Research On Executive Compensation Structure Under Uncertainty

The nature of executive compensation is a corporate governance issue. Currently,corporate governance of both state-owned enterprises and the private companies is notup to standard, with poor quality. The poor quality of corporate governance reflectingon executive compensation is astronomical salaries, serving consumer, little sensitivityof compensation and performance, and as such. The relevant departments have issuedmany rules and regulations to regulate executive pay. However, these rules andregulations are, at least for now, with little success.In this context, the paper establishes a compensation structure model based onbenefit-sharing, and studies the structural features of executive compensation indifferent circumstances. The model assumes one year’s operating results will bedisplayed in different years, and executive compensation should reflect thischaracteristic, as a result, executives should get current return and deferred return (riskreturn). This paper argues that the executive compensation structure is related towhether the executives and shareholders having common understanding about theenterprise’s future performance, the relative bargaining abilities of executives andshareholders, and executives’ and shareholders’ expectations of the deferredperformance.On the basis of the basic model and the extended model, we study the issuesrelated to executive compensation-performance sensitivity and state-owned enterprise’sexecutive compensation incentives; and deem that executive compensation incentivesshould be adapted with government decentralization. This paper argues that in thediscussion of the current executive compensation reform, to examine the correlationcoefficient of compensation and performance is meaningless, because which does notcontain any incentive degree information; to examine their sensitivity coefficient maycause policy makers to become too content, because in the course of high fixed salaryand low bonus shifting into low fixed salary and high bonus, the sensitivity coefficientis constantly being enlarged. State-owned enterprises in dealing with executivecompensation incentives face the dilemma of carrying the political burden with naturalgovernance defects. State-owned enterprises carrying the political burden weakens therelationship between the executives effort and enterprise performance; natural corporategovernance defects are caused by the absence of major shareholders, the dysfunction ofthe Board, and the Government’s dual role of a monitor while pirate. For this reason, the focus of reform should be to strengthen the corporate governance of state-ownedenterprises, to fully disclose executive compensation decision-making process of thestate-owned enterprises and establish a good image of the government.Finally, the paper summarizes the main research conclusions, the inadequacies ofthe research, and points out that future research should motivate the political process ofthe executive compensation, descriptive statistical analysis of executive compensationstructure, and the impact of executive compensation incentives on executive behaviorand firm value.