Impact Analysis Of Performance Change On The Compensation Gap

Since the executives’personal emoluments go public, the reporting and oversight of the news media makes the pay issues become the focus of the attention of the community. Some executives’annual salary more than ten millions, some executives’monthly salary less than two thousand, and some executives even get no salary at all. Some executives’pay increase when company’s performance bad than last year, and some executives’pay decrease when company have a better result. The salary mechanism is lack of efficacy.The compensation gap between executives and ordinary employees of the listed companies in China is huge. Since2004, China has introduced a number of policies to regulate the formulation of compensation, in order to restrict the executives’pay. However, this policies are only qualitative provisions, not be able to effectively improve the phenomenon of huge income gap. China’s Gini coefficient has increased from less than0.2in1992to more than0.5now, more and more people are not fair.Many domestic and foreign scholars have researched the relationship between pay, compensation gap and corporate performance. But most of the time, they focus on the relationship of executive and is executive, and pay a little attention to ordinary employees. And they usually study the relationship between the level of pay and performance; the literature research the relationship between the change of pay and performance is very little. Two different theories have been proposed to explain the correlation of compensation gap and corporate performance. Tournament theory suggests that the compensation gap is positively related to the corporate performance, and the behavior theory hold the opposite idea. However, the tournament theory and the behavior theory only explain the result of compensation gap to corporate performance, regardless the causes of compensation gap. Managerial power theory hold the idea that compensation is not entirely decided by the Board of Directors, executives have the incentive and ability to exert influence on the Board of Directors, and get better compensation contract. Country is the singer big shareholder for most of the state-owned enterprises of China and often disappear from the management of the company, many executives are appointed directly by the Government. Non-state-owned enterprises are often family business; most of the executives are served by the owner themselves. As a result, the management of our nature tends to have great power. Some studies have shown that the management powers can impact the compensation and the compensation gap, but more detailed studies are required."The Interim Measures on management for the compensation of the head of central enterprise" released by SASAC in2004clearly require that the compensation must be linked to performance;"guidance to further standardize the management for the compensation of the head of the central enterprise" released in2009point out the need to build up the pay system that change in the same direction with corporate performance. Most literature study the relationship between the level of pay and performance, and the literature research the relationship between the change of pay and performance is very few. But the relationship between the change of pay or compensation gap and the change of corporate performance is more practical significance, and can better understand the reasonable of the existing pay contract. Therefore, we firstly study the relationship between the change of pay or compensation gap and the change of corporate performance.First of all, reasonable and effective compensation incentive mechanism should be based on the performance indicators that can accurate and timely reflect the degree of the agent’s effort. Pay should change in the same direction with performance, and how much reward get when performance increase, then how much punishment give when performance decline. However, the China’s listed companies still have status that compensation changes unreasonable compare to performance change. Compensation doesn’t rise when performance better or decline when performance worse. Is this the individual or universal? Based on this problem, this paper studies the correlation of the pay of staff within the company at different levels and corporate performance, seeing whether the listed companies in China have established a performance-related pay system and whether the reward and punishment is fair. Specifically, whether or not the compensation of staff within the company at different levels change when the corporate performance change; when the direction of changes in performance is not the same, whether the change of compensation would be different; and whether the corporate ownership impact the result.Secondly, the China companies’ internal compensation gap is expanding year after year, is this a normal phenomenon that derives from the performance-related and fair incentive compensation, or an abnormal situation due to the unfair compensation contract between executives and ordinary employees? The impact of executives to corporate performance is larger than ordinary employees, so executives deserve more compensation, the existence of the compensation gap is necessary. In the case of rights and responsibilities, executives get more reward when performance is good and get more punishment when performance behavior poor. Therefore, the compensation gap should rise when performance get better, and decline in poorer situation. So, whether or not the compensation gap in listed companies of China is the reasonable circumstances described above? Whether or not the compensation contract of executives and employees is fair? Based on this problem, we go on study the relationship between compensation gap and performance, seeing whether the change of performance can lead to the change of compensation gap, how the compensation gap change when performance up or down, and what’s the different in state-owned enterprises and non-state-owned enterprises.Tournament theory and behavior theory research the economic consequences of the compensation gap, that is, its impact on performance, regardless the causes of the compensation gap. The managerial power theory hold the idea that the management can take advantage of the right to obtain more remunerative, in this process, other employees’ interest maybe cannot be taken into account or even be hurt, the compensation gap get larger. Therefore, the presence of management powers will affect the incentive consequences of compensation gap, making the conclusion based on tournament theory and behavior theory biased. Based on this, we try to study the impact of the management powers no the compensation gap.It is generally believed that the existence of management power makes the executives have the motivation and ability to influence the formulation of the compensation contract, gent more private benefits. However, the research is relatively small; how the executives use their power and impact the compensation contract remain to be studied. Specifically, will the managerial power affect the change of company’s internal compensation gap or not, will the relevance of company’s internal compensation gap and corporate performance be affected by managerial power or not; whether or not the impact mechanism of managerial power is the same when performance changes in different direction; whether the result change under different type of ownership.The results of this dissertation are described below.Firstly, the rate of change of the executive compensation and performance have a significant positive correlation, and the correlation between the rate of change of the executive pay and performance is greater when the performance is rise compare to the decline in performance, with sticky characteristics. There’s no correlation between the rate of change of the staff salaries and the performance, the compensation of ordinary employees have rigidity characteristics in upward and downward. Subdividing the executives into the core executives and the non-core executives, the rate of change of the core executives’pay in the state-owned enterprises is not relate to the rate of change of the performance when the performance increase, and has a significant positive correlation with the rate of change of the performance when the performance decline. The pay of the core executives in the state-owned enterprises has upward rigidity characteristics.Secondly, the rate of change of the corporate performance and the compensation gap within the company are significant positive correlated. In state-owned enterprises, the rate of change of the management’s internal compensation gap is not related to the rate of change of corporate performance when the performance increase, and has a significant positive correlation to the rate of change of corporate performance when the performance decline; the rate of change of the compensation gap between executives and ordinary employees is significant positive related to the rate of change of corporate performance when the performance increase, and irrelevant to the rate of change of corporate performance when the performance decrease. The rate of change of the compensation gap in the non-state-owned enterprises has a significant positive correlation with the positive rate of change of corporate performance, and irrelevant to the negative rate of change of corporate performance. In the comprehensive regression, the rate of change of the compensation gap between executives and ordinary employees of the state-owned enterprises and the rate of change of change of the compensation gap in the non-state-owned enterprises are significant positive related to the rate of change of corporate performance, and the correlation is smaller when the performance decline. There is a weak geometrid effect in the compensation of executives in listed companies.Thirdly, the managerial power cannot significant increase the rate of change of the companies’internal compensation gap, but can affect the relevance between the rate of change of compensation gap and corporate performance. The post of chairman and general manager unity and equity separation have been using as the alternative variables of managerial power, finding that both of them have no significant correlation with the rate of change of compensation gap. It means that the managerial power has no direct effect on the rate of change of compensation gap. In state-owned enterprises, if we using the post of chairman and general manager unity as the alternative variable of managerial power, the sensitivity between compensation gap and performance will increase when performance better than last year and has no change in other situation. In non-state-owned enterprises, the managerial power can reduce the correlation between the rate of change of the compensation gap and performance.Based on the conclusions above, we make recommendations in five areas: Firstly, the level of disclosure of the compensation should increase, making the executives’pay more transparent and fair; Secondly, in order to reduce the executives’self-interest behavior, the pay contract ought to be improved, and the correlation between pay and performance should be enhanced; Thirdly, we need to develop the market of professional managers, regulate the behavior of executives and make executives get more supervision; Fourthly, regulating the behavior of the compensation committee to reduce the possibility of complicity with executives; Finally, increasing the stake of the management can reduce the expending of compensation gap in certain extent.This study has a lot of deficiencies. First of all, we only consider the executives’compensation disclosed in the annual report, ignoring other compensation like job consumption and equity incentive which may influence the results; Secondly, the two variables we use to represent managerial power cannot reflect managers’power comprehensive; Secondly, the company’s internal and external environment such as business risk, Ind risk and macroeconomic environment haven’t been controlled; Finally, the study maybe not comprehensive enough. Future study can improve from the aspects above.Possible contribution of this paper may exist in the following two aspects:1. Researching the correlation of pay, compensation gap and corporate performance from a dynamic point, that if study the correlation of the rate of change of pay, compensation gap and performance. While the previous literatures often study the relation between pay level, compensation gap level and performance level from a static point.2. Providing a new idea for the research of managerial power. This paper studies the effection of managerial power to the rate of change of compensation gap and to the correlation between the rate of change of compensation gap and performance, providing a new way to understand the managerial power.