A Research Of The Relationship Between TMT Compensation Gap And Firm Value

Since the1980s, Salary Incentive Mechanism, as one of the methods to alleviatethe principal-agent problem, has increasingly become one of the major research areasboth in theory circle and practice circle. Although scholars have carried out extensiveresearch on executive compensation, the existing literature on abnormal pay gap isless. This paper is based on the reality that the gap of internal payment in listedcompanies expands ceaselessly. From the perspective of Managerial Power, combinedwith the special background of the property rights of Chinese listed companies, thispaper deals with the study of the causes and economic consequences of abnormal paygap among executives of listed companies. This thesis not only enriches the theory ofexecutive compensation incentives, but also provides a feasible explanation for thephenomenon of increasingly widening gap of executives’ payment in China’s listedcompanies. Through this study, the author hopes to address the following issues:（1）What’s the reason of the internal pay gap in executives of listed companies in China iswidening?(2) Whether “The Pay Ceiling Order” issued by the government has theinhibition on the abnormal pay gap within the listed company executives?(3)Whether the abnormal pay gap between senior managements has tournamentincentive effects?In order to answer these questions, this paper begins with introducing the currentstudy about the existing research results and related theories. It is believed thatinternal pay gap is widening in listed companies because of the abnormal pay gap. Onthe basis of previous research, this paper constructs a dynamic role model to explainthe reason why internal abnormal pay gap has arisen and its economic consequences.This model includes the influences of The Managerial Power on the abnormal pay gapamong executives and the further impact on the enterprise value under differentsystems of property right. The empirical study subsequently finds that the executivesof listed companies would use their power for rent-seeking to gain the abnormal paygap. This paper also finds that ownership has an important impact on rent-seeking, and the state-controlled system of property rights significantly reduce the sensitivityof executive power and abnormal pay gap. Further study showed that “The PayCeiling Order” not only failed to achieve the purpose of reducing executives innerexception pay gap, but did not prevent the executives using their power forrent-seeking to obtain greater abnormal pay gap.“The Pay Ceiling Order” did nothave a substantive effect at all. In addition, after studying the economic consequencesof the abnormal pay gap, it is revealed that no significant correlation is found betweenthe power pay gap and future changes in enterprise value, and the abnormal pay gaphas no tournament incentives.In view of the above conclusions, the author offers the following policyrecommendations: Firstly, in order to inhibit the expansion of executive abnormalpay gap, regulatory authorities should improve executive compensation disclosuresystem for listed companies, as well as the transparency of executive compensationinformation, expanding the right of shareholders and investors on executivecompensation information of listed companies. Secondly, in order to curb executiveusing power to pay rent-seeking, listed companies should improve corporategovernance mechanism, set up internal control system, and enhance the independenceand scientific of the remuneration committee decision-making. Finally, to thebehavior of senior management’s using their powers for rent-seeking, in order toprevent executives from expanding the pay gap, media and intermediaries couldincreasingly report the phenomenon of abnormal pay gap. By improving executives’reputational risks, the reports could enhance the costs of executives using their powerto rent-seeking.