A Study On Compensation Rigging Of SOE Chief Executives Based On Psychological Incentives

In recent years, the income distribution and executive compensation of state-owned enterprises (SOE) have been hot topics of great concern in all quarters of society. From the establishment of the SASAC, although chief executives'incentive mechanism gradually standardized, the pay level grows rapidly and the gap between chief executive and general staff widens. For example, chairman of China Merchants Securities, Gong Shaolin, gets the compensation of4.83million in2011, which is60times the average wage of worker. Kong Qingping, party member of China State Construction Engineering Corporation, receives remuneration9.1million, which is180times the average wage of worker. These information mixes with public awareness of the widening income distribution gap. The country makes compensation reform as one of the most important aspects of state-owned enterprises reform, trying to formulate a reasonable compensation contract. However, the phenomenon of high salaries, the deviating of compensation and performance hit the newspapers frequently, which are contrary to the original intention of compensation contract design. These phenomena reflect chief executives using their power to rig compensation. In that way, which are the ways of chief executives' rigging and what are the reasons behind them.Under the traditional corporate governance theory, the scholars use benefit maximization to explain chief executive' remuneration rigging, which cannot give full explanation to the rigging diversity. Because under the traditional corporate governance, people are perfectly rational, which means they take benefit maximization as their only goal. However, seeking to maximize interests alone cannot explain the diversity of people behavior. Combining psychology with corporate governance research, behavioral corporate governance opens the black box that traditional corporate governance neglect and starts from the human psychology and behavior patterns. In the actual decision-making, behavioral corporate governance researches participants'psychological impact on the decisions-making. Under this framework, we discuss chief executives' compensation rigging and hope to achieve the following objectives. Firstly, the dissertation wants to find different evidence of rigging, in order to provide support for the better understanding of compensation contract. Secondly, on the basis of theoretical analysis and empirical analysis, combining executive psychology with their behavior, the dissertation wants to find the reason behind rigging and provide evidence for explaining diversified behavior. Thirdly, through the analysis of realistic basis of the rigging, problems existing in the compensation incentive and psychoanalysis, the dissertation want to provides policy advice to the reform of state-owned enterprises pay, which are from the perspective of constraint of executive power, system design, etc.To achieve the study purpose, this dissertation is divided into eight parts. The basic structure is as follows:The first chapter:Introduction. This part describes the background of the research, at the same time elaborates the practical significance and theoretical significance of this article, and then defines the concepts involved in this paper. It defines the boundary of dissertation, and clears the study logic and main content.The second chapter:Literature Review. This part sorts out the existing literature from the following perspectives:the study under optimal contract theory, under managerial power theory, the executives'psychological research under corporate governance. This chapter reviews and summarizes results of previous studies, in order to refine reference results as much as possible and find out the further positioning of this field, to identify research focus and to expand research space.The third chapter:Background analysis of SOE chief executives' compensation rigging. Firstly, this chapter discusses the systematic obstacles of the state-owned enterprises. Secondly, starting from the realistic foundation of compensation rigging, this chapter discusses the formation of SOE executive power and the difficulty of performance evaluation, in order to find the feasibility of manipulation. Thirdly, this chapter explores the possible problems of incentive by analyzing the status quo of SOE executive compensation, providing a realistic basis for the study of manipulation. The background analysis provides institutional bedding for the subsequent theoretical and empirical studies.The fourth chapter:Theoretical analysis of compensation rigging based on psychological incentive. This chapter first describes the theoretical basis of manipulation, providing theoretical support for our research. Then we uses the behavioral corporate governance as the theoretical basis for the psychological and behavioral research. Under this theory, we combine rigging behavior with executives' psychology. Besides, we explain the generation of executives'different psychology and the relationship between the manipulating behavior and psychology through specific psychological theory.The fifth chapter:The first part of this dissertation's empirical study, which tests the ex ante rigging of compensation based on comparing mentality. The study finds that chief executives use earning rigging to entrench performance compensation. When executive pay below the industry average last year, the rigging motivation will be intensified, which indicates the fair tension coming out of external comparison leads to the rigging behavior. However, even if executive pay below the industry average last year, the widening gap among executives alleviates the adverse mood and restrains the compensation rigging, which illustrate negative input is not necessarily the only way to eliminate negative emotions. By further study, we find that comparing mentality is more applicable to the chief executives of SOEs controlled by local governments, for the chief executive of SOEs controlled by the central government prefer to hidden non-monetary private benefits while the top managers controlled by local governments prefer to explicit monetary private benefits. Besides, the more competitive environment is, the stronger comparing mentality is, which easily leads to the compensation rigging. Since rigging is an extreme way to eliminate psychological stress, it brings negative impact on the firm's future performance and future value.The sixth chapter:The second part of this dissertation's empirical study, which tests the rigging of compensation contract based on defending mentality. Firstly use internal performance measures, we find the chief executives shift compensation weight toward better performing measures in order to defend their high compensation. The greater power executives possess, the more rigging they conduct. Because of the compensation regulation of SOEs controlled by the central government, the rigging behavior is significantly strong in local government controlling SOEs. By specific study, the higher of relative compensation is, the more intense psychological defense is and then the stronger of rigging behavior appears. Secondly use relative performance measures that compared to the industry average, we find the better relative performance is, the stronger of pay and performance sensitivity is, which suggests the improvement of compensation performance sensitivity may be a rigging way based on the defending mentality. Since rigging distorts compensation contract, it brings negative impact on the firm's future performance and future value.The seventh chapter:The third part of this dissertation's empirical study, which tests compensation stickiness based on self-attribution bias. Individual inclines to attributing success to their effort, failure to external environment, calling self-attribution bias, which varies with the stability and controllability of the task.Accordingly, based on the existence of compensation stickiness, we divide the performance into operating performance and non-operating performance according to the controllability, and into revised operating profits and investment returns according to risk level. We find the stickiness between executive compensation and operating performance of high controllability is low, while the the stickiness between executive compensation and non-operating performance of low controllability is high. Besides, the stickiness between executive compensation and revised operating profits of low risk is less obvious than that of investment returns. These evidences suggest the existence of self-attribution bias. We further find the unpredictability of the financial crisis lowers performance controllability, which makes a significant difference of self-attribution bias, appearing that the stickiness characteristic after the financial crisis is significantly higher than before the crisis.The eighth chapter:The summary of the full paper. In this chapter we review and summarize the main conclusions of this paper, at the same time put forward specific policy recommendations from the perspective of restraining power and policy setting. At last, points out the shortcomings of this research and the direction of follow-up study.This research makes innovations in the following aspects: Firstly, the dissertation conducts interdisciplinary research by incorporating psychological factors into the behavior of chief executives, exploring the reasons behind certain behavior from the source. This way of research contribute new perspectives and evidence for the study of executives behavior. To be specific, the dissertation explains the diversity of SOE executive rigging way by analyzing psychological factors. There is still lack of relevant empirical test for such kind of research, and then the research idea can provide inspiration for future study.Secondly, the dissertation conducts explorative study for the rigging way, which enriches the research methods and perspectives related with compensation rigging. For the rigging based on defending mentality, our deduction is different from the anticipation of the agents theory of the mainstream. We deem the increase in executives' degree of performance compensation sensitivity is because of executive's demand for justifying compensation. Accordingly, we firstly use internal performance measures to test whether the chief executives would shift compensation weight toward better performing measures and what the rigging behaves if relative compensation is high. Secondly we use relative performance measures that compared to the industry average, in order to find whether the executives would use relatively better performance to justify compensation.Thirdly, the dissertation incorporates multiple rigging ways into the same research framework for the first time and conducts a in-depth study by analyzing the different manifestation of rigging under different control levels and circumstances. By this way, the dissertation provides a more comprehensive and profound analysis for the revelation of mentality and the comprehension of the effectiveness of compensation contract. The way of discussion can provide direction for future research. Besides, the dissertation analyzes realistic foundation of rigging from the perspective of performance evaluation, at the same time elaborating status quo of SOE executives' compensation, which comprise a reasonable study prerequisite and avails for a complete system of rigging study.