Board Independence, Product Market Competition And Performance Sensitivity Of Executive Compensation

Performance sensitivity of executive compensation is regarded as the importantresearch subject in academic circles and practical circles. According to equity theory ofJohn Stacey Adams and expectations theory of Victor H． Vroom, executivecompensation should have close relationship with the performance of the company. Atpresent, the listing corporation executive compensation is not entirely decided by theperformance which executives create. Executive compensation of some listingcorporation is not matched with the company performance. It reflects the irrationality ofexecutive compensation. An effective executive compensation incentive system ispropitious to perfect internal corporate governance and enhance the competition abilityof listing corporation. Consulted massive literature research on executivecompensation，we find that the former research mainly focused on the corporategovernance perspective. Principal-agent theory thinks that the interests of shareholdersand the interests of management is not consistent. In order to make the interests ofmanagers and shareholders converge, shareholders should take incentive measures andsupervision measures. The incentive is mainly manifested in the executivecompensation, and supervision by the board of directors is to supervise the management.The board of directors is the core of internal corporate governance. Whether it cansupervise the management behavior effectively or not, it largely depends on theindependence of directors. The independence of the board of directors mainly dependson the independence of directors. The corporate governance literature often used thescale of independent directors as the independence of the board of directors. Due to theexistence of information asymmetry between independent directors and management,the independent directors cannot effectively supervise management. At this point, weneed external balance mechanism to improve the internal governance defects. Amongthe many external balance mechanism, product market competition can have afundamental constraint on the corporate governance mechanism. This paper attempts tointroduce the product market competition. The paper combines the internal corporategovernance and external product market competition to study on the performancesensitivity of executive compensation. This paper adopts the method of literature analysis and empirical analysis. First,this paper reviews the research of board independence, product market competition andexecutive compensation. Then this paper defined the core concept of this thesis.Theoretical analysis is carried out, including the incentive theory, principal-agent theory,management theory, the leading full information hypothesis and bankruptcy liquidationhypothesis. On the basis of theoretical analysis, this paper put forward to the hypothesis.This paper selects the research sample data of listing corporation from2002to2012.Then it constructs the model and verifies the hypothesis by empirical analysis. Thispaper verifies the relationship between the independence of board and performancesensitivity of executive compensation through empirical analysis. Based on it, the paperdivides the sample into high competitive industry sample and low competitive industrysample. This paper further analyzes the difference in the independence of the board andthe performance sensitivity of executive compensation in different degree of productmarket competition.According to the research conclusions and the actual situation of our country, thispaper puts forward to the suggestions on perfecting the independent director system,establishing and improving the mechanism of competition in product market, improvingthe mechanism of incentive and information disclosure of executive compensation.