An Empirical Study About The Influence Of Incentive System For Senior Executives On The Effectiveness Of Internal Controls

The purpose of this study was to determine a reasonable incentive mechanism forexecutives and achieve an effective incentive and restraint way in making executives’objectives consistent with corporate objectives. The mechanism reduces agency costs ofenterprises and promote the effective implementation of internal controls.Firstly, using the method of theoretical analysis, based on the theory of modern enterprisecontract theory, agency theory, incentive theory and other theories, combining nature andstructure of internal control, we discussed the impact of equity and incentive pay oneffectiveness of internal control. We made several assumption based on the discussion. Usingthe method of empirical analysis and goal-oriented evaluation system of internal control, wecollected company data samples to calculate the scores of effectiveness of internal control andcomplete the evaluation. Finally, based on the theoretical analysis, we proposed somehypotheses. Then we selected representative samples of companies, and their internal controleffectiveness score. We also collected samples of executive compensation and ownership dataand these data was analyzed based on descriptive statistics. We selected other importantfactors that influence the effectiveness of internal control as a control variable and built amulti-linear regression model to perform the regression analysis and hypothesis testing.Finally, we drawn empirical conclusions that there is a significant positive correlation betweenthe proportion of executives holding and internal control effectiveness score and there is nosignificant positive correlation between the annual remuneration and internal controleffectiveness score. For non-state-owned listed companies, if equity incentive wasimplemented, the correlation is positive. However, for state-owned listed company, thispositive correlation does not exist.The empirical results fully explain the executives incentives, especially long-termincentive mechanisms can contribute to the effectiveness of internal controls. Compared to thebasic salary, annual bonus and other traditional pay system, the incentive effects of long-termequity incentives are better. With the scale of using long-term incentives such as stock options expanding, the flexibility of overall salary performance increases and overall remunerationincentive effects is enhanced. This is because the implementation of equity incentive isallocated a certain residual claims executives arrangements on behalf of the shareholders andmanagers share the remainder. This arrangement is an optimal ownership arrangement, whichcan effectively promote the interests of executives and shareholders, making the businessobjectives consistent with the interests of executives with enterprises. It reduces theExecutives’ violations on shareholders’ interests and agency costs. Thus the internal controleffectiveness is achieved...