The Influence Of Internal Control Quality On Compensation Performance Sensitivity Of Executives

With the development of modern markets, salary level of the management in the public companies is attracting more and more attention. The exposure of sky-high compensation in Pingan company occurred in2008pushed the compensation issue of the management to the forefront. During the same period, the market value of A share of Pingan shrank dramatically made people suspect the rationality of executive compensation. The financial crisis followed that lead to a wider scope of voice of suspicion. Executive compensation problem originated from separation of two rights in modern corporations. Because of the separation of ownership and management, there are some barriers between the executive and the owner, like conflict of goals, information asymmetry and so on, which cause serious agent problems. The executive compensation is a really important tool to enhance the government level of a company and it is always seen as an effective method to reduce agent cost and the hot spot in the scope of academic circles.With the publishment of "the guidelines of internal control on listed company of Shanghai and Shenzhen stock exchange","the basic standards for enterprise internal control" and "enterprise internal control supporting guidelines for application" in and after2006, as a function to ensure a company’s management and development, internal control system became initially shaping in China. From the perspective of agent theory, since agent problem is inevitable between the management and shareholders, the rational managers who have the control over business operation would sacrifice enterprise’s overall benefits in order to pursue the maximal selfish motives. If an effective internal control regime exists, managers’self-serving behavior would be restricted to a great extent, and the efficiency and effectiveness of business operation can be enhanced. But in order to restrict managers’self-interest behavior, corresponding mechanism is required to be built to motivate the management in order to improve the motivation and efficiency of there work. This can result in the interest convergence of the management and enterprise owners. Considering this, linking executive compensation with operating performance is an appropriate and reasonable choice. From another perspective we can see that, compared to some companies with weak internal control mechanism, the managers whose self-interest behavior are constrained would make use of their influence to devote to increasing the executive compensation-performance sensitivity.Based on above assumption, this article combines the empirical research method with the theoretical analysis method, and studies the influential degree of internal control quality bring to the executive compensation-performance sensitivity. This article concludes six parts:The first part, Introduction. Firstly, this part concludes research background, research meaning and research contents. Then, this part illustrates the research method and draws out the research frame diagram. Lastly, this part points out the possible breakthroughs of this article.The second part, the literature review. This part states respectively about relative study about correlation between executive compensation and corporate business performance, executive compensation-performance sensitivity’s influential factors and internal control, and points out the deficiencies of available literature and possible research orientation.The third part, related theory analysis and hypothesis present. First of all, theoretically defines internal control, executive compensation and executive compensation-performance sensitivity. Then, based on the three main theories’ analysis, this part put forward to three hypothesis.The forth part, research design. In this part, this article selects listed companies in Shanghai and Shenzhen A share main board market during Year2011and Year2012as research samples to support the article’s hypothesis through empirical test. Then, this part interprets the dependent variable, independent variables and controllable variables. Last, this part designs the OLS regression model used in the empirical test.The fifth part, descriptive statistics and empirical regression results analysis. This part firstly shows the descriptive statistics about variable characteristics, and conducts empirical test on the overall sample and grouping samples, analyzes the test results which in turn verify hypothesis supposed in the article. At last, using market performance indicator to replace accounting performance indicator in order to carry out robustness test to further examine the hypothesis.The sixth part, conclusion, proposals and limitations. This part summarizes whole article, gives advice to the construction of executive compensation mechanism, and point out the limitation of this article and probable study orientation.The research results shows that there exists a significant positive correlation between the management compensation and corporate business performance, and internal control quality also has an significant influence on management compensation-performance sensitivity. Furthermore, this article classifies all samples into two groups according to the ownership as state-owned enterprises and non-state-owned enterprises. The data indicates that there is a positive correlation between internal control quality and management compensation-performance sensitivity in the state-owned enterprises but in the state-owned enterprise group, the correlation is not significant.The main innovations of this part reflects in following reasons:Firstly, domestic and overseas research on economic consequences of internal control pay most attention on the economic results of disclosing material internal control weakness, the relationship between the internal control quality and accounting information, etc. There is little literature about both internal control and the operation efficiency. Considering this, this article welcomes the moment of publishment of guidelines of internal control construction, using suitable samples to do a research on the influential degree of internal control quality on executive compensation-performance sensitivity which aims to enrich existing research scope in this field. At the same time, this article uses "Di Po listed company internal control index" to measure the quality of internal control implementation level of public enterprises. This index is released in August2011, which made a start in reflecting the listed companies’internal control implementation status. It can also help increase the accuracy and reliability of empirical results.