Research On The Effect Of Corporate Governance Structure On Executive Compensation Stickiness

With the continuous development of modern enterprises, the compensation incentive problems for top executives have gradually become the focus of attention among the public. According to the principal-agent theory, it is suggested that the interests between shareholders and executives are inconsistent, the information relating to business operation is asymmetric, and it is hard to compute how much executives contribute to operation, all of which make incentive contracts incomplete. If the performance is considered to serve as the signals reflecting executives’effort, the contract which relates executive compensation and firm performance will be more reasonable. Along with the development of remuneration reform, the executive compensation of listed companies in China has been showing a significant sensitivity with firm performance. This, however, does not mean that the compensation contracts are fully effective. In the recent years, it has become a common phenomenon at home and abroad that executive pay-performance sensitivity is not constant, that is, when the firm performance is rising, the executive pay-performance sensitivity is greater than that of performance-decreasing firm, which is defined as executive compensation stickiness. Executive compensation stickiness will impair the interest of shareholders; hence, it is agency problem in nature, which reflects the defect of corporate governance mechanism in China simultaneously. So far most domestic studies have just focused on the existence of executive compensation stickiness, while few studies throw light on the effect of corporate governance on it. Therefore, based on China’s national characteristics, this thesis analyzes the effect of corporate governance structure on executive compensation stickiness utilizing the data of listed companies in China.From the perspective of managerial power theory, this thesis explains the existence of executive compensation stickiness and focuses on the analyses of four aspects intimately relating to the power of executives, including the scale of the board of directors, the independence of board, the concurrency of directors of board and general manager and the ownership concentration. Via reviewing the relevant theoretical and empirical literatures, descriptive statistics and multiple linear regression method was used in this thesis to do empirical analysis. The annual reports of Shanghai and Shenzhen A-share listed companies from2009to2011, excluding financial and ST companies, was taken as the sample data. The first part of empirical research is single variable analysis, including descriptive statistics of the general sample and comparison of stickiness of different groups which are divided in accordance with four aspects mentioned above by using the stickiness existence model. Next is multiple-variable regression with the aid of the model containing cross terms. The last is steady research, using abnormal executive compensation as an alternative of explained variable. The findings of this research are as follows:Firstly, executive compensation stickiness can be significantly reduced by increasing the proportion of independent directors and ownership concentration;Secondly, the larger the scale of the board, the greater is the extent of the executive compensation stickiness;Lastly, the concurrency of director of boards and general manager has no obvious effect on stickiness.Based on the above findings, this thesis puts forward some suggestions concentrating on the development of the internal governance structure of listed companies in China and the improvement of executive compensation mechanism. Firstly, companies should keep enhancing the independence of independent director and improve the independent director policy. Secondly, further optimization of ownership structure of listed companies is needed, by actively introducing institutional investors into the state-owned enterprises to improve the efficiency of internal supervision. Finally, it is essential to improve the executive compensation incentive mechanism, by linking the interests of executives with the company’s long-term development, establishing a standardized and reasonable evaluating system of performance for executives and increasing the transparency of compensation contracts, etc.