Research On The Impact Of "Nepotism" Within Corporate Top Management On The Performance Effectiveness Of Executive Compensation Incentive

Executive compensation has been the focus of attention in the community. Pay incentive for executives is the core of the agency mechanism, and also an im-portant part of corporate governance, which largely affects the business perfor-mance and corporate behavior. Currently, subject to the financial crisis the global economy has not yet bottomed out, while one after another report of major media on the increasingly expanding astronomical executive compensation has once again pushed this issue to the cusp of public opinion, and the "eyesore-like" astro-nomical compensation has sparked strong public questioning about executive compensation.Principal and agent establish an interest interrelation mechanism by a com-pensation contract and the pay incentive to the agent makes the agent’s interests fit the business owners’. Executive compensation contract design, while serving as a tool to solve the agency problem, has become part of the agency problem. Unlike previous studies proposing the impact of such institutional factors as executive power and the Compensation Committee on executive compensation or those us-ing directors’ excess compensation to measure the cronyism-based board culture (similar to "nepotism" herein), this paper combined with China’s unique cultural background and using theoretical and empirical demonstration examined the im-pact of the existence of "nepotism" within top management (between Chairman and General Manager) on the performance effectiveness of executive compensa-tion.This paper selected Shanghai and Shenzhen A-share listed companies as sam-ples and2010-2012as sample interval and examined two very different views on "nepotism" through empirical regression method. The results showed that in the case of "nepotism" existing within top management, the performance effectiveness of executive compensation enhanced, so did the stickiness of executive compensa-tion. Specifically, the paper is divided into six parts.The first chapter is Introduction. This part based on the analysis of the back-ground and significance of this research makes clear the purpose and ideas of the research, builds a research framework, determines the research methods, and points out the main contribution and shortcomings of this paper.The second chapter is Theoretical Basis and Literature Review. Combined with the social and historical background of executive compensation incentives, this part makes detailed analysis and elaboration of basic theories including principal-agent theory, incentive theory and so on, laying a sound theoretical groundwork for assumptions below.In addition, this part also summarizes existing literatures of domestic and foreign scholars on executive compensation and then introduces the purpose and content of this research, providing theoretical and literature support for the analysis below.The third chapter is Theoretical Analysis and Research Hypotheses. Combine the basic theories including principal-agent theory, incentive theory with the research object of this article-"nepotism",this part detailed analysis of the "nepotism" performance on the effectiveness of executive compensation incentive. And on this basis, this paper proposes two hypotheses.The fourth chapter is Research Design. This part selected the appropriate sample data, and after summarization of research models made by scholars before, combined with contents of this paper, adjusted and formed a suitable model and variable design for objects of this research.The fifth chapter is Empirical Testing and Results Analysis. According to the designed model, the regression results were obtained by empirical testing and the regression results were analyzed.The sixth chapter is Conclusions and Suggestions. The data and conclusions obtained from empirical demonstration are converted into texts to form the final results of this research. Combined with the current development of enterprises in China, this part puts forward countermeasures and suggestions for corporate gov-ernance from the aspect of executive compensation design.The expected contribution of this paper is studying performance effectiveness of executive compensation combined with China’s special social and historical context from a unique perspective of "nepotism" within top management, thus opening a new field of study on executive compensation, providing a new way of thinking for further optimization of corporate governance and pay system. Moreo-ver, this paper uses a different way from previous studies to measure the relation-ship within corporate top management and extracts whether there is "nepotism"(including the relationship between previous colleagues, relatives, classmates or alumni) between Chairman and General Manager from profiles of directors, su-pervisors, senior management and staff provided by the annual reports of listed companies, thus providing from the perspective of "nepotism" a new explanation of the cronyism-based board culture mentioned in previous studies.This limitation of this paper may be that as "nepotism" herein has a relatively wide range of meanings, many familiar nepotistic relations to the public fail to be fully reflected in the annual reports of listed companies in Shanghai and Shenzhen, coupled with part of the listed companies failing to disclose detailed information of executives in their annual reports, despite the assistance of search tool at the time of data collection, the data collected still has some limitations that may lead to the final empirical results not objective enough.