Research On Relationship Among Management Power, Corporate Divesification Behavior And Executive Compensation

The business development in China experiences a process of diversified rising and climax, followed by leveling off, which has a similar trend with western developed countries. In recent years, a host of researchers point out that the diversification would impair the core competence of the corporation and destroy the firm value, moreover, it is acceptable that diversification could be regarded as a risk mitigation strategy for the market. However. Based on the situation of enterprises development in China, companies which adopt the diversification strategy are still account for a high proportion. Furthermore, along with the rapid development of Chinese economy and based on the maintaining high levels of executive pay, Chinese enterprises has showed that the signs of rising in the respect of managerial compensation is obvious. In addition, this rising trend is not completely according with the executive’s performance and in some case, the managerial compensation even exceed the operating profits. According to the some researchers, top managers may highly depend on their power, which could impact the compensation design, additional, by adopting the diversification, executives could satisfy the self-interest as well, which could influence the level of compensation. This article is in reference to the previous study, based on the theory of principal-agent and management power, combining with the data collection from engineering design and construction listed company between 2012 and 2013, to explore the relationship between managerial compensation and diversification as well as the management power. In the first place, for the measurement of the power management, it uses the continuous integration variables, virtual variables and three component indexes to build five submodules respectively, which shows the relation between executive compensation and management power. Through the empirical study, it has showed that the management power was positive in correlation with the executive pay, moreover, when administration use the power in influencing the compensation design, the level of compensation would improve dramatically. Secondly, for the measurement of the level of diversification, the number of industry and product as well as fender index and entropy could be as four indicators, which could build four submodules in terms of the relationship between executive pay and divarication. According to this research, it has illustrated that the diversification was positive in correlation with the executive pay. Furthermore, the conclusion plays a vital role in helping researchers to explain the tendency of enterprise diversification in China, when the top-managers make decisions for investment and strategic option, it is more likely to seem that the managers may take advantage of the power to meet self-interest needs. In addition to that, in this essay, others factors are taken into consideration as well. From the empirical research, it has identified that the scale of corporation, the rate of return on equity and executive compensation have a positive correlation. On the contrary, the ratio of long-term debt equity and executive compensation have a negative correlation. Moreover, the proportion of board scale and independent board in board of directors have a little effect on executive compensation, further to this, it could have the opposite effect in this areas. This situation has shown that the internal operating system of corporations should be improvement in China.The significance and innovation of this essay is to enrich the researches in the respect of the management powers and the executive compensation of China. In addition, this essay has identified further evidences to support that the theory of management power could be adopted in China as well, meanwhile, it highlighted on exploring the relationship between executive compensation and the diversification directly. The research angles are relatively creative and the contexts of the research are more comprehensive. Furthermore, it has practical meaning for researching in selecting the respect of national economy and people’s livelihood, such as engineering design and construction industry, which is booming in the recent years.Finally, combining with the research conclusion, this essay have presented some suggestions that to improve the corporate governance structure and enhancing the internal and external supervision in terms of the management power and compensation design. Additionally, it is necessary to reform the independent director system in China as well as perfect executive compensation contract design and market mechanism, which could be further compression the management for "rent-seeking" space.