Study On Institutional Investors’Investment Horizon And The Efficiency Of Executives’Performance-Pay

The core of optimal contract theory that based on the principal-agent theory is the efficiency of the compensation contract, if the contract is efficient, executive compensation should be positively correlated with corporate performance. However, existed evidence can not fully support this theory, most scholars had found a significantly positive correlation between compensation and performance, some scholars found no correlation between the two, even some scholars found that the marginal increase in executive compensation is greater when the company gains profit or its performance improved than the marginal decrease when the company has a loss or its performance declined, they also point out that it’s the shareholders’weak supervision that causes the compensation incentive mechanism distorted.On account of the inconsistent conclusions of the problem, this paper decides to use the data about the executive compensation of listed companies over period2005--2007to investigate the relationship between executives’pay performance sensitivity and the supervision of institutional investors. The regression results indicate that:the executive compensation is positively correlated to company performance and shareholders’wealth significantly; there is a weak positive correlation between executives’pay performance sensitivity and the investment horizons of institutional investors; when we distinguish the performance by earnings and losses for further study on the second result, the new findings show that, an obvious asymmetric benchmarking exists in the relationship between different performance conditions and executive compensation, the sensitivity of pay and loss is significantly lower than that of pay and profitable performance; similarly, there is no consistent correlation between the asymmetric pay performance sensitivity and the supervision of institutional investors relationship, specifically, the institutional investors’ short investment horizons exacerbate the asymmetry in rewards and punishments, which causes the executive compensation increases with earnings, but not decreases the equal with losses. At the end, we check the above conclusions by robustness, which includes the the replacement of performance indicators, compensation indicators and so on, the results of robustness support the author’s conclusions substantially.The results show that, the regulatory strength of institutional investors has a significant effect on the sensitivity of executive compensation and performance, therefore, it’s necessary for listed companies to carry out some measures that can increase institutional shareholders’power, promote institutional investors to participate actively in corporate governance, to improve the incentive efficiency of the performance-compensation mechanism, ensure the symmetry of rewards and punishment, then reduce the agency cost.The author argues that, the results of this paper have depicted the executive compensation mechanism and the institutional investors’governance role in Chinese listed companies in details, which makes the readers have access to obtain the profound acknowledge of Chinese executives’compensation. What’s the most important, this paper finds that the positive relationship between executive compensation and corporate performance is not always immutable, the short investment horizons of institutional investors provides a valid interpretation for executives’rent accruing through the asymmetry in pay performance sensitivity, this finding replenishes and perfects the" view of rent accruing" to some extent, enhances the practicability as well.