Research On Top Management Compensation Performance Sensitivity Of Listed State-owned Enterrises

The performance-based compensation contract is deemed to one of themain mechanisms to realize the compatibility of shareholders’ andmanagers’ targets. Therefore, compensation performance sensitivity hasbecome the core issue of the research on top management incentive. Anincreasing number of empirical evidence indicates that top managementcompensation is significantly positively related with performance, and thecompensation performance sensitivity is gradually higher. It seems thatSOEs have gradually established the performance-based compensationsystem and the top management compensation have provided the feature of“optimal contract perspective” to some extent. However, the compensationchaos of listed SOEs has led to strongly public question and continuouspublic attention. The compensation that is set by the managers of SOEsthemselves provides a popular explanation. Compensation contract whichrepresent another form of the problem can’t solve the agency problems.That is “managerial power perspective” for top management compensation decision.Since the1980s, the basic reform direction of decentralization andinterest concessions have made the managerial power constantly rising inthe process of SOEs’ reforms of “putting authority to let benefit”,”tworights separation” and “building modern enterprise system”. As a result, themanagerial power of Listed SOEs is the product of institutionaltransformation on the one hand. On the other hand, the weakening ofcorporate governance including the internal balance mechanism defect (thedefective equity structure, the weak function of the board of directors, theinvalidation of the board of supervisors) and external restraint mechanismshortcoming (the inactive takeover market, the lagging manager market, theless perfect disclosure system)has led to serious "insider control" issue inListed SOEs. Managerial power thus can overwhelm the corporategovernance. And top managers possess the influence over controllingshareholders and board of directors on the obtaining of their owncompensation.Compensation incentive is expected to realize the convergence of interest between shareholders and managers through linking withperformance. However, Sharing in residual also means risk taking. The riskexposure attribute of performance compensation is reflected in residualclaimant right and contract rigidity. The excessive managerial power makesit possible to seek rents to avoid the compensation risk for risk aversionmanagers. First, the management exercises power decrease compensationperformance sensitivity, consequently to avoid the residual risk and weakenthe compensation uncertainty. Second, the management exercises power toselectively alter contract terms which present the apparent asymmetry ofcompensation performance increasing and decreasing sensitivity, thus toget rid of compensation risk and erode contract rigidity.By selecting the samples of listed SOEs from2008to2011, this articleempirically tests the influence of top management power on compensationperformance sensitivity. I find that: the greater power of top managers bringout the lower compensation performance sensitivity and the higherasymmetry of compensation performance while increasing and decreasingsensitivity. The increasing of sensitivity indicates the effectiveness of compensation contract to a certain extent, which also contains some part ofrent-seeking because of the excessive managerial power.In conclusion, this article proposes to improve the top managers’performance evaluation system of listed SOEs by setting up a EVAcentered performance evaluation index system、paying much attention tothe earning equality and strengthening the evaluation of constraint indexes.In addition, consummating the inhibiting and balancing mechanism ofSOEs’ managerial power must optimize internal governance structure alongwith external governance mechanism, including building a diversifiedownership structure, strengthening the core governance function of theboard of directors and the construction of the board of supervisors,improving the top managers’ compensation disclosure system、managermarket and takeover market.The main contribution of the article is as follows:1.Perspective innovation. Existing papers study the influence ofmanagerial power on top managers’ own compensation mainly from theperspectives of compensation amount, compensation structure, compensation gap and so on. This article takes the core dimension thecurrent performance-based compensation-compensation performancesensitivity as the breakthrough point to look for power management therent-seeking evidence of managerial power in compensation contact.Rent-seeking is reflected as avoiding the risk exposure by linkingcompensation with performance, and is shown in compensationperformance sensitivity. Concretely, the article discusses compensationperformance sensitivity and the asymmetry of compensation performancewhile increasing and decreasing sensitivity.2.Variable innovation. Referring to the power model put forward byFinkelstein(1992),the article uses general manager duality, tenure, shareholding and social capital to respectively measure structure power, expertpower, ownership power and reputation power and combining with thereform of decentralization and interest concessions, which forms thepyramid shareholding structure, add pyramid chain depth as theinstitutional feature of listed SOEs. The paper combines the five variablesthat describe managerial power of listed SEOs from different aspects as a comprehensive power index, the cement power structure, thus making upfor the one-sided shortage of existing research on the power measurement.