The Study In Executive Remuneration Of Chinese Listed Banks

The international financial crisis caused by the US subprime mortgage crisis greatly struck the financial system of the United States, Britain, continental Europe and other western countries. It is regarded as the worst financial crisis since the1927Great Depression.In this financial crisis, the bank executive remuneration is widely criticized. While the five largest investing banks were adversely affected. Wall Street executives still got lots of bonuses during the crisis. There is such a great contrast.People began to rethink the role executive remuneration plays in bank, which is such a special industry. Based on the principal-agent theory, executive remuneration is one of the most important mechanisms used to solve the agency problem. The intention is to closely combine the interests of the management and shareholders through reasonable incentive mechanism. Then conflicts of interests can be minimized while agency costs can be reduced. But in reality, executive remuneration is not always appropriate and effective.Even in the United States, lack of the solid base of corporate governance, executive remuneration can not solve agency issues, but become a new agency problem. After profound consideration, the international community generally agreed that the defects of bank executive remuneration come from the defects of bank corporate governance. After the Crisis, many governments started to reform the bank executive remuneration. The reforms paid more attention to improving the corporate governance, information disclosure and the formation of the linkage system between the compensation and risk.The executive remuneration system of listed banks in China grew out of the fixed salary system under the planned economy. In order to keep the stability of financial system, Chinese government directly interposed in state-owned banks "affairs by appointing or removing bank managers, limiting executive compensation and so on.Although listed banks gradually established the modern enterprise system, the executive remuneration still faces many challenges such as the management power under the control of state shareholders. Especially after the Crisis, the MOF, SASAC and other governmental departments have issued a series of rules to limit the salary of bank managers, which slowed down the marketization of executive remuneration of the listed Banks and even produced the "reverse phenomenon"--the salary of the chairman is less than other senior executives. In the long run, not only the large state-owned listed Banks will lose the attraction to financial talents, but new corporate governance problems, such as high on-the-job consumption, huge retirement insurance compensation of recessive executives, will be more likely to arise.Executive remuneration is an important component of corporate governance. The relation between these two mechanisms is not only interaction but mutual promotion. Since the1980s. Chinese economic scholars have started to research on the incentive system of China’s state-owned Banks. However, the remuneration study from the perspective of corporate governance is still relatively deficient. Chinese listed banks are now in the period of speed-up development, which makes the strong needs for excellent managers. If they lose the control of remuneration system, the listed banks could not win in the future competition. Well-developed corporate governance is the basis for executive remuneration, while an efficient executive remuneration helps to solve problems in corporate governance. Research on executive remuneration of listed banks contributes to improve banks’core competence and risk management skill, avoiding financial crisis caused by aimless expansion.Guided by the contract theory, the principal-agent theory, and the human capital property right theory, and closely linked to practices of state and abroad, this article has a deep study on current situation, characteristics and problems of executive compensation in China’s listed banks. This article especially takes reference of "management power theory" and "large-shareholder control theory" to analyze the internal governance mechanism of executive compensation of China’s listed bank, and has a research on the external governance from two aspects--the public governance and the market governance. Finally, the article proposes political suggestions on improving bank executive remunerations by combining the international latest achievements of the executive remuneration reformation after the Crisis with the situation in China.This article is divided into eight chapters. Each chapter has arrangement as follows:Chapter One:introduction. This chapter combined with domestic and foreign research progress makes preliminary analysis of the current situations in China. This chapter puts forward the background and meaning of this paper, summarizes the main research contents, the research methods and the structure arrangement.Chapter Two:theory and literature review. This chapter summarizes three theoretical basis of the executive remuneration:the enterprise contract theory, the principal-agent theory, and the human capital property theory, taking executive remuneration as analysis framework of the corporate governance mechanism. The enterprise contract theory implies the contract between shareholders and managers imperfect due to the existence of limit rationality, transaction costs and information asymmetry. The principal-agent theory holds the idea that "executive remuneration is an important mechanism to solve the agency problems". Human capital theory defines managers as "capital" which can be priced and traded. All three theories make enterprise, compensation contact and manager as objects of study. These three theories are relevant to each other. They provide a strong support for deep research and analysis of executive remuneration.Chapter Three:The the specialty of bank governance and the executive remuneration. This chapter first studies the general rule of corporate governance, analyzing how the industry specialty affects corporate governance in listed banks. The innovation of this chapter is that it claims the industry specialty can influence corporate governance and executive remuneration of banks, pointing out that bank executive remuneration has specialty which needs special attention in policy assessment and operation.Chapter Four:Executive remuneration in oversea banks and its revelation. This chapter makes a comprehensive exposition of the development and status of the West Bank executive pay system, which summarizes and analyzes six characteristics of them. Then this chapter compares the American remuneration system with the Japanese and German’s, taking Stock options as an example to analyze the pros and cons of long-term incentives in detail.Finally, it summarizes five revelations by combining the lesson from the international financial crisis with the reconsideration from the international community. There are four main innovations of this chapter:(1) It summarizes six characteristics of Western banks executive remuneration.(2) It analyses the main differences between American remuneration system and German’s, and suggests that the differences in ownership structure and market environment are the main reasons.(3) Analyzing the pros and cons of stock options in detail, it finds three advantages and two problems of stock options, providing a reference for improving the compensation system.(4)It summarizes the principles and measures that governments and international organizations designed to strengthen the financial institutions’executive remuneration and gets revelation from that.Chapter Five:Analysis of the executive remuneration efficiency of China’s listed banks. This chapter first sums up the status and characteristics of the executive remuneration of China’s listed banks through statistical analysis with large data:(1) The overall level of bank compensation is higher than other industries"and the structure difference is significant.(2) Compensation structure is unitary, no long-term incentive other than cash.(3) Performance-related pay is low, with little or no relation between compensation and net profits. Then this chapter takes executive compensation data from14listed banks from2006to2009as the sample of empirical test. Generally the executive remuneration efficiency is reflected by the relation between compensation and company performance. Assuming a positive correlation existed, if the hypothesis is true, then the executive remuneration of listed banks in China would be efficient.This paper selects the top three executive compensation(logarithmic) as the dependent variable and logarithmic net profits and ROE as the independent variables, making the correlation test and regression test. The results show that ROE is not significant, while the logarithmic net profit is significant, that is, net profit can affect the top3executive compensation. However, the group goodness of fit is0.32, which is a bit low, indicating that the explanatory power of changes in net profits to executive pay is not strong enough, the executive remuneration efficiency in China’s listed bank can be further improved.Chapter Six:Internal factors that affect the executive remuneration of listed banks in China. This chapter analyzes the impact of internal control system on executive remuneration from three aspects:the management power, large-shareholder control and the board of directors. This chapter constructs the analysis framework of internal governance of executive remuneration. From the perspective of internal governance, executive compensation is the game result of shareholders, management and the board. Only in the tripartite balance of power or under the fair market condition, outcome can benefit all parties and reach to a balance. However, because of the existence of management power, large-shareholder control, and the board weakness, executive compensation is often deviated from fair value which becomes a new agency problem. This chapter firstly analyzes the impact of internal governance on the executive renumination and assesses the actual situation of China’s listed banks by numbers and charts. Then this chapter takes executive compensation data from14listed banks to tests the internal factors empirically.This test chooses the compensation(logarithmic) of top three executive pay (logarithmic) as dependent variables, the share percentage of large shareholders, Z index, board size and the proportion of independent directors as explanatory variables. The results show that (1) Z index and executive pay have a significant positive relation.(2) The share percentage of large shareholders, board size and the proportion of independent directors do not pass the significance test.Chapter Seven:External governance of executive remuneration in China’s listed banks. This chapter summarizes the external environment for executive remuneration in China’s listed banks and analyzes the impact of the seven external factors:information disclosure system, administrative regulation, government action, the legal system, capital markets, product markets and bankers market. An innovation of this chapter is taking information disclosure and capital market as important external mechanisms for the analysis of the executive compensation governance of listed banks in China.Chapter Eight:The conclusion and the direction for further study. This chapter summarizes the main conclusions based on the previous analysis of bank executive remuneration. Then combined with the latest development in the reform of executive remuneration in China’s listed banks after the global financial crisis, it proposes recommendations to improve the executive remuneration in China’s listed banks, including improving corporate governance, reducing government administration, improving the executive compensation structure and enhancing the linkage between the executive compensation and the risk management of the listed banks. Finally, it analyzes the limitation of the article and imply the direction of further study.This article has innovations on the research framework and methods, and gets some helpful conclusions:1. This article studies listed bank executive remuneration from the perspective of corporate governance, paying attention to the relationship between the executive remuneration and corporate governance as well as the impact of corporate governance on executive compensation. It finds the problems of executive compensation in China and makes meaningful recommendations. This article attempts to broaden the theoretical research space in the field of executive compensation of listed banks, which certainly has some originality.2. This article constructs a multi-level framework. First, it builds the framework of comparison between a mature Western remuneration system and the Chinese system by comparing the market conditions, the corporate governance mechanism and the executive pay components. Second, it builds the internal governance framework for executive remuneration of listed banks, points out that the management power, larg-shareholder control and the board independence are the three major factors that.influence executive compensation conclusively. Finally, it introduces the role of the capital market in the analysis of external governance factors, highlights that the listed banks are different from the non-listed banks with a more favorable external governance environment.3. As to the research method, it uses a standardized study with a combination of empirical research and statistical analysis, making it a more relevant research. At the same time it uses the latest theoretical research and data as reference, increasing the timeliness of the study.4. Through research, this article draws some meaningful conclusions:(1) Corporate governance is the basis of remuneration system. Defects of executive remuneration root from defects of corporate governance. To improve the executive remuneration, we must improve the corporate governance basis first.(2) China’s listed banks face a unique internal and external governance environment. Factors such as governmental regulation, control of state major shareholders, senior executive appointment and removal mechanisms are intertwined, having a profound impact on the executive remuneration. When practicing executive remuneration of listed banks in China, we should take the special nature of environment into account and establish executive remuneration system that fits the situation of China’s listed banks rather than copy the system from the U.S. and UK directly.