Executives’ Pay Gap And Firm Risk-Taking

The reform of executive compensation system is an important part of China’s comprehensive economic reform.It is the key and difficult point for deepening the reform of the enterprise salary system how to stimulate enterprises to innovate and create,and how to build the enterprise salary system with internal equity and external competitiveness through the salary system reform.Along with the rapid development of China’s economy,the income distribution gap between residents has been continuously expanding.The pay gap between different enterprises and among the top management team(TMT)is all widening.Enterprises pay gap as an economic problem,directly reflects the status of the social income distribution structure.The excessive pay gap runs counter to the goals of our countries’ compensation reform.At the same time,the reasonable pay gap can not only guarantee the rewards and punishment,but also mobilize the enthusiasm of employees;And it is helpful to establish the differential compensation distribution mechanism which is related to the function of the enterprise and the business performance.At the same time,there are more and more scholars are concerned about the economic consequences of the managers gap pay.In view of social comparison theory and tournament theory,it is thought that the managers pay gap may lead to different psychological perception,which can influence the management decision and the enterprise’s performance.In comparison,there is little literature to discuss whether the pay gap affects managers’ risk attitudes and the level of firm risk-taking.Enterprise management decision is based on the trade-off between risk and return.Firm risk-taking refers to the choice of expected income and uncertainty,indicating that the willing to pay for high profit.It is believed that risk taking can not only help enterprises seize market opportunities,win profit opportunities,but also contribute to the shareholders’ wealth.According to the principal-agent theory,managers avoid risk for their own interests,which leads to the loss of value project and the decline of risk-taking level.Therefore,in the financial field of the company,undertaking of risks is regarded as an indirect agency cost.Executive compensation contract as an important system arrangement of enterprise,the level and the rationality of the structure will directly affect the managers behavior and generates an important impact on risk decision-making.Therefore,this paper will help to enrich and develop the theory of executive compensation and firm risk taking.This paper will study the impact of executive pay gap on firm risk-taking and its mechanism.The following three questions are specifically studied:(1)Is there a risk-taking incentive effect on the pay gap of TMT in Chinese enterprise?Will property rights and financial flexibility affect the risk-taking effect of TMT pay gap?(2)what is the relationship between the external pay gap of top managers and firm risk-taking?How will property property and monopoly affect the risk-taking effect of external pay gap?(3)what is the mediation mechanism between the executive pay gap and the firm risk taking,and whether the innovation input plays an intermediary role between the two?This paper attempts to explore the relationship between top managers’ pay gap and firm risk taking by combining theoretical analysis and empirical test,so as to provide theoretical explanation and practical basis for the arrangement of compensation incentive system and the choice of risk strategy.Firstly,the article expounds principal-agent theory,management power theory,the tournament theory and behavior theory.The executive compensation is divided into the internal pay gap of the TMT and the external pay gap between the same industry and the property rights.Then the paper systematically analyzes the influence of internal and external managers’ pay gap on risk taking.Secondly,choosing Shanghai and Shenzhen A-share listed companies from 2008 to 2015,empirical test is mainly focused on the the influence of internal and external managers’ pay gap on firm risk-taking.The paper also explore whether there is the role of intermediary conduction between managers’ pay gap and firm risk-taking on the basis of reference to Sobel intermediary effect analysis method.Finally,according to the conclusions of the empirical research,the paper puts forward some corresponding policy suggestions on the construction of the executive compensation incentive system in China and the level of reasonable risk taking.The empirical research finds that:(1)The pay gap of TMT has positive incentive effect on firm risk-taking.And then,the grouping regression results according to property shows that the above positive correlation between the pay gap of TMT and firm risk-taking is only significant among non-SOEs.(2)The correlation between the executives external pay gap and firm risk-taking is affected by the executive average compensation of the same industry and property companies.When the managers’ pay is higher than the average,the external pay gap has positive incentive effect on the firm risk-taking,but the positive correlation is only significant in non-state-owned enterprises.When the managers’ pay is lower than the industry average,external compensation gap can stimulate managers to seek change,also enhance the level of the enterprise risk bearing,and the positive correlation significantly only exist in the SOEs.(3)The internal and external pay gap above the average of the industry has increased the level of enterprise innovation input;In the role of the executive pay gap to increase the firm risk-taking,the innovation investment has only shown the intermediary effect in the relationship between the pay gap of TMT in the non-state corporation.According to the above conclusions,we put forward the following policy recommendations:(1)Establish a scientific performance appraisal system for senior executives,and tie the level of executive compensation closely to individual performance.(2)To strengthen the disclosure of corporate executive compensation information,especially state-owned enterprises should pay more contention on the disclosure of the information of executive compensation,welfare treatment and in-service consumption.(3)The enterprises should widen the internal and external managers’ gap pay selectively.In the process of executive compensation contract design,the boards should put the promotion incentive of pay gap in TMT into the decision factors,also should pay close attention to the fairness of justice.(4)It is necessary to set differentiated salary policy for executives in state-owned enterprises,rather than "one size fits all".(5)Search for the long-term incentive mechanism for senior executives,and optimize the combination of short-term with long-term incentive.In addition,enterprises should establish innovation-driven mechanism to motivate the willing of manages of taking risk.The main innovation points of this paper may be reflected in the following aspects:Firstly,with systematically analyzed and tested the influence of executive compensation gap on the firm risk-taking from the perspectives of tournament incentive and behavior cognition,this paper enriches and expands the research on the economic consequences of executive pay gap.Secondly,this paper examined the impact of the external pay gap on the firm risk-taking with choosing the average pay of executive in same industry and property rights as the reference point.It is help to expand the theoretical cognition of the executive compensation contract under the behavioral economics paradigm.Thirdly,we continue to explore the mechanism of executive pay gap on firm risk-taking from enterprise innovation perspective.It is not only further expand the existing research about risk-taking and enterprise innovation,but also provide theoretical support for setting up the incentive mechanism of enterprise innovation input.