CEO Compensation Of Chinese Listed Companies: Empirical Research On Performance And Luck

Principal-agent Theory suggests that pay is a good solution to the agencyproblem that owning to the separation of ownership and management rights; OptimalContract Theory believe that by setting a reasonable salary contract (theperformance-related pay and company) can let the executives make decisions whichwould in accordance with the shareholders’ benefit. However, a growing number ofresearch indicates that the process of setting compesation will produce a new agencyproblem; compensation contract is not a good incentive to motivate seniormanagement. Because of the asymmetric information betwee the shareholders andexecutives, executives can make use of the powers in the hands to set their ownremuneration.In this paper,I will base on the fact that remuneration is not linked toperformance as a starting point,"luck" is defined the results to influence companiesperformance that will go beyond the executive’s control, and it will be measured bythe industry weighted average ROE-excluding the company’s own ROE and thetotal book asset-as "luck" instrumental variables to examine whether CEOcompensation is included”luck-pay”, as well as by improving corporate governancestructure can reduce the”luck-pay” paid to the mamagement. The theoretical part ofthis paper is based on Asymmetric Information Theory, Agency Theory and the theoryof Optimal Contract, to sketch the the theoretical basis that remuneration could solvethe agency problem; the empirical part of this article, firstly, it summarize eachvariable via Excel, Stata10statistical software; secondly, this paper’s sample data is2008-2012unbalanced panel data (a total of9535observations),which comes fromSSE companies (non-banking financial), and I will use2SLS regression as measureto study the relationship of CEO compensation and “luck”. Then, I adopt the size ofthe board, ownership concentration, and CEO duality as the proxy for the corporategovernance structure to study the relationship between corporate governance structureand general manager’s “luck-pay”. The results of this paper are the following fourpoints:(1) CEO compensation of China’s listed companies exist the prevalent“luck-pay” phenomenon;(2) companies which has more concentrated shareholding,can effectively reduce”luck-pay”;(3) companies which have two person hold theposition as CEO and director bord respectively,can effectively reduce”luck-pay”.(4)companies which has a reasonable size of board, cannot effectivelyreduce”luck-pay”.Finally, based on the empirical results of the article, it confirmed the fact that the “luck-pay” exist, put forward to improved corporate governancestructure, reducing the company pay the CEO’s “luck-pay” by improve the company’sownership concentration, avoid senior manager hold the position as CEO and directorbord.