Research On The Relationship Between Executive Compensation And Company Performance Based On Institutional Investors’ Influence

The separation of ownership and management in Modern Corporation maylead the managers to sacrifice the interests of the owners for themselves’ interests,then increase the company’s agent costs more and more and cause a complicatedprincipal-agent problem. How to implement an effective compensation systemfor executive is a core issue and a long-term difficult problem of corporategovernance from the principal-agent problem. How to solve the interest’sconflict between owners and operators has an important influence on thedevelopment of Modern Corporation.Since the late1980’s, tremendous changes have taken place in the corporategovernance of western countries. As an important role of the capital market, theinstitutional investors raise the shareholder’s activism and began to activelyparticipate in the corporate governance using their own advantages, such as thescale, information and personnel. After decades of development, the institutionalinvestors’ effect on the corporate governance is growing with each passing day.The institutional investors can significantly enhance the level of the corporategovernance and focus on the executive compensation arrangements. While thearrangements of executive compensation and company performance areinseparable, therefore, the institutional investors will inevitably influence theexecutive compensation and company performance of the listed company. Basedon this point of view, the paper conduct the thorough research to the relationshipbetween executive compensation and company performance under the influenceof institutional shareholders, in order to provide a theoretical and practical basisto the corporate governance of institutional investors.In this paper, we select the listed company as the research sample which hasthe institutional investors in the top ten shareholders of A shares in Shanghai andShenzhen Stock Exchange market from2008to2012. This paper bases on the principal-agent theory, the corporate governance theory and the incentive theory,put forward hypothesis and built model in combination with related literature,then uses the empirical analysis, like multivariate linear regression, to discuss theassociation between executive compensation and company performance underthe influence of institutional investors. Meanwhile, the paper discusses thedifferent effect on the corporate governance of different institutional investors.The results show that the executive compensation and company performance ofthe listed company has the significant positive correlation; the institutionalinvestors will promote the growth of executive pay levels through increasing theproportion. And the institutional investors can improve the companyperformance through affecting the executive compensation incentive mechanism.In addition, effects on the corporate governance of institutional investors aredifferent, and also the impact on the executive compensation and the companyperformance is not the same. The fund holdings and the other institutionalinvestors could affect the salary incentive system, then impact on theperformance level greatly; QFII will significantly impact on the executivecompensation and company performance after they hold shares in a year; thebrokerage, insurance companies and pension funds couldn’t improve thecompany performance through the salary incentive.In view of the above conclusions, this paper puts forward some pertinentsuggestions in order that the institutional investors play a positive role in thecorporate governance, which could reduce the agency cost, alleviate theprinciple-agent conflict and improve the effectiveness of the compensationincentive, the performance and the corporate governance in the listed company.