Research On Top Managers’ Compensation Contract And Performance Standard Choice Based On Corporate Life Cycle Theory

Compensation for top managers of listed companies has received extensive attention from a lot of parties. And the compensation contractis an important mechanism to stimulate them to make improvements for better corporate governance.In recent years, the correlation between top managers’compensation and corporate performance is getting more concerns from the public. Many managers of listed companies are paid with a high salary while the company is struggling in severe losses. This phenomenon has brought the society a controversy that whether the compensation for top managers has an efficient relevance with company’s performance or not. Under the modern enterprise system, the principal-agent situation caused information asymmetry, which makes it difficult for the owner to supervise the behavior of managers directly, and unable to determine if the company’s performance is matched to that under optimal operating conditions. In order to reduce principal-agent cost, business owners generally choose to establish a mechanism to link interests of managers and the corporate, to motivate managers to unify personal goals and the company’s, and then to ensure the efficiency of the compensation contract in stimulating and restraining managers’ behavior. And the issue of performance evaluation has to be involved as that the design of compensation contracts are usually associated with corporate performance. The standards of a performance evaluation have significant influence on the effect of the incentive mechanism, and even on the resource configuration of the enterprise. For the owner of the enterprise, to choose an effective performance evaluation standard is not easy. Companies suffer from the impacts of both internal and external factors when operating, which makes it hard for managers to cover all aspects of the operating. As a result, when choosing the standards of performance evaluation for compensation contracts, we have to consider the focus of the company’s current development, to ensure that the incentive target for managers is in accordance with the company’s development goal. In this article, I divide company’s development to different stages based on the theory of Corporate Life Cycle, considering the life cycle factors belongs to the uncontrollable factors for managers. In different stages, the enterprise is facing different management goals and risks, and has various economic characteristics and performance highlights. To guarantee that the incentive of compensation contracts for top managers and the development goal determined by the company’s economic characteristics are aiming at the same direction, the focus for performance evaluation standards varies with the life cycle stage where the company stands. Therefore, when making compensation contract for top managers, choosing objective and reasonable performance standards according to the economic characteristics of enterprise life cycle theory has a great significance in standardizing top manager compensation contracts and improving corporate governance.There are five chapters in this study.Chapter1is introduction which explains the background and purpose of the study, makes clear of the content and method of the study, and points out the expected contributions and imperfections.Chapter2is theoretical basis and literature review. I reviewed some classical theories of compensation contracts, summarized the document research related to enterprise life cycle, compensation contracts and performance evaluation, which provided theoretical and document support for further study in the following chapters.Chapter3is the theoretical analysis of choice for performance evaluation standards. Based on the incentive mechanism of top manager’s compensation contracts, I made comparisons on level definitions, models and index choosing. And I analyzed the choices for performance evaluation standards in different life cycle stages, with the various economic characteristics appeared in those stages.Chapter4is the empirical analysis between top managers’compensation and performance evaluation standards choosing in different life cycle stages. This chapter came up with the assumptions, explanation of the choosing of samples and source of data, and definition of the correlation variables. I divided the samples into four group of life cycle stages, and made descriptive statistics, regression analysis and robustness test. And through the comparison analysis of the results from regression analysis, the assumptions were verified and concluded.The last chapter summarized the main achievements of the study and proposed some suggestions and expectations for the further study.The expected contribution of this paper is that, I interpret the issue of top manager compensation and performance evaluation standards choosing from a new perspective-enterprise life cycle. And the latest cash flow grouping method I used, as a replacement of the common grouping methods, has enriched the study of this field. Furthermore, the study has a theoretical significance and pragmatic value in standardizing the mechanism to link top managers’ compensation with corporate performance.The drawback of this study comes with the difficulty in obtaining the data of non-monetary compensation of listed company managers, which sets up a limit to monetary compensations exposed in annual reports only. And because the studies on performance evaluation standards based on non-financial indexes are not technically mature, and those indexes are also hard to get, I had to choose standards for performance evaluation from financial data. Those two drawbacks above had caused limitation for my study.