Human Capital Difference Of Same-term Independent Directors And Incentive Distortion Caused By Homogeneous Remuneration

In the process of "Western learning",it needs to be explored whether there is an effective market for independent directors(IDs),whether a market pricing mechanism is formed based on IDs’ human capital,whether the company has reasonably formulated remuneration when hiring IDs and how to set IDs’ salary to promote IDs to play a governance role.The human capital of same-term IDs is usually different,but the remuneration provided by the company is homogeneous overall.When the same-term IDs have different human capital and homogeneous remuneration,the company does not formulate differentiated compensation based on individual human capital,which means some IDs must be underestimated or overestimated compared to their human capitals.How underpaid(insufficient incentive)and overpaid(excessive incentive)affect IDs’ performance is a meaningful question.Although for some IDs,the remuneration of serving as ID may only account for a small percentage of their personal income.The remuneration paid by the company to IDs is not only the recognition of their professional ability and market reputation,but also the economic compensation for their performance risks,time cost and personal energy.In this sense,IDs value the company’s recognition in the form of remuneration.Therefore,this paper focuses on whether providing homogeneous remuneration for same-term IDs can effectively motivate IDs to play a governance role.This paper studies the same-term IDs of A-share listed companies from 2005 to 2017,using Python to download and crawl the IDs’ compensation standard(selection salary or the salary payable)data in original announcements of the board of directors.From the perspective of human capital differences,this paper comprehensively studies the characteristics of IDs’ selection salary,IDs’ pricing mechanism,incentive issues caused by homogeneous remuneration and the impact on governance performance.Firstly,this paper measures the human capital of IDs,studies the human capital difference of same-term IDs and finds that there are differences in human capital among different IDs while the company provides homogeneous remuneration.Specifically,I build a pricing model for IDs,using IDs’ human capital characteristics and company characteristics as independent variables,and using selection salary as a dependent variable.The result shows that from the whole market,IDs get higher salaries with richer experience,overseas background,higher education,and older age.Furthermore,this paper divides the sample into firms with higher differences and firms with lower differences,finding that the correlation between salary and human capital is stronger in firms with lower differences,which means the salary pricing mechanism is more market-oriented in these firms.While in firms with higher differences,the correlation between salary and human capital is lower or even not significantly different from zero,which means the salary pricing mechanism is more distorted.Secondly,this paper explores the impact of underpaid and overpaid caused by homogeneous remuneration on IDs’ governance performance(diligence and dissent).I use the coefficients obtained from the salary decision model in firms with lower differences to obtain the degree of incentives(underpaid and overpaid),and then explore the differences in IDs’ governance performance when they are underpaid or overpaid relative to their human capital level.Insufficient incentive(underpaid)will weaken the IDs’ diligence,reduce the probability of attending board meetings and hard to motivate IDs to act for the benefit of shareholders and issue objections.Excessive incentive(overpaid)will weaken the independence of IDs and reduce the possibility of dissent.Therefore,considering diligence and independence together,compared with excessive incentives and insufficient incentives,moderate incentives are more helpful for IDs to play a governance role.Finally,this paper compares the influence of IDs’ compensation incentives estimated at the company level and the influence of IDs’ compensation incentives estimated considering human capital difference at the ID level on governance performance.Compared with the traditional estimated compensation incentives,the negative relationship between insufficient incentive and diligence,the positive relationship between excessive incentive and diligence,the negative relationship between insufficient incentive and dissent,the negative relationship between excessive incentive and dissent is stronger after considering human capital difference at the ID level.This result shows that the influence of IDs’ compensation incentives on governance performance is not only derived from the differences in the overall salary between different companies,but also from the incentive problems caused by the ignorance of IDs’ human capital difference within the company.Considering the compensation difference between different companies only and ignoring the IDs’ individual characteristics within the company,will lead to a weaker impact of compensation incentives on governance performance.This paper focuses on the same-term IDs’ selection salary and conducts a systematic analysis on the same-term IDs’ human capital differences and incentive distortion caused by providing homogeneous remuneration.The purpose is to provide a theoretical basis for how to design the compensation mechanism of IDs in our country,how to establish and improve the IDs’ external labor market,and then enrich the research of IDs’ compensation from the perspective of same-term IDs’ selection salary.The contributions of this paper is as follows:Firstly,this paper studies the compensation incentives of IDs from the perspective of human capital differences for the first time.This paper examines the incentive problems caused by companies providing homogeneous remuneration for same-term IDs with differences in human capital.How underpaid and overpaid affect IDs’ performance is a meaningful question.There is a big gap in the large sample research of IDs’ compensation incentives from the perspective of human capital differences.This paper analyzes the IDs’ salary pricing and compensation incentives caused by homogeneous remuneration,making a certain contribution to this field from this perspective.Secondly,this paper deepens the understanding of the relationship between IDs’ compensation incentives and governance performance.We discuss the impact of insufficient and excessive incentives on governance performance,including diligence and dissent.For the first time,this paper compares the influence of IDs’ incentives estimated at the company level,and the influence of IDs’ incentives estimated considering human capital difference at ID level on governance performance.This paper provides empirical evidence for the rent-seeking theory of IDs and finds that compared with excessive incentives or insufficient incentives,moderate incentives are more helpful for IDs to play a governance role.From the two direct dimensions(diligence and dissent),this paper provides incremental evidence of relative incentives for further understanding the factors affecting IDs’ performance.Thirdly,this paper is the first to study the same-term IDs’ selection salary empirically and systematically in a large sample.By downloading and crawling the original announcements of the board of directors,this paper constructs a database for IDs’ compensation standard.This paper positions at same-term IDs for the first time.IDs who enter the company in different periods belong to different sessions of the board and there may be natural differences in their remuneration.The compensation incentive is more comparable among the same-term IDs.The salary data used in this paper is the data of IDs’ salary standard in the original announcement of the board,which is set by the company when IDs are selected and have not started work.The selection salary can alleviate the endogenous problems caused by the fact that the actual salary used in the previous literature already includes the performance of IDs.Finally,this paper has policy implications and provides some feasibility for optimizing IDs’ compensation mechanism.The result shows that China has not yet fully formed a mature labor market for externally hiring independent directors.Listed companies still provide homogeneous remuneration for same-term IDs with different human capital.We suggest listed companies consider incorporating individual human capital into compensation mechanism when selecting and hiring IDs.It is biased to provide homogeneous remuneration to same-term IDs when the human capital difference is too large.Companies should formulate appropriate compensation contracts to motivate IDs based on IDs’ individual characteristics.It is also necessary to build a more effective labor market for IDs,form a labor pricing mechanism based on IDs’ human capital,fully disclose information about IDs’ diligence and violations,and thus encourage IDs to perform their external supervision functions.