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

As the real manager of a company's daily operation, the executives'behavior and decisions have critical impact on the company's performance. To great extent, the top executives'choices will decide the company's prospects and the shareholder's benefit. 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 are not complete. The effective way to solve the problem may be that coordinate the interests between shareholders and executives in a possible situation. To be more specific, make a contract linking pay and performance would settle the dispute to some extent. Therefore, pay-performance sensitivity becomes a significant index to measure the effectiveness of compensation mechanisms. Foreign research shows that the pay-performance sensitivity is likely to depend on corporate governance. Good corporate governance such as more independent and professional broad, moderately concentrated ownership structure, etc. will greatly contribute to the implementation of compensation mechanisms, resulting in better incentive effects. In China, there has been much research on factors influencing pay level but little systematic research on the impacts of corporate governance on pay-performance sensitivity. So, based on the existed study, the thesis analyses the impacts of corporate governance of China's listed company on pay-performance sensitivity, with a hope of designing an appropriate corporate governance structure to solve the agency problems.On the base of summary of relevant theoretical empirical literature, the thesis makes advantage of descriptive statistics and multiple liner regression method to analyze. The sample data is from annual report of Shanghai and Shenzhen A-share listed companies from 2008 to 2010. It focuses on the analysis of two major corporate governance factors---ownership structure including equity concentration ratio and the structure of shareholder, the structure of broad referring to the independence of compensation committee to explore their impacts on the pay-performance sensitivity. The research shows some findings as follows: the equity concentration ratio and the independence of compensation committee will enhance pay-performance sensitivity; the structure of shareholder has no influence on pay-performance sensitivity.In the end, the thesis explains the results and provides some suggestions as follows: firstly, encourage the listed companies to establish compensation committee, accelerate the regulation and improvement of the compensation committee system, promoting the effective operation of it; secondly, improve the independent director mechanism by enhancing the independence and level of participation of independent director. at last, improve the executives'compensation mechanisms, an effective way is linking interests of executives and the company's long term goal, building reasonable performance measure index system, reducing the influence of random factors to the results of appraisal.