A Study Of Influence Between Derivatives Hedging And Executive Compensation

With the continue development of capital market in china, the number and size of listed companies is growing continually. As a result, top executive compensation of listed companies is growing correspondingly. Because of the agency trouble inside of the company, the aim of the client and agent is totally different. In order to refrain from such agency problem, the client needs to design an optimal contract to stimulate the agency. Studies show that, for the purpose to protect the interests of shareholders and investors, incentive contracts which combine top executive compensation and company performance is effective. Such top executives will exert themselves to enhance the performance of the company for the sake of their compensation. However, in the rapidly changing capital market nowadays, the price of the raw material and goods are changing constantly. And company will face with all kinds of uncertain risks. In such a changing environment, it is a quite difficult thing to maintain stable performance and even improve company performance.Therefore, in order to prevent sudden change of price of the raw material and the goods, the listed company using appropriate derivatives to hedge. Hedging is an enterprise making such business activities as use equal amount but in the opposite direction for the same commodity on the spot and futures markets to avoid loss of price changing in the future. As a result, the use of derivatives hedging can control risk and keep stable profits. So, in practice, the use of derivatives can really improve the company’s performance? Can top executives bring direct benefits to themselves through derivatives hedging?Based on the above background, this paper makes the theoretical and empirical research on the effect of the use of derivatives hedging to top executive compensation for Non-ferrous metal smelting and rolling processing industry listed companies.in this paper, we review relevant literature about derivative hedging to company performance and company performance to executive compensation. On this basis, we analyze the current situation of derivative hedging and executive compensation, describing the theories of derivative hedging to company value and incentive theory. On such basis, the paper make empirical analysis of derivative hedging to executive compensation, and pointing out that company performance is the median variable of derivative hedging and executive compensation. That is derivative hedging influence executive compensation by company performance.The conclusions are as follows:First, the use of derivatives hedging can significantly improve the company’s performance. Second, the company’s performance has significant positive correlation with executive compensation. Third, the use of derivatives hedging has significant positive correlation with executive compensation. Forth, the company’s performance is a median variable of derivatives hedging using the executive compensation, namely the use of derivatives influence executive compensation by company’s performance. At the end, this study makes some suggestions:(1) Encouraging companies to use derivatives for hedging reasonably.(2) Encouraging executives to use derivatives reasonably.(3) Perfect the structure of executive compensation and increase the long-term incentive.