Internal Control Can Be Suppressed Viscosity Executive Pay It?

Correlating the compensation paid to managers with firm performance is asub-optimal option for many listed companies to reduce agency cost. A number ofexisted researches have shown that top managers’ compensation is positively relatedto firm performance. However, recent studies found that during the fulfilling processof the compensation system in which compensation is sensitive to performance, thereexists an asymmetric change between these two elements. For specific expression, thecorrelationship between top managers’ compensation and firm performance isweakened when the performance is gliding. In other words, when the performance isgliding, the extent to which compensation is decreasing is distinctly smaller than thatof increasing when performance is rising. The compensation is even increase insteadof decrease when the performance is gliding and these features can be calledstickiness. The purpose of correlating compensation with performance is tosupervise managers and encourage managers to operate according to the principle ofmaximizing owners’ profit, but the stickiness of compensation caused a discount onthis purpose and enlarged the agency cost, showing the defects of the existingcompensation system.Internal control is an internal system arrangement in order to ensure theoperation and management should be legal compliance, capital be safe, accountinginformation be complete and real, efficiency and effectiveness be enhanced andaccelerate the process of fulfilling development strategy. Internal control askscompanies to establish and improve various institutions considering stuff recruitment,training, dismissal and resignation, compensation, assessment and promotion, so as tomaintain transactions fair and equal; reduce the risk caused by opportunism, avoidfriction between owners and managers and eventually reduce the agency cost. Fromthe perspective of agency cost, compensation stickiness increases agency cost, andexisted studies shown that internal control is the main approach to reduce agency cost,so to a certain degree, internal control can help restrain compensation stickiness. Fromthe perspective of economic consequences of internal control, a good internal controldisclosure on the one hand can make sure accounting information is real and effective,which is good for owners to supervise managers, so as to decrease administer rightsand rent-seeking motivation, and reduce the sensitivity between compensation and performance. On the other hand, internal control is fulfilled by managers. High qualityinternal control means the self-interest behaviors of managers are restrained. Asincentive, a rational manager would apply a performance-related compensationsystem and enhance the sensitivity between compensation and performance, andeventually achieve the goal of restraining top managers’compensation stickiness.On the basis of a literature review and related theory conduction, this paper usetop managers’ compensation and their change as explained variable, firmperformances and their change, internal control as explanatory variable, choosesuitable control variables according to existed studies and construct model of Leveland Change. The sample is4943listed companies of A-share form year2009to2011,rejecting companies of financial industry and companies with missing statistics. Thepaper use measurement software STATA11.0to process data and complete OLSregress. The results show top managers’ compensation does stick to firms’performance. The extent to which compensation increases when the performance isrising up is1.22and1.26times to that when performance is gliding. After takinginternal control into consideration, this stickiness is much relieved, reflected in theresults as the extent to which the compensation increases when performance is risingup is similar to the extent to which the compensation decreases when performance isgliding. To put it in other words, sensitivity between compensation and performance isenhanced by the help of internal control. As a robustness test, internal control isdivided into two parts according to its quality; regression results indicate that wheninternal control is higher, the stickiness is weaker, and when internal control is lower,the stickiness is more obvious. Besides, the results also show that independentdirectors didn’t work when governing the compensation stickiness; this iscorrespondent with other scholars that independent directors may have the effect ofthe vase. Compared with state-owned companies, private companies have a moreobvious compensation stickiness character.