Research On The Incentive Mechanism Of Executive Compensation

Executive compensation has always been regarded as one of the important mechanisms that alleviate the agency problem. But recently, with the appearance of more and more unreasonable compensation phenomenon, many scholars began to question the applicability of optimal contract theory. Three American researchers, Bebchuk, Fried and Walker elaborated systematically the two basic theories of executive compensation-optimal contract theory and managerial power theory in year1992.In the west, more and more empirical research showed that executive compensation was affected by managerial power, and executive compensation had become part of agency problem.In our country, there exist defects in the hypothesis of optimal contract theory, and this makes the adoption of managerial power theory in Chinese listing corporations possible. This paper provides a study of Chinese listing corporations’ executive compensation based on managerial power theory.This paper measures managerial power of listing corporations through construction of managerial power index, and studies whether executives would take advantage of managerial power and raise their compensation and acquire power gain. Due to the special institutional background in China, Chinese listing corporations mainly include the state-owned and private listing corporations. The different influence of managerial power on executive compensation is also studied in this paper. In addition, this paper constructs power pay and performance pay, and study the relationship between agency cost and the two kinds of pay respectively.The result of this study shows that Chinese listing corporations’executive compensation incentive contracts are greatly affected by the impact of managerial power and questions the validity of executive compensation incentive contracts. Executives of private listing corporations are more easy to use power to raise their pay. In addition, executives of Chinese listing corporations utilizing the power to obtain power compensation is Selfish behavior, not to stimulate.