| With the economic reform program, Chinese market becomes more competitive than before. As executives play a pivotal role in the success of companies, how to design an effective compensation system to retain and attract talented managers becomes an important issue in current companies. Besides, the gap between the ownership and the power of operation is a key character of the contemporary companies, which leads to the Principal-agent problem. There are different benefits between the principal and the agent. Specifically, the principal would like to pursue the maximum wealth of the company, but the agents will pursue the maximum benefits and spare time of themselves, which may result in the conflict between the agent and the principal. Because of the information asymmetry between the principal and the agent, it is difficult and costly to monitor managers’ behavior. In order to tackle these two issues, previous academics would like to adopt the compensation systems that are based on managers’marginal product, which can motivate executives and achieve the convergent benefits between the principal and the agent.Due to the increasing competition and complication in Chinese market, the managerial content of the agent is accordingly becoming complicated. Consequently, it is more difficult and costly for the principal to monitor the agent’s behavior, and the compensation systems that are based on marginal product may fail in motivation. Additionally, with more and more managers using their power of the management to pursue their own benefits, people tend to question the function of the previous compensation system. There are two main issues in the design of managers’compensation system:the level of the pay and the structure of the pay. Even though most Chinese academics pay more attention to the level of managers’ pay and ignore the importance of pay structure, this article will emphasize the managers’pay gap in the structure of compensation. On the basis of behavioral theory and tournament theory, this article will discuss the relationship between managers’ compensation gap and company performance.Based on the analysis of previous literatures and important theories, it finally presents the system which can show how managers’compensation influences organizational performance. There are two main factors in this system, including managers’effort and the cost of monitoring. Specifically, based on the tournament theory, if managers want to achieve higher level of compensation, they should work harder and success in the competition with other managers. With the increased effort of managers, the organizational performance will be improved. Moreover, the big pay gap between managers can present organizational recognition to the managers who own higher level of compensation, which can increase the job satisfaction of these managers. Because of the increased level of job satisfaction, managers in higher hierarchy would like to dedicate more efforts to their work, improving the organizational performance. Besides, the tournament theory states that the pay system should be based on the rank of marginal product instead of the exact level of marginal product. Due to the convenience and preciseness of the assessment for rank of marginal product, the cost of monitoring will be decreased, so that the organizational performance will be improved. In the following part, this article uses data from Chinese listed companies between2009and2010to analyze the relationship between the executive pay dispersion and the company performance. The empirical research in this article, the tournament theory has been tested, which shows the application of this theory in the Chinese market. Specifically, there is a positive relationship between executive compensation gap and organizational performance. After that, this article also analyzes the factors that affect managers’ pay gap. The findings in this article may provide an effective theory to design the compensation system that can motivate managers successfully. |
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