Empirical Research On Efficiency Of Compensation Committee Governance In Chinese Listed Companies

In principal-agent theory, the interests between shareholders and managers are not always consistent due to the separation of proprietary and management power. Adverse selection and moral hazard may exist when the managers maximize their own interests, even in the price of interests of the shareholders. Thus, the shareholders would design a series of mechanism to motivate and monitor the management to reduce the agent cost. In the expectation of the shareholders, these mechanisms will realize the shareholders interests when the managers pursue their own interests.In order to realize the consistence of the interests between the shareholders and managers, besides reasonable designation of motivation and monitoring, relevant institution and organization are necessary to ensure the realization of the mechanisms. The characteristic of separation between the proprietary and management power makes the shareholders not operate and manage their corporations directly, rather they consign these activities to the management. In this case, the asymmetric information emerges. For public companies, it is difficult to monitor and restrict the action of management by numeric scattered shareholders since the restraints in acknowledge, energy and capacity. The shareholders have to consign their rights to the board of directors to motivate and monitor the management more professionally.Compensation committee is the sub-institution of board of directors, the aim of compensation committee is to evaluate the performance of CEO and other executives, to make and check the compensation of directors and executives. Compensation committee forms the internal monitoring and controlling mechanism to executive from the perspective of compensation.The direct motivation of setting up compensation committee is from the dissatisfaction due to the executives make the compensation of themselves. What's more, the increment of executive compensation deviates from the actual performance more and more seriously.China Securities Regulatory Commission (CSRC) has published"Governance Guidelines for Listed Companies"since 2002. The Guidelines require the listed companies to set up strategic decision committee, auditing committee, nominating committee and compensation committee et al as the sub-institutes of board of directors. They also require that independent directors in auditing committee and compensation committee should be majority and should be in charge of the committee. The responsibilities of compensation committee include: (1)establishing the criterion to evaluate directors, supervisors and executives; (2)inspecting compensation policies and programs of directors, supervisors and executives. Since publishing"Governance Guidelines for Listed Companies", the number of compensation committee has increased largely in China, however, whether compensation committee fulfills its responsibilities effectively, and whether compensation committee achieves its governance purpose. These questions are concerned not only by shareholders and management, even investors, but also by department of supervision. The empirical evidences of these questions ease the department of supervision understanding the policy effect of setting up compensation committee and are helpful to perfect the professional committee governance. Beyond these researches, the empirical evidences of compensation committee governance in Chinese listed companies could complete the literature of corporate governance, provide experiences for developing countries like China.This dissertation focuses on the relations between executive compensation and performance, researches the efficiency of compensation committee governance in Chinese listed companies. The conclusions are significant in both theoretical and practical aspects, for they make it easy understand the effect of compensation committee governance and the intermediate conducting mechanism between executive compensation and performance.This dissertation researches the effect of compensation committee governance from 3 perspectives, that is, while containing over high executive compensation promoting over low executive compensation; strengthening the sensitivity between executive compensation and performance; and making executive compensation criterion more rational and objective. The configuration of this dissertation is as follows: Chapter 1: Introduction. Introduce research background, research method, major perspectives, contributions, significance, and simple configuration of the whole dissertation.Chapter 2: Background of Compensation Committee. Exactly analyze the emergence, development of compensation committee and problems in its developing process. Review the revolution of compensation committee in America, and further understand the developing tendency of compensation committee. At last, introduce compensation committee in China briefly, put forward the motivation of this research.Chapter 3: Literature review, theory basis and hypotheses. Firstly, review researches of compensation committee from 3 aspects: CEO's effect on compensation committee, the role of compensation committee in setting terminal-year compensation, and the role of CEO and compensation committee in structuring executive pay. Then, based on the theory basis and previous researches, this dissertation puts forward 3 research hypotheses, that is, the developing tendency of executive compensation, the sensitivity between executive compensation and performance, and the choices of executive compensation criterion.Chapter 4: Model design and sample selection. Based on previous section, design empirical models, then, select relevant data from available database (CSMAR).Chapter 5: Empirical analysis and explanation. Employ descriptive statistics, correlation analysis, and regression analysis to test the hypotheses put forward in section three, and explain the results from theoretical and practical aspects.Chapter 6: Summary and conclusions, policy suggestions. Based on the hypotheses in section 3 and empirical results in section 5 and section 6, summarize the efficiency of compensation committee governance in China listed companies. Finally, provide relevant policy suggestions combining empirical evidences, and future research trend.The conclusions of this dissertation contain:(1)Though compensation committee in China exists for not a long time, some evidences have indicated that there exists"mean reversion"tendency between over high compensation and over low compensation, to be exactly, compensation committee can make executive compensation more rational, while constrains over high compensation promotes over low compensation.(2)The relation between executive compensation and performance will be more sensitive in companies setting up compensation committee, what's more, it is more sensitive for the relation between executive compensation and accounting indicates compared with market indicates. This dissertation also finds that the number of directors in compensation committee doesn't have significant influence on sensitivity between executive compensation and performance (both accounting indicates and market indicates). The reasons may exist in the structure of compensation committee, it is said that insiders, especially CEO on the compensation committee will reduce the sensitivity, however, this presumption needs further research on compensation committee structure.(3)Accounting indicates ROA and CFO both have significant influence on executive compensation, comparing these two indicates suggests that both ROA and CFO have significant influence on executive compensation, but ROA is more significant. When ROA and CFO are contained in one model CFO indication still has significant influence on executive compensation, but is not significant in compensation committee sample.To further test the influence of ROA and CFO on executive compensation, this dissertation chooses two grouping variables (earnings persistence and discretionary accruals), and makes regression analysis respectively based on these grouping variables for purpose of finding evidences on alternative choice between different performance indicates. The results are that ROA exerts more influence on executive compensation as earnings become more persistent, but the results in compensation committee don't show significant incremental influence on executive compensation. Ceteris paribus, ROA will have less influence on executive compensation as discretionary accruals have higher proportion in earnings, but CFO indicate doesn't show this trend. These findings suggests that compensation committee has not completely realized the effect of CFO in deciding executive compensation, has not found more rational indicates to evaluate executive compensation under conditions of low earnings persistence. These findings also indicate that compensation committee has little alternative selections when evaluating executive compensation, and may exist"functional fixation" phenomenon to some degree.The contributions of this dissertation include:(1)This dissertation focuses on the research on sub-institute of board of directors (compensation committee), provides empirical evidence in efficiency of compensation committee governance in Chinese listed companies. The findings give us an insight into the mechanism how compensation committee influences executive compensation, provide some theoretical and practical evidences for further revolution and perfection of compensation committee, and provide brand-new perspective on how motivate executives.(2)This dissertation employs statistical, econometrical and other methods to test the mechanism how compensation committee motivates and monitors executives, strengthens understanding the efficiency of compensation committee governance. The findings may provide useful perspective in understanding efficiency of other sub-institutes of board of directors, like auditing committee, strategic decision committee and nominating committee et al. They also provide suggestions for researching on corporate governance and perfecting corporate governance structure.