The Study On The Correlation Between Pay Gap Of Senior Management Team And Firm Risk

The compensation of senior managers has been an issue widely concerned by the scholars of theory and practice at home and abroad since the1980s.As an important part of corporate governance, research system of executive compensation has been gradually mature and research area is in constant development and extension. How to reasonably establish the pay gap within the listing corporation executive team is currently the focus of scholars at home and abroad. Domestic scholars started to study the pay gap late, mainly based on the tournament theory and behavior theory at present to study the correlation between pay gap of senior management team and corporate performance, and verify the effect of compensation gap on the corporate performance through the empirical study of listed companies. Chinese listed companies have had the incentive effects of executive pay gap as an important reference when they set the salary structure system, and widely used in real life. However, with the expansion of pay gap, incentive effects are likely to bring fierce competition between senior executives and prompt them to choose riskier projects or make riskier decision in order to improve their performance, and this is likely to lead to increasing risk of the companies. In addition, if the pay gap is too large, executives may feel they have been exploited and it is not conducive to improve the enthusiasm of work. It also may lead to self-interest and political intrigue. This may increase the risk of the companies too.What’s the correlation between pay gap of senior management team and firm risk? Whether listing corporation which is setting the salary structure system, especially the designing the pay gap, should take the firm risk into account? Because of these questions, this article start to explore the correlation between pay gap of senior management team and firm risk through empirical analysis after reading the related literatures home and abroad. It is based on the actual situation in our country and with the data of listed companies in Shanghai stock market as the samples. This thesis will draw some conclusions and put forward some relevant suggestions, hoping to provide some reference for compensation structure designing and corporate governance of listed companies in china.This paper is divided into six chapters, and the main contents of each chapter are as follows:Chapter1IntroductionFirst of all, this chapter expounds the background and significance of the paper. It elaborates the background of the research on the correlation between pay gap of senior management team and firm risk, and introduces the theoretical and practical significance. Secondly, the author elaborates the ideas and framework of the research, research ideas is a general description of the paper, and research framework describe the contents of each chapter in detail. With the chart of research framework, the reader can comprehend the paper quickly. Finally, the author introduces the method of study. Conclusions could be more reliable and more rigorous with research method of the combination of normative and empirical analysis.Chapter2Literature ReviewThis chapter firstly reviews the relevant literature both foreign and domestic, which includes three aspects:influence factors on pay gap, pay gap and company performance, pay gap and firm risk. The existing domestic and foreign literatures think factors that affect the pay gap mainly include company hierarchies, corporate characteristics, corporate governance structure, executive characteristics, regional differences and team coordination. And the study on the pay gap and company performance mainly concentrated on which one applies to companies in China. Both tournament theory and behavior theory can explain the correlation between pay gap and company performance, but the conclusions are opposite. As a whole, tournament theory is more in line with the modern corporation than behavior theory on pay gap problem. Foreign scholars started to research pay gap and firm risk in recent years, but domestic scholars do little research in this area. The author analyzes the literature at the end of this chapter after summarizing relevant literature.Chapter3Related Conceptions and TheoriesThis chapter firstly defines the main conceptions involved in this paper, these conceptions include:senior managers, senior managers team, compensation, pay gap and firm risk. It makes the contents of this paper more clearly after every conception is defined. Secondly, the author has introduces the theories involved in this paper. Principal-agent theory is the most basic theory under the two powers separate structure, which is the basic theory and logical starting point to study the problem of corporate governance. Tournament theory and behavior theory is the main theory to explain the pay gap. Tournament theory explains why the pay gap is generated from the perspective of game theory, while the behavior theory is to study the pay gap from the perspective of psychology. Finally, the author analyses the correlation between pay gap and firm risk based on tournament theory and behavior theory in this chapter. Both two theories are able to well explain the correlation between pay gap and firm risk, and the conclusions are the same.Chapter4Research Design and Variable DefinitionsThis chapter mainly includes the research hypothesis, sample data selection, model establishment and variable definitions. According to the theoretical analysis in Chapter3, the author puts forward the hypothesis that positive correlation does exist between the pay gap of senior management team and firm risk (including operational risk and financial risk). The sample data selection includes data sources and sample selection. Data used in this study is from CSMAR Solution, and it’s based on listed companies in Shanghai stock market (including A shares and B shares) from2007to2012. In order to ensure the preciseness of the research, the author removed the samples that don’t meet the requirements. The regression model is set up after put ting forward the hypothesis and sample selection, and the model variables are defined. The explained variable is firm risk which is divided into operational risk (DOL) and financial risk (Z); the explanatory variable is the pay gap of senior management team, referring to method generally used by domestic scholars, the pay gap of management team is measured with the average compensation of the top three executives and that of others. The control variables include the company size, revenue growth rate, ownership concentration, duality, ratio of independent directors, board size, the proportion of state-owned share, the regional dummy variables, the industry dummy variables and year dummy variables. To make the variables more clear, the author list the variables used in this paper in a table at the end of this chapter.Chapter5Empirical Results and AnalysisThe samples used in empirical research are made descriptive statistics at beginning of this chapter, including descriptive statistics of each variable and the pay gap of senior management team in each industry. The sample data of main variables are summarized and analyzed briefly. Then, the author analyses the correlation between the explained variables and control variables, the correlation analysis is also did between explained variables and explanatory variables. Although the results of correlation analysis are not entirely consistent with the expected ones, it just shows the simple correlation, the accurate correlation would be concluded through regression analysis. The paper makes analysis after regression with model1and model2. The regression results show that significantly positive correlation does exist between the pay gap of senior management team and firm risk whether the explanatory variable is operational or financial risk. Because operational risk and financial risk are the main part of firm risk, it can be concluded that significantly positive correlation does exist between the pay gap of senior management team and firm risk. Finally, this paper did a robustness test in order to make the conclusion more reliable. The regression results are similar with previous ones, so the regression models used in this paper are robust.Chapter6Conclusions and SuggestionsFirst of all, this chapter obtained the conclusions based on previous theoretical analysis and empirical research, including that significantly positive correlation does exist between the pay gap of senior management team and ownership concentration and corporate financial risk exists significantly positive correlation. Secondly, the author puts forward two suggestions according to the conclusions:①The pay gap of senior management team should be appropriate. When compensation structure is formulated in domestic listed companies, not only the performance but also other factors should be taken into account.②The compensation structure of executives of listed companies should be optimized. By adjusting the compensation structure of executives and balancing the relationship between short-term incentive and long-term incentive, to make the compensation structure more reasonable. Finally, the author introduces the limitations of the study and prospects of future research.The main contributions of this paper are as follow:(1) Enrich the research system of pay gap in China. In the domestic field that researching the pay gap of senior management team, scholars usually focus on the correlation between pay gap between and company performance, and the factors that influence compensation level. Only a few scholars study the pay gap from the perspective of firm risk. This paper study the correlation between pay gap of senior management team and firm risk, which based on the productions home and abroad about correlation between pay gap and company performance. Not only can it enrich the existing literature, but also provide some reference for the scholars.(2) Improve research methods on company risk. Foreign scholars didn’t subdivide the firm risk when they study the correlation between pay gap of senior management team and firm risk. In this paper, the firm risk is divided into operational risk and financial risk considering that executives often take riskier projects or make riskier decision in order to promote. Combine Chinese special economic environment and unique characteristics of listed companies in this research.(3) This paper can provide some references for listed companies in China in their designing compensation structure. A reasonable compensation structure and incentive mechanism not only can improve working enthusiasm and effort of executive staffs, but also can improve the corporate operational efficiency, and then the corporation performance will be improved. In real life, listed companies usually expand the pay gap so as to motivate executives and improve the performance of the company. However, this paper finds that the expansion of pay gap leads to higher firm risk. So the companies should consider many factors when they design the compensation structure so that the pay gap is more reasonable.