The Impact Of Corporate Governance On Top Executives' Pay-performance Sensitivity

With the development of modern enterprises, the compensation mechanism for top executives has become a hot issue. Corporate governance reform which began from early 21st century greatly promoted the establishment of compensation mechanism. Agency theory suggested that interests between shareholders and executives are not consistent, the information is not asymmetric and executives' business activities are difficult to observe. So the contract between shareholders and executives is not complete. If the performance is the signal of executives'efforts, the contract linking pay and performance will be more reasonable. Therefore, the study of pay-performance sensitivity has always been an important part in the study of executives and this index is widely used to measure the effectiveness of compensation mechanisms. Foreign research shows that pay-performance sensitivity is likely to depend on corporate governance. Good corporate governance, such as more independent and professional board, moderately concentrated ownership structure, etc. contributes to implementation of compensation mechanisms, resulting in better incentive effects. In China, there is much research on factors influencing pay level and little research on the impacts of corporate governance on pay-performance sensitivity. However, owing to some historical reasons, the corporate governance of China's companies has many particular characteristics. Foreign research results may not be fully applicable to domestic listed companies. Therefore, by considering our national characteristics and making use of the data of China's listed companies, this thesis analyzes the impacts of corporate governance on top executives'pay-performance sensitivity.On the base of summary of relevant theoretical and empirical literature, the thesis uses descriptive statistics and multiple linear regression method to do analysis. The sample data is from annual report of Shanghai and Shenzhen A-share listed companies from 2005 to 2008. It focuses on the analysis of four aspects, including the structure of board, the independence of chairman, the scale of board and the ownership concentration. The research shows some findings as follows:the increase of proportion of independent directors and ownership concentration can significantly enhance pay-performance sensitivity; the larger the scale of board, the higher the pay-performance sensitivity; the independence of chairman has no impacts on pay-performance sensitivity. In addition, by comparison method, this study finds that corporate governance of less developed regions'listed companies has more significant impacts on pay-performance sensitivity relative to developed regions' listed companies, and the non-state corporate governance has more significant impacts on pay-performance sensitivity relative to state corporate governance.According to findings of this paper, several suggestions are provided as follows: firstly, Chinese companies should improve the independent director mechanism by enhancing the independence and level of participation of independent directors; secondly, improvement of corporate governance of the less developed regions'listed companies is useful to enhance pay-performance sensitivity; thirdly, the property right system's reform of state enterprises is needed; at last, it is necessary to improve top executives'compensation mechanism. The efficient way are linking interests of executives and the company's long term goal, using reasonable performance measure index and increasing transparency of the salary contract.