Manager Power, Compensation Structure And Corporate Performance

Due to the mutual separation of ownership and management rights in modern corporate governance, executive pay has been a hot topic of discussion in the academics and practitioners, especially after the financial crisis sweeping the world in2008. investors huge wealth loss and manager swelling pay is in stark contrast, the greedy manager seems to be the only survivor in the crisis. The topic about setting executive compensation therefore has been pushed to the cusp of public opinion. According to the theory of optimal compensation contract, the main goal for executive compensation is to alleviate agency conflict, establish interest mechanism between owners and managers, so as to improve the correlation of manager’s interest and shareholders’interests, in other word, it’s to increase the sensitivity between executive compensation and corporate performance (both accounting performance and market performance). However, there is still no consistent evidence about the research in this field, academics failed to achieve substantial progress in improving the sensitivity roads in past hundred years. Especially in recent years, when a large number of companies facing the financial crisis and declining performance, the managers are still reluctant to give up their greed, still required astronomical salaries under decoupling performance, grabbed private income from all aspects, all the ugly behavior have triggered strong reaction in society. In response to these phenomena, the theory of manager power points out that on one hand, the agency contract reflected the supervision and oversight, on the other hand, it has also played a role to maintain the relationship between managers and shareholders. Due to the existence of manager power, the loss of independence in board is very serious, the board members have been captured by managers. So the optimal compensation contract not only doesn’t solve the problem of agency, itself may become an agency problem.In Chinese enterprises, a considerable part of the listed companies are state-owned enterprises, however, there existed complex agency relationship, which led to the absence of owners, state-owned shareholders can’t be a qualified supervisor of the owner’s equity, but may use their power in collusion with managers, engulfed the interests of minority shareholders. In addition, due to the external in Board, there is serious information asymmetry between the owners and operators, operators as the part with information superiority, it’s more easy to manipulate power, which flourished the "internal control" phenomenon. All these reasons may lead managers to deviate from the track to maximize the interests of the shareholders of the Company, by inducing agency problems of moral hazard and adverse selection. Manager power played an important role in corporate decision-making, the size of power directly decided whether managers can make an impact on private income or even on compensation contract. Therefore, the author took the power as a dominant factor in managers’behavior, it’s necessary to make it be an independent variable when do research about compensation contract. How the power exactly to affect the formulation of executive compensation contract? Whether there is rent-seeking behavior for managers to obtain private benefits? Based on different power characteristics, the ration between power and compensation contract will how to affect the corporate performance? It has been long short of empirical evidence to support.Based on such situation, this paper will rely on our special institutional context, take the sample of listed companies, using the capital market data and file-based research methods, discuss the following three aspects respectively:(1) under the special system background in our country, power variables how to affect the manager’s remuneration absolute value (including monetary remuneration and non-monetary remuneration);(2) what’s the effect about power on the established salary structure;(3) The impact of different ratio between manager power and salary structure on corporate performance.The arrangement of the main content:The first chapter:introduction. This part mainly introduced the research background, significance, research methods, main contents, research framework, features and possible contribution.The second chapter:literature review. This part systematically analyzed and reviewed the existing related research literature about the area of manager power, salary structure and corporate performance, both domestic and international, to understand the dynamic and forefront of research at home and abroad.The third chapter:theoretical analysis and hypotheses. Through the elaborating of optimal pay contract theory and the theory of manager power, this part put forward the four hypotheses, and set up the selected variables.The fourth chapter:the empirical analysis and research results. Through the building of multiple regression models, using statistical software to do statistical analysis about sample data, to get the descriptive statistics, correlation coefficient analysis and multivariate regression results. Finally, set forth the results combined with the reality.The fifth chapter:conclusion, policy recommendations and inadequate. Combing the conclusions of this study comprehensively, put forward relevant policy recommendations for practical problems, and also pointed out limitations in the article.Through empirical research, the main conclusions of this paper are drawn:Manager power is an important factor to affect the salary structure, the size of the manager power will lead to the difference among their salary structure. While, non-pecuniary compensation as an alternative of monetary reward to exist, its incentive effect is significantly lower than the monetization incentive effect reward. When the greater the manager power, they would be more inclined to choose the pecuniary compensation, rather than non-pecuniary compensation. Meanwhile, as to the limited application of non-pecuniary compensation, the size of manager power will also affect the range of using non-pecuniary compensation by constraints. The greater of manager power, the less constraints on using non-pecuniary compensation, more easy to meet the managers’ private income, the stronger alternative of pecuniary compensation to non-pecuniary compensation.Furthermore, the author thinks that the arrangement of compensation structure of executive is not only within certain power configuration, the proportion of its relationship with the power will further affect the corporate performance. The non-pecuniary compensation motivation of manager has a dual nature, not only satisfy the private benefits of managers, but also can produce spillover effects on the development of enterprises, on the other side, its incentive cost is greater than the monetary rewards. At the same time, the study found that the restriction of non-pecuniary compensation determines the relevance between non-pecuniary consumption and corporate-performance, when the manager power is larger, and the restraint on non-pecuniary consumption is not strict, namely the alternative of monetary reward to non-pecuniary consumption is stronger, non-pecuniary consumption is more likely to be used on the private interests of managers, rather than the interests of enterprise, so as to the worse enterprise performance.Based on the research perspective of manager powers, this paper studied the effectiveness of managers’compensation incentives. This research perspective not only reflect the situation of China, but also help to enrich our incentive theory of executive compensation, offer new perspectives and theoretical evidence to enhance the effectiveness of incentive pay on executive.The characteristics and contributions:First, among the exist compensation literature in China, most scholars are based on the point of optimal compensation contract of agent theory, to explore the sensitivity between executive compensation and corporate performance. Relevant research from the perspective of manager power just started. Therefore, this paper took the variable of manager power as an entry point, respectively studied the relationship between manager power and salary structure, the ratio and corporate performance, tested the suitability of manager power theory in our manager’s pay system to a certain extent, meanwhile, enriched our executive compensation incentive theory.Second, it’s the measure of manager power. This article referenced some classical literature at home and abroad, and made some innovation. In this paper, author took the synthesis of principal component analysis, decomposed the indicator into four dimensions and continued to be refined to eight sub-indicators, using the statistical software of STATA10.0, and finally took the top three principal components, weighted calculation to the respective coefficient as the measure of power.Third, the paper comprehensively discussed the double impact of manager power on of salary structure (including monetary remuneration and non-pecuniary consumption), as well as what the different representations of corporate performance with different proportions of manager power and the salary structure. In comparison, previous relevant studies generally only focused on one side:the impact of manager power on monetary remuneration or the effect of manager power on non-pecuniary consumption, compared with previous studies, this paper covered more comprehensively about the path of manager self-remuneration behavior through the power.Fourth, the study found that the arrangement of compensation structure of executive is not only within certain power configuration, the proportion of its relationship with the power will further affect the corporate performance. The author thinks that the non-pecuniary compensation motivation of manager has a dual nature, not only satisfy the private benefits of managers, but also can produce spillover effects on the development of enterprises, on the other side, this phenomenon is particularly evident in the non-state-owned enterprises. When the manager power is larger, due to the limitation of non-pecuniary compensation, the using of non-pecuniary compensation does help to achieve the managers’ interests as while as the interests of enterprises, at this time, the manager’s compensation contract is more inclined to the non-pecuniary compensation. This article differs from previous research conclusions which generally took the non-pecuniary compensation as a side effect on agency costs, so as to reduce corporate performance.The limitations of this article:First, there are many styles to incentive managers, in addition to monetary remuneration and non-pecuniary compensation, there are many other ways, such as political promotion, equity incentives. Due to the objective conditions such as time constraints and the difficulty to obtain data, this paper didn’t conduct a comprehensive study.Second, since the non-pecuniary compensation data is not direct displayed in the report, it’s hard to accurately measure. This article drew on the method that Chen Dong Hua et al (2005) used, according to the term of "paid relating to operating activities cash expenses" in the financial statement, but after all, this indicator is only a rough estimate of the non-pecuniary compensation, to some extent there is noise. At the same time, as the non-pecuniary compensation integrated eight subjects by hand, there are inevitably some errors in the collection process.Third, as the voluntary disclosure project, non-pecuniary compensation is usually disclosed more complete in better-performance and sound-corporate governance corporate, which led to a certain deviation in the sample selection.Fourth, as China is currently in a specific economic transformation stage, the information disclosure transparency and authenticity existed certain problems, the disclosed data in financial statements of listed companies is not necessarily a real reflection of economic activity results, which is probably with earnings management and even the risk of financial fraud, it is inevitable to lead to the inconsistent in empirical research.