Managerial Power, Compensation Incentive And Enterprise Performance

Executive incentive has been the hot topic for domestic and internationaltheorists, who have long been in the agreement on the necessity of encouragingcompany managements. However, despite of numerous controversial incentivesituations, how to implement an effective incentive becomes main focus in financialeconomists’ studies. However, based on the review existing literature, we find thatcurrent studies focuse on the correlation between executives’ annual pay, equityincentives and corporate performance, while ignoring senior management’s role incontract design, that is, managerial power on influencing salary system.We think thatmanagial power as an institutional arrangement in the companies, plays an importantrole in the managers’ incentive contract. So this paper concerns on the effect ofmanagerial power to executives’ compensation contract, thereby to the performance ofthe listed companies.This paper, with managegial power as a breakthrough, with listed small andmedium size companies as object of study, describes the transmission mechanismwithin the incentive effect of executives’ compensation. Firstly, we analyze therelevant incentive theory to educe the key theory-managerial power theory, and thenwe expound its definition, origin, incentive effect. After that we use empirical data toprove that managerial power can cast significant influence on executives’ pay level,that is, the greater managerial power the manager has, the more he can do ininfluencing the compensation contract design. We analyze the influence of executive’sstimulation mechanism under different managerial power, and find that salary can bea good incentive no matter under what managerial power, but there is still somedifference between compensation incentive and equity incentive. Lastly, We draw aconclusion through further analysis that if the enterprises want to enhance the capacityof profitability, compensation incentive can be a good solution when the managementdoesn’t have too much power, otherwise, equity incentive will be better. But if theenterprises want to improve their market value, the effect of the compensationincentive is better when the management has much more power, while the equityincentive does not help to enhance the market value, and may even has adverse effect.From all the above empirical results, we make the following recommendations inthis paper in perfecting the stimulation mechanism:1.Appropriating management ofcentralization and decentralization, while improving the examination system ofpromotion;2.Establishing internal and external oversight mechanisms to prevent opportunistic behavior management;3.Regulating executive pay disclosure system tostop over-the-job consumption.