An Empirical Research On The Impact Of Corporate Power Structure On Executive Compensation

Recent years, high priced compensation in the banking industry has beenexposed frequently, the SASAC introduced some related policies to regulate andrestrict CEO’s compensation of the central enterprises. The logic of those introducedpolicies was restrict the executive compensation under a reasonable standard and takethe enterprise’ performance in consideration meanwhile. But what is the reasonableexecutive compensation? What is the standard? In fact, the deciding mechanism ofexecutive compensation is still not very clear. The principal-agent theory considersthat as a way to solve the agent problem, executive compensation should be positivecorrelated with the corporate performance. While the managerial power theoryconsiders that the executive has the power to influence the board, thus influence thecompensation package. To establish effective executive compensation regulations inpractice, it is necessary to research the standard, efficiency, reasonability and decidingmechanism of executive compensation.From the perspective of team work, executive compensation is an issue onallocation of corporate earnings in its essence. Enterprise is a pattern of resourceallocation different from the market mechanism. It is also different between enterpriseand market in pricing manner. Because of the value contributing process ofmanagerial human resource in corporate is creative and cannot be duplicated, so it isneeded to be priced in the corporate inside. The pricing process of managerial humanresource in the corporate is not finished by the other members of enterprise, but isfinished automatically in the process of members bargaining for the corporativeprofits. The power structure of corporate members determines the member’s ability tobargain for the corporative profits, thus influences the outcome of pricing. It is to say that the result of enterprise corporative profit distribution is affected by the member’spower structure in corporate.This paper analyzes the pricing mechanism of executive compensation inenterprise based on cooperative benefits. It is concluded that executive compensationdepend on the power structure between executive and board. That is to say, the morepowerful the executive, the higher compensation they will get. And the more powerfulthe board, the lower executive compensation will be. The main theories to explainexecutive compensation are optimal contract theory and managerial power theory. Theoptimal contract theory considers that executive compensation is a way to solve theprincipal agent problems. And executive compensation is related to the corporateperformance. While the managerial power theory holds that because the executiveshave the power to influence the board, so the pricing process is not a fair negotiation,thus executive power determines the executive compensation. In fact, the divergenceon executive compensation between the optimal contract theory and the managerialpower theory is derived from different assumption to power structure. Power structurefactors determine the confirmation of optimal contract theory and managerial powertheory in practice and executive compensation contract itself.This paper takes2009-2013Chinese listed companies as samples to test theimpact of the executive-board power structure on executive compensation. This paperestablishes executive power index and board power index using principle componentanalysis method, and tests the relationship with executive compensation. The resultsshows that the executive power has significant positive impact on executivecompensation in listed companies and the board power restrained executivecompensation in private enterprise. In order to establish reasonable executivecompensation regulation in state-owned company, some suggestions are put forwardto balance the executive-board power structure in state-owned company.