The Research On The Relationship Between Executive Compensation Contract And Corporate Performance

The separation of corporate ownership and control brings forth the principal-agent problem. The interest or benefit of the manager is not consistent with that of shareholder. It is one part of the studies on reducing principal cost that taking use of compensation policy to solve the principal-agent problem between shareholder and management. Because the manager's investment is unable to be observed and verified, and the effect of uncertainty cannot be expected, people have to align the manager's compensation with the corporate performance that can be measured easily. The correlation between executive compensation and the performance of company is of vital importance of the efficiency of management compensation contract. Only efficient compensation contract could produce great incentive and promote corporation performance. Therefore people pay close attention to the problem of the relationship between executive compensation and corporate performance.The compensation contract is a subtle constitution of many factors, such as incentive, risk, decision, and so on. It is also the significant component in the governance structure of contemporary companies. In the reform proceeding of China's economic system, listed corporation is selected as the No 1 objective model in many state-owned enterprises. Serious problems of insider control, however, are existed in our listed companies, and the efficiency of corporation governance is being weakened. As one of the corporation governance internal mechanism, top executive compensation contract fails to trade off and match manager's risk and return. Based on the current situation of our listed companies, this paper discusses the sensitivity between executive compensation and firm performance, and considers that there is a statistical significance between two of them. Then the thesis explains the economic consequences of the relative effect, and puts forward suggestions on the design of executive performance-based compensation contract. If one of performance-based indexes includes more information about manager's behaviors, the proportion of the index should be increased in the contract. Meanwhile, the trade-off between incentive and insurance should be concerned in reward contract. And what's more, the improvement of corporate internal and external supervisory mechanisms is important to the implement and realization of executive compensation contract.