| With the advancement of science and technology, along with the economic and social development, enterprise scale becomes greater and operating range becomes more and more widely, the social division of labor is more and more detailed, it is difficult for business owners to independently assume full operational work of the enterprise as before, even if they do it reluctantly, they may not make effective decisions due to limited energy and experience or other reasons. Obviously, they can gain more by hiring experienced and professional managers instead of themselves. That is the separation between ownership and control in the enterprise, the widespread principal-agent relationship in the modern enterprise.However, since the defects of goal of the principal-agent relationship, conflict of interest generates, which is what we usually call the agency problem.An effective means to settle the problem is that you can hook relations established between the client’s goals and the goals of agents, In other words, you can link executive compensation to corporate wealth, which will motivate executives to achieve corporate wealth maximization. The implementation of this strategy is to sign a compensation contract, the more efforts executives pay to maximize the wealth of the company, the higher return they can gain.How to examine the efforts executives paid? It is unrealistic to use the degree of effort directly, because the degree of effort is a very abstract indicator, it is difficult to accurately measure, and observation costs are very high. Since the process of efforts making is not suitable as a standard, it can be replace by the result, the company’s results of operations. We found a indicator which has multiple advantages:accounting earnings.Accounting earnings data can be easily obtained by both shareholders and executives, it also can be accurately measured and easily verified. Therefore, a large number of empirical studies focus on the relationship between executive compensation and performance (accounting earnings), and made different results.In general, we always use the quantity to measure accounting earnings. Accounting earnings, however, has not only characteristics of quantity, but also characteristics of quality; we need to observe not only characteristics of quantity, but also characteristics of quality of earnings to measure executive performance compensation contract.There are two ways to study executive compensation contract Earnings quality through earnings quality, the first approach is to directly study the relationship between earnings quality and executive compensation, the second approach is to study the effect of earnings quality on pay-performance sensitivity.The purpose of this study is to study the effect of earnings quality on pay-performance sensitivity, so that we can know whether the executive compensation contracts can scientific, effective and reasonably reflect the characteristics of quality of earnings. In addition, the paper will also examine the direct relationship between earnings quality and executive compensation.This study has both theoretical and practical significance. On the theoretical side, whatever the outcome, it can make a contribution to this area which has not yet been adequately studied; Through this research, in reality, we can to understand and evaluate the status of the executive compensation incentive mechanism, that will provide support to the improvement in the future.This paper is divided into six sections:The first part is the introduction. This section puts forward the background and describes the purpose and significance of this study, and shows overall framework of the research, it is a summary of the full text.The second part is the review of the literature. This chapter gives a brief review of studies about pay-performance sensitivity and earnings quality. Most of the studies about pay-performance sensitivity found that there exists a significant positive correlation between executive compensation and corporate performance, it means that the compensation incentive mechanism is reasonable and feasible. However, these results were not uniform, even very different, there are still some shortcomings. Earnings quality literature review found that scholars measure, inspect and test earnings quality from different angles, such as persistent, report timeliness and the different components of earnings. The third part is a theoretical overview. This section first describes the principal-agent theory and contract theory, then explained how to judge the quality of earnings, and taken this measurement of earnings quality model:DD model, and provide a theoretical basis for empirical research below.The fourth part is the empirical research design. On the basis of the literature review and the theoretical overview, this paper selects the study sample and designs the variables and the models. Here are the hypotheses:H1:Performance (accounting earnings) of China’s manufacturing listed companies has a positive influence on monetary remuneration of the senior management.H2:Earnings quality can enhance the explanatory power of the "pay performance "model.H3:Earnings quality of China’s manufacturing listed companies has a positive influence on monetary remuneration of the senior management.H4:Earnings quality will affect pay-performance sensitivity rhigher earnings quality leads to higher pay-performance sensitivity.Based on the above hypotheses, This paper uses executive compensation as the dependent variable, uses Rate of Return on Common Stockholders’Equity, earnings quality and earnings quality as independent variables, and uses a series of control variables.The fifth part is the empirical analysis. This section contains descriptive statistics and regression analysis on the basis of the previous chapter, research design, verify the hypotheses and explained the results.In the further study, this paper divides the samples by phases to test the hypotheses again. In the robustness test, this paper uses different indicators to measure the accounting surplus, and reached the same conclusion.The sixth part is about conclusions and recommendations. Empirical results show that executive compensation is largely determined by operating results, which reflects the good effect of the compensation incentive mechanism, executive compensation contract is scientific, reasonable, and effective; the compensation contract can not establish the direct relationship between earnings quality and compensation incentive mechanism, but it was able to identify the earnings with different quality, earnings quality impact on executive compensation indirectly by affecting the relationship between the earnings and pay. Higher earnings quality leads to higher pay-performance sensitivity. This paper makes the following recommendations:to maintain and strengthen the influence of earnings quality in the compensation contract; incentive mechanism and supervision mechanism should be in parallel.The contribution of this paper are mainly reflected in the following three aspects:first, in the literature of executive compensation incentives, a lot of researches focus on corporate performance (earnings quantity) and executive pay, less researches focus on relationship between earnings quality and executive compensation, while very few studies care about the impact of earnings quality on the relationship between executive compensation and performance. This paper complements the existing research.Second, in the further study, this paper divide the samples by phases, This makes the results of the study dynamic, on the one hand,the progress of pay incentives can be found, on the other hand, the possibility of improvement can be seen. This can provide a reference for remuneration contract makers.Third, this paper makes an explanation that why the hypothesis3did not pass the test, and explore the limitations of the compensation incentive mechanism.The limitations of mis paper are mainly reflected in the following two aspects:first, because our equity incentive plan implemented late in china, range is small and the effect is also poor, so this paper can only use monetary remuneration of executives on behalf of the executive compensation instead of building a comprehensive system of executive compensation, which may cause affected accuracy of the conclusions.Second, although the DD correction model has the advantages which other models do not, but it measures earnings only from the angle of matching degree between Accruals and cash flow. The future studies can measure earnings quality from different angles and do some comparative analysis. |
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