Empirical Study On The Effectiveness Of Executive Compensation Incentive In Chinese Listed Commercial Banks

As the core of corporate governance, executive compensation incentive has a significant impact on company performance, and determines the interests of various stakeholders; therefore executive compensation has always been the focus of attention for people from all social circles. While banking is a particular financial industry with special features of high yield, high liabilities operations, strong monopoly etc., the fat salary of its executives has aroused widespread public concern, and brought about relatively prominent social contradictions. As the "leader" of Chinese banking, listed commercial bank has a large share of the market, and plays a decisive role in Chinese financial stability and national economic development, at the same time, the information that listed commercial banks disclosed is relatively perfect, which would help easily access to research data. So this paper will select listed commercial bank as the research object, and discusses how to design a more scientific executive compensation incentive mechanism for Chinese banking industry. In addition, most existing studies do theoretical and empirical research on the correlation between executive compensation and corporate performance for general enterprise, but researches specifically on the effectiveness of executive compensation incentive in banking industry are scarce, and seldom consider the bidirectional relationship between executive compensation and bank performance. Therefore, the paper attempts to use empirical research to explore the relationship of the two, and makes further improvement from the perspective of equity concentration to carry on an in-depth study. The research will be of important theoretical and realistic significance to the robust operation and sustainable development of Chinese banking industry.The content of this paper goes as follows:firstly, we show the background and significance of the selected topic, then put forward problems and reveal their innovativeness through summing up predecessors’ studies, equally, introduce the research idea and main structure of this paper from a general view; next, we lay a theoretical basis for the paper through presenting the relevant theories and concepts, then aiming at the particularity of banking, analyze the general characteristics of the sample data by the method of statistical description analysis from the quantitative and qualitative perspectives, consequently, reveal the characteristics, current situation and existing problems of executive compensation incentive of listed commercial banks in China; Then, based on Principal-Agent Theory and predecessor’s results, we take2005-2011annual report data of14listed commercial banks in China as samples to build commercial bank comprehensive performance score model, executive compensation decision model, and compensation incentive effect model. Then we make empirical analysis to explore the relationship between executive compensation and operating performance in China’s listed commercial banks, and classify the sample from the perspective of ownership concentration to make multivariate regression analysis for a more comprehensive research on the effectiveness of executive compensation incentive in commercial banks; Finally, summarize the main conclusions of the paper according to the results of empirical analysis, and put forward some countermeasures and suggestions which help to perfect the executive compensation incentive mechanism of Chinese listed commercial banks, combining with the current actual situation of China.By means of making correlation statistical analysis, regression analysis, and regression analysis specifically for ownership concentration classification to the relation between performance and executive compensation of Chinese listed commercial banks, and combining with the results of related theoretical and descriptive statistical analysis, the paper draws the main conclusions as follows:(1) The executive compensation and performance of Chinese listed commercial banks are positively correlative, which shows that the reform of executive compensation incentive mechanism in Chinese listed commercial banks has obtained a certain effect. Currently, we have initially established a favorable interactive compensation-performance mechanism.(2) The comprehensive performance of the bank has a significant positive influence on executive compensation, which indicates that bank performance is a main factor in deciding executive compensation; while the effect of non-performing loan ratio and capital adequacy ratio on executive compensation is respectively negative, and positive, which fully shows that the executive compensation of listed commercial banks in China also links to the anti-risk capability of banks to a certain extent, and the compensation incentive mechanism taking risk into account is basically set up; the net profit growth rate representing the growth ability of the bank has a positive effect on executive compensation, but the total assets growth rate, another growth indicator, has no obvious correlation with the executive compensation, which shows that China’s listed commercial banks lack long-term incentives for executives, and neglect the long-term development targets, thus resulting in that the growth indicators of the bank could only be a part of reference in determining the executive compensation; executive compensation is positively influenced by bank’s combined assets, which accords with most researchers’ conclusion. The result shows that the bigger the bank size is, the higher skills in every aspect we demand for bank executives, therefore the executive compensation is much higher; in the two compensation-decision model, the coefficients of ratio of independent directors and the supervisor scale are both non-significant, and they have little impact on executive compensation, which presents that independent director and supervisory board system in Chinese listed commercial banks don’t play the effective supervision role in improving bank performance and supervising executive compensation.(3) Executive compensation of the bank has a positive effect on bank performance, which makes clear that the increase of executive compensation would encourage executives to work hard, thus improving the company performance; the effect of bank size on comprehensive performance is significantly positive, which shows that currently, the operating income of China’s listed commercial banks mainly derives from the interest margin income that is supported by scale. however this kind of relatively extensive mode of operation is easy to make the bank executives pursue partial performance through various means such as blindly expanding the size of bank assets, providing loans in large scale, etc., which brings risk and hidden troubles to the future, and goes against the long-term development of the bank; the independent directors proportion has a positive effect on bank’s comprehensive performance, but the effect isn’t significant, while the impact of the size of supervisors board on the comprehensive performance is non-significantly negative, all of these indicate that independent directors and supervisory board system of China’s listed commercial banks don’t play an active role in improving bank performance.(4) In both the executive compensation decision model and compensation effect model, the sum of the top five shareholders’ shareholding ratio is not significant. It neither takes effect on supervising and controlling executive compensation, nor has a positive effect that it should have on bank performance, which shows that the equity structure of listed commercial banks in China at the present stage isn’t reasonable, and this is mainly caused by the insider control problem that is as a result of the absolute proportion advantage of the first largest shareholder, therefore listed commercial banks in China need to continually optimize the equity structure, and effectively solve the problem of owner absence and customizing compensation.(5) The ownership concentration and executive compensation level of listed commercial banks in China are negatively related, while the effectiveness of executive compensation incentive and the ownership concentration are positively correlative, what’s more, commercial banks with high ownership concentration will gain a high-level effectiveness of executive compensation incentive.