Internal Control:a Effective Way To Reduce Executive Perks

As media and shareholders put a lot of attention on executive compensation of listed companies,the amount of executive compensation included in financial statement is no longer so "surprise". But is it mean that executive compensation in listed companies has been controlled in a reasonable level? Gul(2011) point out that due to increasing attention and regulatory restrictions on cash compensation of executives, perks became a new way for executives to misappropriate firm resource to derive private benefits. In China Executive perks are widely exist.For example, Kato and Long(2006) estimate that perks represent as15%to32%of totol executive compensation. Chen(2010) further argue that perks are8times of average executive compensation. A large number of academic studies have found that executive perks is harmful to company(Liang,2014). Due to its negative effect, how to suppress executive perks has become important problem that must be addressed. In recent years, the construction of the internal control of listed companies in China has become a hot topic, the Commission issued a series of guidelines to promote internal control system of listed companies. However, listed companies questioned the effectiveness of internal control system, therefore internal control self-assessment report failed to offer useful information to capital market.(Tian,2012)This paper combined normative and empirical research to draw conclusion that higher internal control quality can suppress executive perks. First, based on relevant theories, this paper explained how high internal control quality can reduce the level of executive perks. Then, test this conclusion using data of Chinese listed companies in2006to2011. I find that higher internal control quality indeed suppress executive perks, and the relationship is more obvious in non-SOE companies. Lu et al.(2011) found that improving the quality of internal controls will improve the sensitivity between executive pay and company performance. That is to say, improving the quality of internal controls will make executive pay more reasonable, but they only studied the visible executive compensation. In this paper, it is the first time that the relationship between internal control system and executive perks had been tested.