The Legal Regulation Of Executive Compensation Of Listed Company

Executive compensation of listed companies is the price(reward or remuneration) paid to the executives by the company in cash and non-cash way for their managerial service provided to the company. With the separation between ownership and management in modern enterprises, owing to the market adverse selection and ethical risk, there is conflict of interest between shareholders(owners of the company) and executives who act as the agents of company. The executive compensation of listed companies based on pay-performance was put forward originally as an effective tool to reduce the agency cost and to balance the interests between the two parties. However, in fact it was only found that it had alienated to one of the complex agent costs itself. Since 1990 s, the soar of executive compensation in Anglo-American countries attracted high attention, and it led to the corporate governance reform in UK initiatively. According to the relative survey, in some large public companies, the average compensation of middle and high executives is almost 30 times higher than the general stuff, not counting in the few very high ones. Nevertheless, Instead of being contained effectively, the executive compensation issue was getting worse during that corporate governance reform.Since the financial crisis in 2008, people’s bottom line was broken thoroughly by the exposed high-executive compensation and by their fearless and ignoring attitude of high executives. According to reports, before an acquisition due to too much loss by a bank from Wall Street in 2008, Merrill Lynch distributed more than ten billion of dollars to their high-executives. The financial industry executive compensation of listed companies was widely accused and questioned by the public during this crisis. The President of the United States who was planning to provide economic aid, also denounced that the behavior of high executives was very shameful and irresponsible for shareholders, meanwhile, he announced that the executive compensation in the listed companies in United States which received government bailouts, would be subject to a cap, and multiple regulatory measures were lay down to strengthen the supervision to the company at the same time. Similar action was taken in Britain. In 2009 British prime minister brown said, to realize financial reform, the starting point should be wiping out the executives high-pay of listed companies in financial industry. Shortly and widely, the criticism and accusation from public against executive compensation of listed companies grew more severe. In China, the same problem was to the forefront. In addition to the rising concern about the high compensation of the executives in financial listed companies, the benefits of the high-ranking managers in stated-owned enterprises caught high attention as well. This further contributed to the Chinese characteristic "executive compensation mystery". In 2010, Sina Finance Economics launched an online social survey called "how to view executives high-paying".Results showed that the public is hard to accept the excessive pay gap to high-executives’ pay. With increasingly social conflicts and accusation on high executive pay, measures and regulation to limit the highest pay were adopted in China; however, no expected effect was obtained. Neither did other countries.As Brian R. Chefins puts it, executive compensation is such a topic that is easier to find a problem than to find a solution. Many people, including shareholders, employees, politicians and the press, get a reason to criticize the existing system.It is with this question that I study. Firstly, a review is made on the executive compensation structure and its theoretical basis; Secondly, a development is exhibited about the principle and the boundary of legal restriction to executive compensation of listed companies; finally, explanation and establishment are illustrated about the specific methods of legal restriction to executive compensation. In the process, this article answers three questions step by step: 1) Why should legal restriction be imposed to executive compensation in listed companies? 2) What is the legitimacy foundation and boundary of the legal restriction to executive compensation in listed companies? 3) What are the specific methods for legal restriction to executive compensation in listed companies?There are five chapters in this article. Each chapter can be briefed as follows:Chapter I The reality and the abuses of executive compensation in listed companies. As a starting point of the entire article, the concept and scope of "executive “in listed companies are defined firstly in this chapter. It includes not only the company management personnel referred in paragraph 1 of article 216 of the "company law",but also those directors who directly involved in company operation and management. Secondly,after consolidating the basic theories regarding executive compensation of listed companies, this chapter analyzes the internal and external factors which obviously influence to executive compensation in practice and business. These factors mainly include business operation and management, executive personal situation, market competition and demand, and the institutional environment, etc. At last, an exploration is made through some typical cases and the empirical data to find out theabuse and the crucial reason behind the executive compensation system. In my opinion, in order to reduce the agency cost between shareholders and executives, and to response to the heterogeneity of managerial production factors invested, incentive mechanism should be embedded into the executive compensation system. Therefore, the essential issue of the entire executive compensation system is how to implement effective incentive and restriction to the executives. In practice, incentive distortion and disconnection have been long-standing abuses between executive compensation and corporate performance. These abuses are caused by market failure, by dislocation of programming, and by the defect of the entity system as well. Could these problems be intervened and corrected by law? And if the answer is yes, then by what sorts of adjustments?Chapter II The foundation and the boundary of legal restriction to executive compensation of listed companies. Based on the abuses and their causes of executive compensation in reality, people might want to rely on the legal restriction method. However, is it proper for law to intervene into the private contracts between companies and executives? And from where to intervene? This is the logical starting point of construction of legal system of executive compensation of listed companies, meanwhile it sets up the basic framework for the purpose and principles of legal restriction of listed companies, which further more provides theory support for designing specific paths for legal restriction to executive of listed companies. Research suggests that in the modern corporate governance structure, the traditional contract structure has been replaced by the characteristics of the public regularization. The basic manifestation of being able to applying law to the entire company power structure is to endow rights to companies, business managers or any internal organization through law and regulations, and to exert rights for the benefits of all shareholders. The legal restriction to executive compensation of listed companies, in essence, is a kind of process of dynamic adjustment of company autonomy. Its purpose is to establish reasonable and fair incentive system practically, and seek fair and transparent pricing system of executive compensation in procedure level. Nevertheless, just as some scholars said, the legal restriction to executive compensation is necessary and important but evidently not a panacea. The means and the scope that it impacts are specified, due to the limit of incentive strategies and company governance standards. Hence, when restricting executive compensation of listed companies, the principles of autonomy, fairness, and incentives shall be insisted, in order to stand fast within the reasonable boundary.Chapter III Adjusting the decision-making mechanism of executive compensation. The objectivity and impartiality of the decision-making mechanism which includes the subject of decision-making and decision-making procedure provide certain foundation for reasonable executive compensation. Therefore, the subject of decision-making is in a core position, and plays a decisive role in the allocation among right, obligation and responsibility in the legal relations of executive compensation. Therefore, the law should restrain on the appointment of the decision-making subject of executive compensation and the isolation of the benefits of decision-making object. The change and development of the market environment and the variation of company organization structure, lead to the difference of decision-making configuration of executive compensation. The subjects that is guaranteed or restrained are also changing consistently. Early in the development of the company form, the organization structure is featured as human joining; the executive compensation is decided by shareholders directly. Trust between shareholders and judicial tolerance can maintain efficient operational of the family business. Later, in the process of family business evolving to public firms with diffused ownership, the decision-making right shifts from executives to directors, as the power transferring. Owning to the difference of the traditional corporate governance structure in various countries, the configuration of the power structure is not the same as well. But due to the identity overlap of directors and executives or the directors’ capture by executives, it is getting more and more possible for executives to decide their compensation by themselves. So at the current moment, it is getting clearer that the decision making right on executive compensation is returning to shareholders. The “Say on pay” rule established by Britain has been imported for the equity supervision, and in some degree it restrains the executive compensation. It is therefore referred by U.S and EU gradually. But current legislation in China temporarily has not reflected in this aspect. Therefore, lastly in this chapter I analyze and evaluate our entire decision-making mechanism of executive compensation, and propose in four aspects on establishing benefits-isolation mechanism of decision-making subject, classified supervision to executive compensation of state-owned enterprises, introducing vote suggesting right to shareholders, and adding in” sunset clause”.Chapter IV Improving information disclosure mechanism of executive compensation. As to the executive compensation of listed companies, it should be measured and judged by the investors and the public, whether the executives’ capability, efforts and contribution to the company match its compensation, or whether the compensation decision-maker fulfill its duty with due diligence on compensation solution. Therefore, the real, complete and timely disclosure of information is the guarantee for investors and regulators to supervise over executive compensation of listed companies. However the practice indicates no fall on the soaring executive compensation even with the information disclosure on executive compensation. So queries are called to the function of information disclosure system. To conclude, on the basis of dialectical analysis of information disclosure, this chapter points out that its impact to executive compensation is indirect. Meanwhile, with investigation to the information disclosure situation on executive compensation in U.S and Germany, it can be concluded that the concentrate and diversified information disclosure mode is the trend of the times. For China, it is more important to improve the information disclosure on executive compensation, with the upcoming stock issue and registration. Against the four problems on dispersion and singleness of information disclosure, insufficiency of the information disclosure on compensation structure, lacking of transparency on compensation decision-making process, and deficiency on bearing civil liability for disclosure defects, some recommendation for improvements are provided, including optimizing the information disclosure methods, shifting mode form singleness and dispersion to concentration and multiple, expanding disclosure content of performance and compensation, improving the transparency on decision-making of the compensation committee, and setting up the information disclosure mechanism for recessive income of executives.Chapter V Improving the judicial relief mechanism of information disclosure on executive compensation disclosure. Whether to strengthen the control to the decision-making mechanism of executive compensation of listed companies or to improve the transparency of executive pay, both belongs to regulation method beforehand, and it can’t prevent the executive compensation arrangement to the detriment of the shareholders’ interests. As the proverb goes, "no remedies, no rights". By the way of judicial relief, to realize the protection of shareholder rights, and finally to carry out the responsibility of relevant subjects, it is the final path to solve the problem of executive pay as well as an important way to safeguard the rights and interests of shareholders. The existing system resources and theory accumulation have provided reliable path to judicial relief on executive compensation. The shareholders who meet the conditions can seek judicial relief through the form of shareholder derivative litigation, against executive compensation arrangement of a listed company which could possibly violate the benefits of shareholders. With the understanding of the relevant legal provisions and the application of business judgment rule, the court gradually forms a judging criterion whether executive compensation arrangement damages the interests of the shareholders, and with further judicial referee, the court defines specifically if the executive compensation arrangement is reasonable, if damages the interests of the shareholders,, and how will the relative subjects bear the responsibility, etc. In the process of setting up and improving judicial relief system of executive compensation of listed companies, externally we can refer U.S, UK and Australia for their valuable the experience on judicial practice, and internally the useful exploration on executive compensation in state-owned enterprises in China also provide valuable resources.