The Empirical Research On The Correlation Between Executive Compensation And Earnings Components

With the improving of the system of executive compensation disclosure, more and more people pay attention to executive compensation. More scholars focus on the correlation between executive compensation and earnings components.Foreign studies suggest that, on the conditions of moral hazard according to earnings to determine executive compensation is the only viable method. So compensation contracts can be based on earnings. This paper is on the foundation of Principal-agent theory, management motivation theory and bonus plan hypothesis. In this dissertation.earnings were gradually divided earnings into normal earnings, extraordinary items returns, accruals, cash flows from operation, discretionary accruals and nondiscretionary accruals according to certain rules. Based on the data from capital market in China from the year 2006-2008. controlling relevant variables, this paper empirically studies the relation between executive compensation and different parts of earnings. The results show that (1) executive compensation has a significant positive correlation with normal earnings and extraordinary items returns. normal earnings made a greater impact on executive compensation than extraordinary items returns. It is only normal earnings that play the main role.(2) executive compensation is strongly associated with operating cash flow and accruals. the regression coefficient of operating cash flow is less than accruals. executive compensation can not significantly distinguish between cash flows from operation and accruals.(3) Basing on this point with Jones model,this paper divided accruals into DA (discretionary accruals) and NDA (nondiscretionary accruals) to identify differences between them. The result shows that DA (discretionary accruals)and NDA (nondiscretionary accruals) have roughly the same influence on executive compensation.According to the conclusions, this paper argues that China has established with earnings-based compensation contract. Executive compensation can not significantly distinguish other variables except normal earnings extraordinary items returns. The result of this paper can reflect the situation of the correlation between executive compensation and earnings components, promote executive compensation consistent with corporate strategy. Consequently the result can give some advice on reducing agency costs, increasing efficiency, and reforming pay system. I hope it is helpful to the design of compensation tract and reduce management moral hazard.