A Study On Executive Incentive Mechanisms In Chinese State-owned Enterprises Under Government Regulation

Effective incentives and restraint is one of the main ways to bring managers’interests into correspondence with shareholders’, that can reduce agency costs andenhance the value of the corporation. With the improvement of the socialist marketeconomic system since the reform and opening up, executives incentive contracttransformed from planned economy to market-oriented direction in state-ownedenterprises. Under the government regulation, executives incentive mechanisms stillhave many problems in the transition period. Government intervention and imperfectcorporate governance make the market-oriented incentive contract difficult toimplement. Therefore, the analysis of the current situation and existing problems willprovide a way out for future executives incentive mechanisms reform.Based on the literature review and the institutional background of executivesincentive mechanisms, this paper deeply analyses executives compensation and theimplicit incentives. After SASAC issued “Interim Procedures of Business PerformanceEvaluation for Central State-Owned Enterprises Principal” and “Interim Procedures ofCompensation Administration for Central State-Owned Enterprises Principal”, thispaper analyses the phenomenon of executive compensation rigidity under thegovernment regulation and the effect of executives incentive mechanisms by using thedata of listed company after2003. On this basis, this paper uses Optimal ContractDesign method to analyse the influence of executives selfish behaviors on executivesincentive mechanisms and uses empirical studies to analyse the influence ofcompensation regulation and managerial power on executives incentive mechanisms.The main content of the paper has the following several aspects.(1) This paper divides the course of the reform of executives incentive mechanismsinto three stages and reviews the relevant laws and policies on income distribution ofstate-owned enterprises. Further, this paper provides comprehensive statistical analysison the overall current situation of executive compensation, regional differences,industry differences, differences in corporation size and state-owned and privateenterprises differences. Through analysing on the current situation of executivecompensation incentives in state-owned listed company, this paper points out thecharacteristics and existing problems of state-owned enterprises executives incentive.(2) Based on the institutional background of executives incentive mechanisms, this paper argues that as a result of government intervention, market-oriented compensationcontract can not be done. That also blurs the correlation between executivecompensation and performance. On the other hand, the imperfection of internalcorporate governance structure will lead to excessive managerial power. It is possible touse their power to seek personal gain. This paper analyses the influence of governmentregulation and managerial power on compensation rigidity by selecting the data ofstate-owned listed corporation from2005to2010. We find that executive compensationnot only has the downward rigidity, but also has the upward rigidity. Under theinfluence of managerial power, executive compensation not only has the downwardrigidity, but also has the upward elasticity.(3) Corporation investment is one of important financial decisions that theexecutives make. It is a bridge to connect with executive compensation and corporatevalue. Analyzing on the interaction between important financial decisions, current andfuture performance and executive compensation can further explains the effectivenessof executive compensation contracts. Based on the corporate capital investmentperspective, this paper examines the effectiveness of current executive compensationcontracts of listed companies. Based on endogeneity perspective, this paper examinesthe relationship between executive incentives and corporate investment, using the dataof listed companies from2004to2010. The study finds that there is an interactionbetween capital investment and executive compensation. Corporate investmentactivities significantly affect the level of executive compensation through the company’saccounting performance. Executive compensation contracts basing on accountingperformance can not stimulate long-term investment activities of the executives. Whilestock options can significantly improve the company’s investment strength.(4) Executive implicit incentive mechanisms may become an alternative form ofexecutive incentive mechanisms, especially in the institutional background ofcompensation regulation of state-owned enterprises. Introducing agent’s self-interestbehaviors into the linear contract principal-agent framework, this paper analyzes theeffect of agent’s self-interest behaviors on the optimal incentive contracts design fromtwo perspectives of hidden income and perks. By theoretical model and numericalanalysis, we find that agent’s hidden income behavior leads to the lower coefficient ofpay-performance sensitivity and agent’s perks behavior leads to the higher coefficient ofpay-performance sensitivity. It shows that the optimal incentive contracts which theprincipal provides depend on agent’s self-interest behaviors. In addition, agent’s self-interest behaviors improve the level of their own efforts to varying degrees.(5) The government intervening in executive compensation distorts the enterpriseoriginal incentive mechanism. Alternative implicit private income may be managerialself-motivation. This paper analyses the influence of compensation regulation andmanagerial control power on executive implicit income and the value analysis ofexecutive implicit private income by selecting the data of state-owned enterprises from2004to2010, including excess costs and excess perks. We find that governmentcompensation regulation results in more implicit income of executives in thestate-owned enterprises. More managerial control power of executives leads to higherimplicit income by rent-seeking. In addition, we find that implicit income reduces thevalue of the corporation.Based on the main research content, this paper has many characteristics andinnovations, as follows:(1) Based on the institutional settings of executive incentive of state-ownedenterprises, this paper further explains that the government regulation and managerialpower may lead to executive compensation rigidity At present, there are not manystudies on executive incentive mechanisms of state-owned enterprises under thegovernment regulation. The current studies also have been unable to make a goodexplanation of executive compensation rigidity phenomenon in state-owned enterprises.This paper puts forward explains for compensation rigidity and evidences on theeconomic consequences of government regulation and the theory of managerial power.(2) Existing executive compensation incentive effectiveness studies are mostlybased on the sensitivity between executive compensation and corporate performance.Therefore, it lacks to explain the internal mechanism of the executive compensation andcorporate performance. This paper analyses the effectiveness of executive compensationcontracts basing on capital investment and realizes the endogeneity between executivecompensation and capital investment. Through the establishment of the simultaneousequations model, we test the relationship between the executive incentive andinvestment. The research findings further illustrate the intrinsic link between thecompany’s financial activities, company performance and executive compensation.(3) Based on the institutional settings of executive regulation of state-ownedenterprises, executive incentive mechanisms may be distorted. So, executive implicitincentive alternatively become a source of self-motivation. Introducing agent’sself-interest behaviors into the linear contract principal-agent framework, this study analyzes the effect of agent’s self-interest behaviors on the optimal incentive contractsdesign from two perspectives of hidden income and perks. This paper expands thestudies on optimal incentive contract design. It shows that incentive contract which theprincipal provide should take agent’s self-interest behaviors into account. By modelanalysis, this paper shows that agent’s self-interest behaviors may be show as a kind ofself incentive mechanism under the institutional settings of executive incentivemechanisms of state-owned enterprises.(4) At present, these is on many empirical studies on executive implicit income. Themain research are focus on executive privilege, additional allowances and so on. Thispaper examines the effect of government regulation and managerial power on executiveimplicit income which is measured by excess costs and excess perks. Moreover, it alsoprovides evidences on the effect of executive implicit incentive on corporate value. Thispaper expands the studies on executive implicit incentive contract and puts forward newresearch achievement for executive implicit incentive.