The Correlation Between Managerial Power And Compensation Incentive

With the establishment of modern enterprise system, increasingly people paid more attention on the agency problem which is caused by the separation of ownership and management rights. Among various methods which principals can use to reduce the agency costs, the most effective incentive method is the compensation incentive. However, the compensation contract cannot solve this problem fundamentally. The optimal contract theory has been regarded as the main method to resolve the issue. According to this theory, effective salary contract is beneficial to meet shareholders’ interests. This theory cannot make a reasonable explanation for high executive compensation in recent years, thus some scholars questioned the function of the compensation contracts. In the process of exploring the reason, scholars find that managerial power affect the process of compensation. Managerial power theory thinks that executives have the ability to influence the board of directors, and further affect their compensation contracts. The greater executive power they have, the stronger ability to control the compensation they will. Managerial power theory can explain the executive compensation phenomenon which is difficult to explain by the optimal contract theory. Scholars think it can be a new breakthrough point. With the progress of study, they found that compensation incentive is not only cannot solve the principal-agent problem, it may also become a part of the agency problem. In the process of the market oriented reform, the power of Chinese listed companies’ management is gradually form and expand. Moreover, the internal management structure defects were caused by some reasons such as ‘state-owned share is dominated’ and ‘insider control’ provide enough space for top-managers who can use their power to affect the compensation contract. Because of the imperfect external governance mechanism, it is difficult to control the top-managers’ rent-seeking activities. This mechanism also gives strong independence to senior management in the process of wage system. Hence, this research aims to express that management’s power play a vital role in the executive remuneration incentive system.Based on related theoretical review and background analysis, this research used principal-agent theory which contains optimal contract theory and the theory of management’s power to analyze the relationship between the management’s power and compensation incentive system. For this problem, on account of the guidance of management’s power theory, this dissertation use principal component analysis that contains the duality of CEO and chairman, employment duration, the ownership concentration and the power rating of the board to measure the power of the management. These four factors will become a synthesized indicator, and further, it will form a synthesized index system to measure the power of management. This dissertation made empirical analysis to test the relationship between the power and salary incentive by collecting 5798 listed companies from Shanghai and Shenzhen A stock market as sample data during 2010-2012. Through empirical analysis, this research draws four following conclusions. Initially, Chinese current environmental institution gives top-manager a great deal of power. Secondly, in our country, top-managers’ compensation incentive is significant positively associated with the power of management. The greater power of the management, the higher salary the top-managers have. It may leads to the situation that top-managers may have the incentive to self-pay. Thirdly, there is a significant positive correlation between top-managers’ equity incentive and the power of management. Based on the stock, top-managers may utilize their power to get their gains. Finally, there is a significant positive relationship between top-managers’ non-pecuniary compensation. Management may take advantage of their power to gain excessive non-pecuniary compensation. Above conclusions can illustrate that top-managers can utilize their power to increase their own salary. Therefore, this research gives some related suggestion from some points of views, such as, perfecting corporation’s governance structure and external restrictions of market, establishing effective salary contract system and governing the information disclosure regulation about the top-managers’ compensation.This paper is divided into six parts, the first part is the introductionwhich describes the research background, significance of the paper, the research ideas and methods, and the basic framework of the thesis. The second part is the literature review. This part summarizes some representative viewpoints of the domestic and foreign research on the managerial power and compensation incentive. The third part is theoretical analysis. It introduces the related concepts and theoretical basis of the thesis. The fourth part is the research hypothesis. In order to listing Corporation companies in China as the research object, which focus on the analysis of the relationship between managerial power and compensation incentive, then put forward the research hypothesis. The fifth part is the empirical analysis. The empirical analysis of the selected sample data can be used. The sixth part is the research conclusion and suggestion, limitations and future research prospects.