Asymmetric Performance Benchmark And Executive Compensation

In the fierce market economy, how to implement the compensation incentives effectively isimportant to maximize the core competence. The company executives incentive problems are hottopics in the academic world. The performance of the executives is not only influenced by itsown efforts, but also influenced by some external uncontrolled factors. Therefore, it is importantto give objective and fair valuations to executives’ operating performance.In this paper, we have examination on the use of performance benchmarks in executivecompensation, based on the sample of manufacturing listed companies from year2007to2011.We found that companies would use performance benchmarks unequally. When theperformance benchmark is preferable, the executive compensation is higher, and so is thesensitivity of compensation to performance. There exists lucky pay. When company performanceexceeds performance benchmark, the executive compensation and the sensitivity ofcompensation to performance are both enhanced. However, no double compensation exists. Theexecutive employment duration and CEO Duality further strengthen pay-for-luck andcompensation for adjusted performance. Our research is significant for revealing the irrelevantcompensation increase with the performance, agency cost in deciding executive compensationand explaining ratchet phenomenon of executive compensation. We also give suggestions abouthow to choose the performance benchmarks and how to control the executive entrenchment.