The Empirical Study Of Correlation Of Executive Pay-performance Sensitivity And Overlap Between Auditing Committee And Compensation Committee

With the development of modern enterprises, how to improve effectiveness ofcompensation mechanism for top executives has become a hot issue. In order toimprove efficiency of corporate governance, CSRC (China Securities RegulatoryCommission) publish an regulation called Corporate Governance Guidelines in2002,which regulates that public companies, according to decisions of shareholdersconvention, should establish the special committees under the board, includingstratagem committee, auditing committee, nomination committee and compensationcommittee. It also regulates the function of these special committees. One of the mostsignificant functions of auditing committee is supervising financial and managementsituation of the whole company. Also the main function of compensation committeeincludes recruiting or dismissing CEO and other top executives and arranging theircompensation level. As the establishment a development of institutes for auditingcommittee and compensation committee in China, the effect of these institutes getattention widely. Compared with the institution of special committees in west country,our Remuneration Committee system is set up lately and still in the immature stage. Inthis situation, we study the affection of compensation mechanism for top executivesfrom the perspective of structure of auditing committee and compensation committee.In respect of theory, this article summarizes literatures at home and abroad whichinclude auditing committee, compensation committee and executive pay-performancesensitivity. With the guide of Principal-agent Theory, Management incentive Theory andother related theory, we analyze the significant impact of compensation mechanismfrom operation of auditing committee and compensation committee, and define thecharacteristic of compensation committee’s structure. Then we further study how theinteraction of auditing committee and compensation committee impacts compensationincentive mechanism from the perspective of the structure of ownership structure. Atfirst, this paper introduces the definition of executive pay-performance sensitivity andthe way to calculate. The first approach is to calculate the ratio between change ofdifferential rate of executive pay and change of differential rate of public companyperformance. The second approach is to study how executive pay will change caused byone dollar of shareholders’ wealth change. Secondly, this article respectively introducesdevelopment process and basic function of auditing committee and compensationcommittee. Thirdly, this paper reckons foundational theory of the relationship between the function of auditing committee and compensation committee and executivepay-performance sensitivity. Meanwhile, in perspective of two mechanism ofManagement incentive Theory, namely contract mechanism and monitoring mechanism,this paper explains how Management incentive Theory effects our result.In respect of empirical research, because of monitoring effect on executive pay andpublic company performance made by auditing committee and compensation committee,this paper recommend the first hypothesis which is that overlap between the members ofauditing committee and compensation committee has remarkable positive correlationrelationship with pay-performance sensitivity. Than regarding the influence on auditingcommittee and compensation committee caused by the change of ownership structure,we propose separately two competitive hypotheses. The first one is that when the topone shareholder has the absolute right of control, overlap between the members ofauditing committee and compensation committee has no correlation relationship withpay-performance sensitivity. The second one is that when the top one shareholder do nothave the absolute right of control, overlap between the members of auditing committeeand compensation committee has remarkable positive correlation relationship withpay-performance sensitivity. Next, this article takes the A-share listed company from2004to2011as sample data, using financial data, establishing multiple linear regressionmodel, confirmed the influence of the remuneration committee on the relationshipbetween executive pay and company performance. At last, empirical resultdemonstration:⑴overlap between the members of auditing committee andcompensation committee has remarkable positive correlation relationship withpay-performance sensitivity;⑵From view of the ownership structure, When the topone shareholder do not have the absolute right of control, the bigger overlap betweenthe members of auditing committee and compensation committee is, the higherpay-performance sensitivity will be. To sum up, the interaction between auditingcommittee and compensation committee plays a distinctly supervision role forcompensation incentive mechanism in listed companies.According to findings of this paper, several suggestions are provided as follows toimproving governance structure of board and compensation incentive mechanism.Firstly, Chinese companies should enhance the establishment of auditing committee andcompensation committee and improve their independence. Secondly, CSRC shouldcomplete the institution of auditing committee and compensation committee, in order toinsuring remuneration committee acting efficiently. Thirdly, listed companies should reform the structure of ownership to improving the level of monitoring for executivecompensation incentive mechanism. At last, listed companies should set up propermeasurement index of performance and institution of executive compensationdisclosure, in order to increasing transparency of the salary contract.