Research On The Remuneration Committee’s Effectiveness In China’s Listed Companies

As an interest’s tie between shareholders and managers, what institutionalarranagements would make the Chinese listed companies’ RemunerationCommittees(RCs) and shareholders’ interests converge, and what institutionalarranagements will hinder its role to play need people to explore. Based onprincipal-agent theory’s three-tier model，this paper investigated the impact of RCs onmanager’s compensation formulation and design. By introducing a three-tier modelinto principal-agent theory’s optimal contract, this paper attempts to regard RCs assupervisors, alough it exist in the form of organization, and to analyze the RCs’ rolein the internal corporate governance. The purpose of this paper is to investigatecurrent Chinese listed companies RCs’ role in mitigating the agency problems relatedto managers’ pay, and trying to understand how RCs’ characteristics can reduce orincrease the information asymmetry, increase or ease the agency problems relating tomanager’s compensation, so as to explore the beneficiary information to RCsgovernance practices.China’s listed companies exist in a special “dual system” which combine somefactors in the “unitary system”. Comparing with “unitary” countries, investorprotection in our country is still imperfect, equity is relatively concentrated, somecompanies are controlled by large shareholders, and the government still has theability to control part of listed companies as actual controller. In this case, thestate-owned controlling shareholders or major shareholders have substantial influenceon the board of directors. The compensation committee is likely represent the interestsof the major shareholder, or even dominated by major shareholders and conspiredwith managers to rob small shareholder. According to the system background ofChina’s listed companies and the analysis of three-tier principal-agent theories, thispaper studies the following three specific topics. One is from the the features of thesupervisors’ perspective to explore whether the features of the supervisors are consistent with shareholders’ interests, and try to investigate whether the membershipof RCs’ directors are in the interests of the shareholders. Second, from the view ofsupervisory conspiracy, this paper try to answer the question of what role do RCs’information accessing ability, supervisory intensity and supervision incentives play inthe design of listed company’s manager compensation in our country. Third, from theangle of principle and supervisor, this paper try to explain which kind ofcharacteristics of RC members can make it more consistent with shareholder’sinterests, so as to coordinate the conflicts of interest between shareholders andmanagers in listed companies effectively. This paper examines the related sixquestions: the qualifications features of RC members, how these features affectmanagers’ pay level, pay structure, pay performance sensitivity and the design of thecompensation contracts, as well as the difference of aforementioned relationshipbetween enterprises with different ownership structure. The results show as follows:①Even under different system background, independence is not the only significantcharacteristic of RCs.②The director of listed company’s compensation committee isnot significantly different with other director in gender. The main differences are:①At present, about84%listed companies have more than above50%independentdirectors, about27%companies in which the manager is also a RCs’ member. Mostcompanies has a higher percentage of independent directors, but there are alsophenomenon as to "managers’ customized compensation".②In our country, onlystate-owned listed companies or higher ownership concentration listed companies’RCs tend to choose inside directors with business background.③The directors tenureof RCs is relatively short,3.47years in average, it shows China listed companies didnot consider director’s experience when they elected RCs’ members.④Amongst thedirectors of the listed company’s RCs, only outside directors have the significantfeature of part-time directorship in other companies.⑤Non-state-owned companiesor companies with high ownership concentration, internal directors who have morestake are more likely sit on RCs. In the above two types of listed companies, the morestake hold by outside directors, the less likely they are elected to the RCs.⑥Thegreater the directors’ age and the higher the education level of outside directors, theeasier it is to be selected by RCs. This phenomenon is more significant in non-state-owned listed companies.⑦The RCs’ directors being selected by listedcompanies in China are likely younger, this may induce RCs lack the age advantagein the negotiation between the managers and RCs. From the above characteristics,China’s listed companies tend to select outside directors with more work relatedexperience, the ability to obtain information on the board and within the board’sinternal network, the ability to cooperate with other board effectively, and the abilityto fulfill multiple tasks, rather than outside directors’ interests in the company. Thecriterion of internal directors’ selection in listed company’s RCs focuses on directors’interests in the company and business experience, rather than the directors’ companyworking experience. In addition, the state-owned controlling shareholders and theblock shareholders of listed companies in our country still have great influence, whichaffected the selection of RCs’ director. From the existing empirical results, theinfluence is conducive to maintaining shareholder, especially large shareholders’interests（.2）The channel of RCs’ independent directors play their role is by promotingmanagers to hold company’s stock to coordinate the interests of managers andshareholders. The proportion of independent directors on the RCs does notsignificantly improve the level of managers’ monetary compensation. Independentdirectors of RCs mostly are not hold shares in the company, this reduces RCs’motivation to align managers’ interests with shareholders’. In non-state-controlledlisted companies RCs, the higher the proportion of independent director, the more toincrease the timely earnings information in promoting managers engaged in companylong-term development in the design of managers’ compensation contract.（3）Theownership and monetary incentives of supervisors are effective means of preventingcollusion. The ownership of the supervisor (i.e., the equity of compensationcommittee member) will reduce potential trenches of managers in the frame of thethree-tier principle and agents model. It increases the chances of managers to obtainequity incentives, and enhances the relationship between managers’ compensation andcorporate performance, so that coordinated the interests of managers and shareholders.The monetary incentives of RCs’ members did not improve managers’ monetarycompensation, but promote the consistency of managers and shareholders’ interests instate inforqqustions owned listed companies and companies with low ownership concentration.（4）irectors holding position in multiple boards is characterization ofthe RCs’ information acquisition and monitoring incentives, and in our country’sspecial "dual system" mode, these characteristics can play a role in state-owned listedcompanies and large shareholders companies（.5）Women can bring the diverse to RCs.Female directors of RCs are not listed companies’"facade decoration", the role ofwomen directors in the listed companies RCs’ mostly embodied in state-ownedlisted companies and more scattered equity companies.（6）RC members’ externalpart-time is a "double-edged sword". Director’s external part-time can enhance RC’soutside experience in design managers’ compensation contract, increase weights onaccounting surplus index in managers’ compensation contracts, promote managersengaged in the operation of the enterprise long-term development and avoid managersshortsighted. However, the communication between RCs’ directors and externalcorporate managers make RCs have more reference points in setting managers’ paylevel, thereby boosting the managers’ pay levels.（7）Finally, we found that managersnot in the non-state-owned RCs will lead to lower compensation performancesensitivity. And this article doesn’t find that whether evddedmanagers sit on the RCswill affect their monetary compensation and incentive. The policy meaning ofaforementioned research conclusion is quite obvious.Finally the article summarizes the full text of the research, and put forward thefuture extended research topic based on the three layers of principal-agent theory,mainly including the impact of RCs’ oversight and incentives for managers on theirimplicit compensation’s supervision and control.