Remuneration Committee And Manage Compensation

The original intention of the Remuneration Committee under the board of directors was to solve the principal-agent problem in the corporate governance practice.The theories justifying the compensation committee are the "effective contracts theory" and "three-tier agency model",while those defying the compensation committee are the "managerial power model" and the "justifying compensation hypothesis" which is developed in china.The Remuneration Committee in western countries has a history of 35 years.And here in China,the environment of corporate governance is different from those in Western countries.At the beginning of establishing the Remuneration Committee,Chinese firms learned a lot from the mature Western markets.Thus,it just took a short period of ten years to shift from a voluntary scheme to a compulsive one.It is a question whether the institution contributes to the designing executive compensations and monitoring CEOs from the perspective of corporate governance.In this paper,we test the effectiveness of these theories in dealing with the problem in Chinese firms,taking into consideration the specific economic environment in China.Based on theoretical derivation and empirical tests,this paper studies the relationship between the Remuneration Committee and the executive compensation,tests the effectiveness of the compensation committee when the firm has different property rights or in different political levels,and further testifies the influence of these factors on executive compensation after the remuneration committee has been set up.The empirical study seeks to answer the following five questions.Firstly,what are the differences between those listed companies that voluntarily established a remuneration committee and those which did not in executive pay,compensation-performance Sensitivity?Based on the data of the listed companies from 2003 to 2006,this empirical study has found:In companies with the Remuneration Committee,the executive Compensation is higher than that in companies which do not have the Remuneration Committee,while there is no significant difference in the compensation-performance sensitivity;the companies'performance affects the function of the Remuneration Committee,especially in the companies which have poor performance,the establishing of the Remuneration Committee has significantly lowered compensation-performance sensitivity;and the process of marketization also affects the function of the Remuneration Committee:in areas with a low degree of marketization,the listing Corporations which have the Remuneration Committee have lower Compensation-performance sensitivity,while in areas with a higher degree of marketization,setting up a compensation committee will make the pay-performance sensitivity greater.Secondly,what is the difference between state-owned and non-state-owned companies respectively after they have established the Remuneration Committee?The empirical study has found that:compared with the non-state-owned enterprises,state-owned listing enterprises which have set up the Remuneration Committee have higher compensation and higher Compensation-performance sensitivity;in enterprises with a relatively higher performance,state-owned listing enterprises which have set up the compensation committee have higher pay-performance sensitivity.Thirdly,what is the difference of the influence of setting up the Remuneration Committee on executive compensation and the compensation-performance sensitivity between state-owned listing enterprises of different political levels,eg,between those controlled by the central government and those controlled by local governments?Empirical studies have found that:those listing Corporations controlled by the central government which set up the Remuneration Committee have higher compensation-performance sensitivity;when the performance is relatively high,the compensation-performance sensitivity between the two types of enterprises is the same;while when the performance is relatively low,the compensation-performance sensitivity in companies controlled by the central government is higher,and the contrary is true in local state-owned enterprises.It is also found that the local state-owned listing corporations have stronger functions of"justifying compensation hypothesis".Fourthly,in the listed companies that have established a remuneration committee,will the present remuneration of the Remuneration Committee members themselves affect the determination of executive pay?This empirical research has found from the samples chosen from the year 2002 to 2010 that:when the compensation and shareholding ratio of independent directors in the compensation committee is higher,the executive compensation and the shareholding ratio will be higher.Fifthly,will the proportion of independent directors,internal directors and the external non-independent directors have influence on the executive compensation?The empirical research has found that:when internal directors are members of the remuneration committee,the management compensation of the listing corporation is lower;on the other hand,whether internal directors join the remuneration committee or not does not affect the compensation-performance sensitivity;and whether external managers join the compensation committee or not is not relevant to the management compensation.The results of the empirical research show that the remuneration committee is in accordance with the "managerial power model" in China.