper will not only add a new viewpoint to the study of the executive pay incentive, but also have some significance in perfecting incentive mechanism of listed company. This paper will also be helpful to better perform their role for the government at all level. This paper mainly study some questions as follows:First, to study the effectiveness of the executive pay incentive contract by analyzing whether pay incentive contract stimulate the executive to achieving the purpose of improving corporate performance.In China, the central and local government are acting as the advocator of the market-oriented reform. Owing to the influence from the governments above varied from different regions, thereby the progressiveness in market reform varies. In some provinces, in particular, east coastal regions, market reform has achieved decisive progress, but in other regions, non market factors still play an important parts. Therefore, this paper secondly study the effect of the progress of market-oriented reform in different regions on the effectiveness of the executive pay incentive contract by examining whether there are differences in the executive pay level and in the effectiveness of the executive pay incentive contract of listed companies in different regions.Thirdly, the former studies indicated that government intervention has effect on the corporate governance. Therefore, whether there are influences on the executive pay level and on the effectiveness of the executive pay incentive contract by the government intervening the corporate management acting as the real controller of the company? whether there are differences in the executive pay level and in the effectiveness of the executive pay incentive contract between the listed companies controlled by central government and local government?Fourthly, whether the progress of market-oriented reform in different regions influence the effectiveness of the executive pay incentive contract of private companies? whether the progress of market-oriented reform in different regions influence the effectiveness of the executive pay incentive contract of the companies controlled by the government?After analyzing empirically by establishing a regression model the data on the listed companies over 2001-2005 relating to the questions mentioned above, this paper drew the following conclusions that the executive pay contracts of listed companies have incentive effectiveness as a whole firstly, consistent with the previous research findings; Secondly, the data analysis indicated that the degree of progress in market-oriented reform has no influence on the effectiveness of the executive pay contract of listed companies, i.e. data analysis don't support the hypothesis that the process of market-oriented reform improve the sensitivity of executive pay to corporate performance.In order to make further analysis, this paper classified the segment data according to the real controller of the companies into two sections: data of government-controlled listed companies and data of non-government-controlled listed companies. The further analysis indicated that for the government-controlled companies, a higher level of marketization don't improve the sensitivity of the executive pay to corporate performance consistent with the conclusions mentioned above, but for the non-government-controlled companies, the process of market-oriented reform improve the sensitivity of the executive pay to corporate performance. i.e. relative to the government-controlled listed companies, market-oriented reform process of the non-government-controlled listed companies influence the effectiveness of executive compensation contracts more significantly.In this paper, the sample size of non-government-controlled companies only amounted to 880, less than 20%of the full sample data companies(amounting to 4728), government-controlled companies accounted for a larger proportion of the total sample. For the government-controlled companies, as a result of the policy burden, and the company's social goals and other factors, executive compensation contracts can hardly be linked with corporate performance effectively, thereby enabling the incentive effects of compensation contracts is difficult to play. Resulting from the impact of government-controlled companies which accounted for more than 80% of the total number of samples, the regression results of the full sample of data in this paper do not support the "market-oriented affect the sensitivity of executive pay for corporate performance" hypothesis.Finally, the study of the influence of the nature of real controller of companies on the effectiveness of the executive pay contract indicated that the sensitivity degree of the executive pay to corporate performance for the non-government-controlled companies is higher than that for the government-controlled companies, i.e. for the non-government controlled company, the effectiveness of the executive incentive compensation contract is better than the that of government-controlled companies. The test results of the incentive effects of executive compensation contracts for the companies controlled by the central government and local government are different , the central government acting as real controller influence the effectiveness of executive compensation contracts more significantly than that by local government.This paper investigated the factors which affect the executive pay contract of listed companies from the external environment and internal mechanism respectively by examining the effect of market-oriented reform and the nature of real controller on the executive pay. At the same time, this paper analyzed the effect of government behavior and its intervention on the corporate governance structure acting as legislation regulator and real controller of the company respectively.Finally, several suggestions were given base on the former analysis in the end of this paper. On one hand, in order to play the role, the structure of corporate governance should adjusted dynamically to meet the requirements of the environment; On the other hand, we should further change the role of the government, lessen government intervention to market and company, let the market play an increasingly important role in resource allocation.