An Empirical Study On The Impact Of Executive Compensation On Banking Innovation In Chinese Listed Banks

With the intensification of financial disintermediation, banking industry is facing increasingly fierce competition in recent years, thus to win in this competition, bank innovation has been highlighted. There are many factors can affect enterprises’ innovation capability and have been studied thoroughly and comprehensively by researchers from domestic and abroad, however, most of the previous studies are based on the manufacturing industry or high and new technology industry to study the factors which can affect the innovation input or output. In fact, the bank itself belongs to the service industry and does not directly research or product high-tech products and services. Because of that, the previous paper that has studied how to stimulate innovation and R&D of enterprise is not applicable to banking industry. Considering that the bank executives’ decisions have a significant impact on innovation, besides, the nature of the bank’s innovation is a rather risky progress, then how to reduce the bank executives’risk aversion and throw themselves to innovate business, management and regime has become a meaningful thing. This paper attempts to on the basis of the traditional principal-agent theory, to studies the effect of cash compensation and equity incentive on the bank innovation of the domestic commercial banks separately. We try to verify the validity of the incentive theory and enrich the knowledge of how bank executives’compensation incentive affects the innovation, as well as to provide empirical evidence for the reform on the financial executives’pay.First of all, previous paper about the incentive utility of executive compensation has been presented in this paper so as to clarify how can compensation influence corporate executives’risk preference and affect their decision-making. Then, according to principal-agent theory, the paper analyzes the influence of the bank executives’compensation on the innovation so that we provide a theoretical basis for the follow-up study.Subsequently, this paper selects 14 domestic listed banks as sample from 2007 to 2014, the sample is analyzed by panel data method in the empirical analysis part. The results suggest:(1) There is a significant positive correlation between bank executives’ cash compensation and bank innovation; (2) Bank executives’ shareholding ratio and bank innovation are also significantly positively related and what’s more, the correlation coefficient is much greater than that of cash compensation to bank innovation, which means that the equity incentive has a positive effect on bank innovation.Finally, we put forward the corresponding policy recommendations based on the results of the empirical test. And given that people should improve the banking innovation evaluation system, insert bank innovation into those executives’ compensation system, keep on promoting the stock incentive system and improve the corporate governance structure, this paper has presented advices from the above four aspects.