The Research On The Optimal Explicit And Implicit Incentive Combination Of The SOE’s Executive Based On Fairness Preference

In recent years, the exposure of the sky-high salary of executives and thegovernment’s adjustment of the state-owned enterprises(SOE) executives’compensation policy make the fairness of the compensation of the executives instate-owned enterprises a controversial topic, especially under the circumstances thatthe economy continues to struggle and the income gap becomes lager, people paymore and more attention to the income distribution equity, how to design acompensation contract which both considers fairness and efficiency has becomes apractical issue to be settled. Previous traditional theories based on pure self-interestassumption cannot provide good explanation. With a lot of game experiments,Fairness Preference Theory rising in recent years proves convincingly that besidesself-interest, people also have fairness preference. It overcomes the limitations ofstandard economic theory based on pure self-interest hypothesis, and is graduallybeing introduced into the standard incentive theory and becomes a frontier researchtopic, which is likely to better explain these enterprises incentive problems.Meanwhile, from the practical operation, compensation incentives of executive inChinese SOE actually are a series of incentive contracts combined of explicit andimplicit incentive. But related research mainly concentrated on one aspect of explicitincentive or implicit incentive, thus it can’t reveal the incentive scheme for SOE’sexecutive systematically. So this paper discusses the optimal incentive combination ofSOE’s executive with consideration of fairness by introducing fairness preferencemodel into explicit incentive contract and implicit incentive contract model, andstudies the effect of fairness preference on executive compensation, then test theconclusions from the models we build by empirical methods. So it provides newexplanations to SOE’s executive incentive problem and also provides some newtheoretical guidance for improving the incentive mechanism of SOE’s operators.Based on the Fehr&Schmidt Fairness Preference model, we start from theframework of only implementing explicit incentive and explore the impact of fairnesspreferences of executive and government on optimal incentive compensation byintroducing fairness preference. The results show:(1) In the aspect of the taskconfirmed by third party, the jealous that is caused due to owing less than fair wage,will increases the optimal incentive payment, while sympathy preference that iscaused by owing more than fair wage and the government fairness preference thatreflects maintaining social fairness will decrease the optimal incentive payment, thus making the executive compensation move to fair wage.(2) In the aspect of the tasktarget that cannot be confirmed by third party, the optimal incentive compensation iszero, which reflects explicit has no positive incentive effect on this task target, thegovernment has to lower incentive payment of other task targets in order to avoid thatexecutive prefer other task targets with giving up this one. Consequently, there isgreat limitation for the SOE multitask incentive.So this paper further extends this fairness preference model to the explicit andimplicit contract parallel incentive compensation model, and discusses the optimalincentive combination with the fairness preference of executive and governmentbased on the repeated game background. The results show:(1) In the executivefairness preference, in optimal incentive combination, executive fairness preferencefirst influences implicit contract, then indirectly affect explicit contract incentiveunder the substitute relation of implicit contract, finally making explicit compensationgradually move to fair wage. Besides, the variation extent of implicit contract isgreater than that of explicit contract. And executive’ sympathy preference is animportant factor for implementing implicit contract, it not only relaxes th e first orderoptimal conditions, but also has positive effect for improving the execution of implicitcontract even though the explicit contract is perfect.(2) In the aspect of government,the government mainly carry out two methods——directly lower explicit contractincentive and substitute implicit contract for explicit contract——to imposerestrictions on overpaid compensation for SOE executive to promote the fairdistribution of social income. In these two methods, the government prefers thesecond, and the substitute implicit contract increases with the increase ofgovernment’s fairness preference. This reveals that implementing lots of implicitcontract could help alleviate the government’s restrictions of social fairness withconsideration of efficiency. But further research finds that the effect of implicitcontract is subjected to the government’s subjective assessment ability on executives,the worse the government’s subjective assessment ability, the worse the effect of thegovernment’s salary regulation policy is.In practice, not only executive could care the gap between his/her wage and fairwage, but also the gap between executive’s wage and other team member’s wage makethem unfair psychology, then influencing the competition and cooperation of the team.So, on the background of repeated game, we further extents the fairness preferencemodel to multi-agent incentive model, and explores the effect of the fairnesspreference in SOE executive team on the variety of team contract. The results showthat team contract includes relative performance evaluation (RPE) and jointperformance evaluation (JPE).(1)Assuming that team contract belong to explicit contract, implementing the optimal condition of RPE is that the jealousy preference ofexecutives is large enough or the sympathy preference is small enough. While, forjoint performance evaluation, it’s optimal for implementing the extreme JPE when thejealousy preference is small enough or the sympathy preference is large enough.(2)Assuming that team contract is implicit contract, the feasible condition of extremeJPE is stricter than the ordinary JPE, and the feasible condition of ordinary JPE isstricter than the RPE. If every team contract is feasible, the extreme JPE is optimal,because the supervision and collaboration between team members could reduce theexpected payment cost of government, which makes the expected payment cost of theextreme JPE lowest. Fairness preference has no effect on the feasible condition ofextreme JPE, and its effect on ordinary JPE is unsure. However, for RPE, jealousypreference can loosen its feasible condition, and sympathy preference can tighten itsfeasible condition.(3)Except for extreme JPE, no matter team contract is implicitcontract or explicit contract, the effect of fairness preference on team contract is: thejealousy preference of executives in the team can reduce the expected payment cost ofgovernment, which has a positive incentive effect; while sympathy preference canincrease the expected payment cost o f government, which has a negative incentiveeffect.Finally, this paper sets the econometric models of simultaneous equations,nonparametric regression and panel GMM, taking Chinese listed companies’ data assamples. The models are aimed at empirically testing the incentive effects of theexternal pay gap and the pay gap inside the executive team, and explaining theinfluence on determining explicit and implicit compensation. The empirical resultsobtained agree with the above theoretical conclusions. Fina lly we make necessaryrecommendations on relevant policies.